The number of company directors convicted of criminal activity during the pandemic has risen 205% to 122 in the year to 30 September 2021, up from just 40 for the same period to 30 September 2020.
This trend is set to continue as the Insolvency Service takes an increasingly tough stance on fraud during the pandemic.
Statistics that stand out include:
A potential £27bn deficit in public finances created as a result of Covid-19 loan defaults and fraud.
An 87% increase in the number of directors facing prison sentences in 2021/22.
The rise in prosecutions is likely to relate to the government-backed schemes introduced during the Covid-19 pandemic, including the CBILS and BBLS loan schemes. These support schemes were introduced as a lifeline for businesses during the pandemic, but time pressure and the volume of demand forced banks to dilute their normal due diligence procedures, making them susceptible to fraud.
Coronavirus Job Retention Scheme
Similarly, there was extreme pressure on HMRC to implement the CJRS (“Furlough”) scheme as soon as possible and because of this, certain directors have taken advantage by fraudulently claiming Furlough monies. Current estimates are that over £5bn has been claimed fraudulently through a combination of:
Employers claiming Furlough despite their employees continuing to work and not being made aware of the claim;
Exaggerated employee numbers to increase their claims;
Employers claiming Furlough and then demanding their employees continue to work for fear of losing their jobs; and
Employers not passing on Furlough monies to their employees.
File on 4, an award-winning current affairs documentary series that investigates major issues at home and abroad, investigated 'Furlough Fraud' on Nov 9th, 2021. Micheal Pallott, our expert in contentious insolvency investigations and asset tracing, and one of the commentators adds his insights into what companies have been hiding during the pandemic and the repercussions of this today. The full recording can be accessed by clicking on the image below.
The cost of fraud
The full extent of the fraud is still unknown, but the National Audit Office has estimated that up to 60% of BBL claims could be fraudulent or defaulted on. This represents over £27bn lost from the public purse.
The Institute of Chartered Accountants in England and Wales and the Insolvency Practitioners’ Association have urged their members to report any suspected cases of malpractice relating to Covid support schemes directly to the Secretary of State. The guidance has helped increase the number of directors being investigated and prosecuted as a result of activities undertaken by the Insolvency Service.
The Insolvency Service is sending a clear message that directors will now face serious penalties, including prison sentences, in cases of gross misconduct. Covid fraud is just one example of this.
The challenges of the pandemic meant that the government’s resources were considerably stretched. However, the Insolvency Service is committed to cracking down on Covid related fraud and is taking a much more hard-line approach; it is not afraid to pursue criminal prosecutions where necessary.
Normally such sanctions for directors would be limited to disqualification. Given the state of public finances, it is in everyone’s interests to have an effective enforcement scheme to make an example out of dishonest business owners. Directors who have committed Covid related fraud need to take serious notice of these trends.
Michael Pallott Partner, Restructuring and Insolvency Services
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The Contentious Insolvency team enhances recoveries for insolvent estates by undertaking forensic investigations and bringing claims against directors and 3rd parties in respect of fraud and other unlawful transactions. The team provides an independent and pragmatic view on the likelihood of achieving realisations via litigation.