Furlough fraud: the offences and sanctions
The Coronavirus Business Interruption Loan Scheme (“CBILS”) was introduced to provide financial support (loans and other kinds of finance up to £5 million) to small and medium-sized businesses affected by COVID-19. The scheme was only available to businesses based in the UK with annual turnover of up to £45 million, who could show that: (a) they would be viable were it not for the pandemic; and (b) they had been adversely impacted by COVID-19. Lenders under the scheme invariably required applicant businesses to provide documents evidencing their ability to repay the loan, such as management accounts, a cash flow forecast, a business plan, historic accounts and details of assets.
The Future Fund provided government loans ranging from £125,000 to £5 million to UK companies, subject to at least equal match funding from private investors. A business would be eligible for a loan if: (a) it was UK incorporated; (b) it had raised at least £250,000 in equity investment from third party investors in the previous 5 years; (c) none of its shares were traded on any regulated market, trading facility or other listing venue; (d) it was incorporated on or before 31 December 2019; and (e) half or more of its employees were UK based and/or half or more of its revenues were from UK sales.
The Bounce Back Loan Scheme (“BBLS”) enabled small and medium-sized businesses to access finance more quickly, by offering loans of between £2,000 and the lower of 25% of their turnover or £50,000. Under the scheme, the government guaranteed 100% of the loan, with no fees or interest to pay for the first 12 months, followed by interest at 2.5% per annum. Applicant businesses had to be: (a) based in the UK; (b) established before 1 March 2020; and (c) adversely impacted by COVID-19.
The schemes have been incredibly successful in terms of uptake. According to the latest figures issued by the Treasury at the date of this blog, over £61.9 billion of loans have been made under the various schemes. However, alongside that success, we have seen significant reports of fraud and other criminal activity associated with the schemes.
It was reported earlier this year that back in May 2020, the British Business Bank, which supervises the BBLS, had raised concerns regarding the risk of fraud associated with the scheme. According to the BBC, the Chief Executive of the British Business Bank wrote to the Business Secretary, warning of “very significant fraud and credit risks” and noting that the BBLS was “vulnerable to abuse by individuals and organised crime”. More recently, in October 2020 it was reported that the National Audit Office has estimated that up to 60% of loans made under the BBLS, amounting to as much as £26 billion, may never be repaid due to fraud, organised crime or default.
There are a number of serious criminal offences for which individuals and companies could be investigated and prosecuted, including:
A person is guilty of fraud by false representation if they dishonestly make a false representation, knowing that it is or might be untrue or misleading, intending to make a gain for themselves or another or to cause a loss (or expose a risk of loss) to another. This offence could arise if, in the course of applying for a loan, an applicant knowingly provided false information, for example relating to the business’ turnover or the manner in which it had been adversely impacted by COVID-19.
A person is guilty of false accounting if they dishonestly falsifies any account or any record or document made or required for any accounting purpose, with a view to gain for himself or another or with intent to cause loss to another. This offence could arise if, in the course of applying for a loan, an applicant knowingly provided falsified accounting records (e.g. cash flow forecasts or management accounts) in order to obtain a loan which they would otherwise have not qualified for.
This common law offence has two variants: (a) a dishonest agreement by two or more persons to deprive another person of something which is his or to which he is entitled; and (b) a dishonest agreement by two or persons to deceive another person into acting contrary to his duty.
There are a number of potentially applicable offences under the Proceeds of Crime Act 2002, specifically under section 327 (concealing, disguising, converting, transferring or removing criminal property), section 328 (entering into or becoming concerning in an arrangement which facilitates the acquisition, retention, use or control of criminal property) or section 329 (acquiring, using or possessing criminal property). Such offences will often be investigated and charged alongside a substantive fraud or false accounting offence.
There have already been reports of arrests in relation to fraudulent applications to the BBLS and the other schemes. Given the significant uptake in loans under the schemes, it is inevitable that many more criminal investigations and prosecutions will follow, particularly as the schemes come to an end. This has been made clear in recent comments by the National Crime Agency (“NCA”), which earlier this month spoke of intelligence suggesting COVID-19 loan schemes being exploited by organised criminals making fraudulent applications. The NCA made clear in its comments that it continues to provide intelligence to partner investigating authorities and will investigate cases itself where there is a serious and organised crime element.
For further information on the issues raised in this blog post, please contact a member of our criminal litigation team.
Phil Salvesen is an associate in the criminal litigation team who specialises in advising individuals and corporates in relation to criminal and regulatory issues. His cases frequently involve serious allegations such as fraud, market abuse, insider dealing, money laundering, false accounting, bribery and corruption, electoral offences and anti-competitive behaviour.
Phil maintains a general crime practice and also advises on contentious regulatory issues in a range of other sectors, including matters involving the Financial Reporting Council (FRC), Institute of Chartered Accountants in England and Wales (ICAEW), Gambling Commission and CFA Institute.
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