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William England and Mark Watson consider the widely reported instances of fraud in relation to the government’s coronavirus support schemes and the implications for prosecutions.
Bounce Back Loans
David Clarke, the Chair of the Fraud Advisory Panel has warned that “in 10 years’ time, people will still be looking for the money…when the inquiries start into what happened with this scheme”. Mr Clarke was discussing the “Bounce Back Loan” scheme, commonly referred to as BBLs. The Fraud Advisory Panel have set up a COVID-19 watch group to share information on emerging fraud threats, such is their concern.
Rishi Sunak, Chancellor of the Exchequer, launched the BBL scheme in May 2020, to provide money rapidly to struggling businesses. The application process and granting of BBLs were lax from the outset. Mr Sunak told MPs in April 2020 “There will be no forward-looking tests of business viability; no complex eligibility criteria; just a simple, quick, standard form for businesses to fill in.”
The terms of the scheme, as introduced, were that:
Following introduction, the scheme was enthusiastically taken up after the Treasury guaranteed all loans and encouraged a quick turnaround. This meant that bankers, not considering business viability, historic performance or future projections, relied only on basic KYC (“know your customer”) and pre-existing industry fraud checks before approving loans.
£8 billion was lent within days, though the scheme was initially estimated to total no more than £26 billion.
The possible frauds
By December 2020, £43.5 billion had been lent under the scheme and it is predicted that £26 billion could be lost due to defaults on the loans or through fraud. These figures will continue to rise, with the Office of Budget Responsibility estimating that the Treasury will back £87 billion of business borrowing, the majority consisting of BBLs.
Concerns were raised within weeks of the start of the scheme regarding the ability of borrowers to repay their loans. The very nature of the businesses requiring these types of loans meant that they could not afford to pay them back under ordinary banking conditions. The removal of basic checks on the businesses, in a rush to provide the loans, left the scheme vulnerable to abuse.
It has been reported by one senior executive of a high street bank, that in the first weeks of the scheme as many as 15% of applications were fraudulent. The absence of rigorous checks to obtain the loans is troubling; BBLs are vulnerable to identity theft and business impersonation. A company can be left none-the-wiser by fraudsters hijacking their identity to obtain a BBL. Correspondence regarding the loans can be subject to redirection, and staff shortages associated with lockdown provides the fraudster with another layer of protection to avoid detection. The revival of dormant companies and the use of other people’s bank accounts by fraudsters to make loan applications and receive funds are particularly concerning.
The conditions of a BBL are:
In small businesses, the lines between what is and what is not “company money” can easily be blurred. HMRC’s confirmation that company dividends can still be paid where the business has retained profits but is cash poor only adds to the general confusion.
The consequence for small businesses, and small business owners, can be dramatic. If the business has received a BBL and then becomes insolvent, this has the potential to cause even larger issues.
BBLs are not the only measures that the Government has introduced to combat the financial impact that COVID-19 has had on the UK economy. The Coronavirus Job Retention Scheme, and the Eat Out to Help Out initiative colloquially referred to as “Rishi’s Dishes,” are perhaps the most well-known examples.
The Eat Out to Help Out Scheme was one of the Government’s policy measures to support businesses reopening following the first COVID-19 lockdown. The scheme aimed to help protect jobs in the hospitality sector by encouraging consumers to eat out. The Scheme was in existence for one month and over 84,000 businesses took part in it.
The sheer speed in which the schemes and the associated legislation were introduced by the government (however well intentioned) meant that the usual safeguards in terms of drafting and the like, were not given as much consideration as one would normally expect.
In relation to Eat Out to Help Out for example, wrongly claimed payments could include situations such as:
The Government introduced the Finance Act 2020 (“the Act”) in a bid to define the schemes and the support available to businesses during the pandemic. The Act received Royal Assent on 22 July 2020.
S.106(2) of the Act provides a list of measures, collectively defined as the Coronavirus Support payments. They are:
A number of schemes have subsequently been subject to s.106(2)(c) directions. One example is the Eat Out to Help Out scheme. The effect of the s.106(2)(c) direction is that where businesses have received wrongly claimed payments under the Eat Out to Help Out scheme, even honestly, they require urgent action.
HMRC can now compel employers to provide information regarding incorrect claims and, where appropriate, can hold directors personally liable for the tax, pursuant to s.100 and Schedule 13 of the Finance Act 2020, where the business is no longer solvent. Where businesses have received a wrongly claimed support payment, those payments will be taxed at a rate of 100%, allowing HMRC to recover the payment through tax pursuant to Schedule 16 of the Act.
Further, Schedule 16 now imposes a burden on businesses, in a similar manner to the Bribery Act 2010, to notify HMRC of any awards that have been wrongly claimed. It is important to note that these wrongly awarded sums do not have to be fraudulent.
A 90-day amnesty period, or “correction window” has been introduced for businesses to make such reports. The correction window is prescribed as the latest of:
Each employer who has received a payment now has the positive duty to declare any wrongly received awards and any failure to declare will be treated as deliberate and concealed by virtue of Schedule 16. There is no statutory defence.
Sole traders and partners must repay the money by 31 January 2022, pursuant to Schedule 16 paragraph 14 of the Act.
Looking at s.106 and the definition of Coronavirus Support Payments, the BBL scheme is not caught by the Act. Clarity appears to have been sacrificed at the altar of speed and necessity.
Unusual and of concern to those who have received a BBL, however, is s.106(3) of the Act, which essentially provides the Treasury with the ability to apply the Act to any coronavirus business support grant scheme, which could include BBL, in the future.
This means that if you received a BBL, you are not presently subject to the requirements of Schedule 16 of the Act. Should the Treasury decide to introduce regulations that capture BBLs, this would place all of those burdens, duties and possible penalties on businesses and business owners in receipt of BBLs; loans that when received were not subject to the Act.
The disturbing consequences of the BBLs may well be felt in the future. It will be difficult for the HMRC to establish if a BBL was intentionally or fraudulently misspent as opposed to one that was the subject of a poor business decision made in extraordinary circumstances. For those businesses, the spectre of section s.106(3) and Schedule 16 looms over them.
The prosecution landscape
It is clear that cases are being investigated and brought in relation to allegations of BBL, furlough and Eat Out to Help Out frauds. Investigations have recently resulted in arrests in respect of BBL fraud. In a further well-publicised example, a Papa John’s franchisee has faced investigation after allegedly defrauding the scheme. For businesses operating franchise models, urgent action is required to avoid similar negative attention; to avoid allegations relating to a single franchisee negatively impacting the business as a whole. In these situations, urgent legal assistance and advice should be sought.
Looking to the future of investigations and the subsequent prosecution for fraud related offences in relation to Coronavirus support payments generally, it is not hard to see that there will be a public appetite for such prosecutions and resultant consequences for those that have engaged in such criminality.
Schedule 16 of the Act may cause judges difficulty when it comes to directing a jury on the same. If, for example, one defendant, or a group, is alleged to have received a BBL incorrectly and dishonestly and is prosecuted where the defendant or group accepts the validity of the claim but denies dishonesty, the judge pursuant to Schedule 16 will nonetheless have to direct a jury that the failure to report was deliberate and concealed.
There is a tension that could emerge between this paragraph of the Schedule, the directions the judge will have to give and the issues that the jury will be required to consider. Where a business has deliberately failed to return a loan that was incorrectly claimed and has concealed the fact, that could be seen as persuasive evidence of the honesty of the original claim.
Whilst the scale of the frauds appears to be potentially very substantial indeed, the powers the government has retained to deal with them appear potentially dramatic as well, particularly in the context of other criminal legislation. It will be interesting to see how these powers are applied in the courts. Loose drafting means uncertainty will remain for some time to come, but in the longer term, whether these provisions may become testing grounds for possible expansion into other areas of the criminal law must remain one possibility.
William England is a leading junior recommended in the Legal 500 2021 and Chambers and Partners Directory 2021. He is a specialist in financial crime and regulatory compliance. He has been described as “a force of nature.”, “very shrewd, good with clients and a fine cross-examiner”, “an exceptionally bright and extremely hard-working barrister” (Chambers and Partners 2021), and “a fighter who oozes confidence” (Legal 500).
Mark Watson is a member of Carmelite Chambers who specialises in financial crime and was called to the Bar in 2011. He defended in the largest counterfeit cigarette production operation that HMRC has ever prosecuted and is developing an early practice in Covid related payment frauds. He is also an elected member of the Criminal Bar Association Executive Committee.
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