COVID-19 EXPERT LEGAL INSIGHTS

How immune are COVID-19 relief scheme fraudsters from law enforcement action?

A version of this blog has been posted by Fraud Intelligence on 24 March 2021

21 April 2021

The devastating economic impact of the COVID-19 pandemic has led to unprecedented levels of government support aimed at keeping jobs intact and businesses afloat. Although the news is beginning to promise a path out of lockdown and a gradual return to some degree of normality, equally as prominent are reports of fraudulent abuse of the COVID-19 support schemes and the government’s planned response.
 

In the 2021 Budget, presented to Parliament on 3 March, the Chancellor announced a new HMRC taskforce set up to investigate fraudulent exploitation of these schemes. The taskforce will be backed by £100 million of government funding and will comprise more than 1,250 HMRC personnel.

In this blog we examine the reality of government pronouncements of “getting tough on crime” in the context of COVID–related fraud. Such statements are often met with scepticism from some commentators wondering whether, in reality, they are more a publicity stunt in the hope that the threat will serve as a deterrent rather than anything of substance. But is such a cynical view justified when it comes to tackling COVID-related fraud? And, in any case, what steps can businesses take to ensure that, if suspicions of fraud do arise, the interests of the company are protected?

The Law

Before considering these issues, it is worth briefly reminding ourselves how criminal liability might arise. All of the government’s support measures are susceptible to fraud, although it is perhaps the Coronavirus Job Retention Scheme (more commonly known as the Furlough Scheme) and Bounce Back Loans Scheme which have received the most attention. The most likely offences which may be committed are fraud by false representation (section 2 of the Fraud Act 2006), false accounting (section 17 of the Theft Act 1968), conspiracy to defraud (common law offence), cheating the public revenue (common law offence), forgery (section 1 of the Forgery and Counterfeiting Act 1981) and money laundering (various offences under the Proceeds of Crime Act 2002).

Any individual employee or director can attract liability for these offences and it is also possible for a corporation as a separate and distinct legal entity to be liable where the relevant conduct is carried out by a person deemed to be the ‘directing mind and will’ of the company. In addition, there are some offences which can only be committed by a corporation, such as failure to prevent the facilitation of tax evasion.

Law Enforcement

Considering the novelty of COVID-related fraud and the unique and unprecedented challenges to which the pandemic has given rise, it is difficult to properly assess what the government’s response will look like in practice. There are certainly good reasons to think that the authorities will be relentless in their pursuit of suspected fraudsters. For one thing, the scale and estimated value of the fraud is staggering. When HMRC CEO Jim Harra appeared before the Public Accounts Committee (PAC) in September 2020, he intimated HMRC’s assumption that 5-10% of claims under the Furlough Scheme would be fraudulent, equating to between £2 billion and £3.9 billion. In December 2020, the PAC suggested that potential losses under the Bounce Back Loan Scheme due to credit losses and fraud could be as much as £15 billion to £26 billion. Such significant sums at a time of severe economic hardship, likely to last for years to come, will increase the pressure on the authorities to take meaningful action.

The creation of the new HMRC taskforce in itself provides some indication of a genuine determination to tackle fraud. A dedicated team of 1,250-plus personnel and funding to the tune of £100 million is not insignificant.

Furthermore, we have already seen examples of arrests and charges arising from COVID-19 related fraud, with the first arrest of an individual on suspicion of defrauding the Furlough Scheme occurring as early as July 2020. Agencies involved in these cases include not just HMRC but also the NCA and NATIS.

On the other hand, there are reasons to suspect that the government’s stated aim of tackling COVID-related fraud will fail to translate into anything meaningful in practice, at least where HMRC are involved. One need only look at HMRC’s previous record to find evidence of this. For example, in their 2015-2020 business plan, HMRC pledged to increase the number of criminal prosecutions of wealthy individuals and corporates to 100 per year by 2020. This followed significant criticism from the PAC over some £16 billion denied to the Treasury due to tax fraud and a tax gap of £34 billion. HMRC were urged to ‘increase the number of investigations and prosecutions, including wealthy tax evaders, and to publicise this work to deter others from evading tax and to send out a message that those who try will not get away with it.’ In response to a Freedom of Information request made by our firm in October 2020, HMRC confirmed that there had not been a single prosecution of a company between 2015 and 2020 and only 32 wealthy individuals were charged with tax evasion offences in 2019/20, with lower figures for previous years. A mere 46 wealthy individuals were investigated for tax offences in the same year. It was no surprise, therefore, to see that this pledge had been removed from HMRC’s updated business plan in October 2019.

Response Planning

Nevertheless, whatever view we may have about the government’s intended response to COVID-related fraud, businesses across all sectors of the economy should ensure that robust internal measures are in place to prevent, identify and report fraud, and that whenever fraud is suspected, appropriate action is taken.

The most important steps to take when responding to potential fraud are to seek immediate legal advice from in-house counsel or external lawyers and preserve all evidence which may be of relevance. In many cases, especially where concerns are raised internally, there may initially be a lack of sufficient information to be able to determine whether the suspicions or allegations are true. It may therefore be prudent to conduct an internal investigation before taking any further steps. If this process is followed, it is important to make sure that the integrity of the process is maintained. For example, the investigation should be led by somebody who is sufficiently distanced from the suspected fraud and those who may be responsible (preferably an independent external lawyer). A written scope of investigation should be prepared recording the purpose of the investigation and the matters to be investigated. Clear records should be kept of all steps taken, including notes of any interviews and a record of the reasons for deciding to speak to certain witnesses but not others.

Another important consideration for a company in these circumstances is whether to self-report to law enforcement agencies. This is a difficult decision and should only be made once specialist legal advice has been obtained. One of the main benefits of self-reporting is that it may increase the likelihood of a favourable outcome for the company in circumstances where corporate liability potentially arises. This is particularly so if the self-report is accompanied, for example, by senior management taking steps to remove those responsible and introducing measures to reduce the chance of similar fraud arising again in future. On the other hand, if the self-report is made prematurely and it later transpires that no fraud has in fact taken place, a lengthy criminal investigation with potentially damaging consequences for the reputation of the company will unnecessarily have been triggered.

Conclusion

Ultimately, it will be some time before we begin to see whether law enforcement agencies are genuinely willing and able to tackle the huge level of COVID-related fraud. There is certainly some evidence to suggest that this will be the case but, in any event, businesses would be wise to take a pro-active approach and ensure that internal measures are as robust and effective as possible.

A version of this blog was first published by Fraud Intelligence on 24 March 2021

Further information

For further information on the issues raised in this blog post, please contact a member of our criminal litigation team.

 

About the authors

Nicola Finnerty is a Partner in the Criminal Litigation team and is a leading criminal defence expert in both business and general crime. She has experience of fraud, corruption  (including the Bribery Act) and cartel matters, financial compliance, money laundering, asset seizure and confiscation cases, through to sexual offence cases, drugs, murder and offensive weapon crimes. Nicola has acted for many high profile individuals who have needed advice on criminal matters. She has also represented corporate clients, financial institutions and professional firms in investigations and proceedings brought by the SFO, CPS, FCA, HMRC and other prosecuting bodies. She is routinely instructed in judicial review and appeal cases.

Will Hayes is a Associate (Barrister) in the Criminal Litigation team and represents individuals and corporate clients in a range of criminal cases. He has represented clients in cases covering the full spectrum of general crime, cases with an international dimension and represents clients defending extradition requests and challenging Interpol Red Notices. Will has a particular interest in legal professional privilege (LPP) and has developed a comprehensive understanding of the law and its practical application.

 

 

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