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Is the government adequately tackling COVID fraud?

Author: ICAEW Insights

Published: 13 May 2024

While progress has been made, significant challenges remain in the meaningful recovery of fraudulent losses from pandemic support schemes, says Mike Miller, ICAEW’s Economic Crime Manager.

Due to unprecedented challenges facing businesses and individuals during COVID-19, the government launched a number of support schemes aimed at supporting businesses. They included the Small Business Grant Fund, the Retail, Hospitality and Leisure Business Grant Fund, and the Local Authority Discretionary Grants Fund. 

However, it is now apparent that the schemes were subject to significant levels of fraud, and action was necessary by government and law enforcement agencies to recover funds where possible and investigate the perpetrators.

A 2023 National Audit Office (NAO) report revealed that the amount of fraud in government expenditure reported in accounts audited by the NAO rose from a total of £5.5bn in the two years before the pandemic (2018/19 and 2019/20), to £21bn in the following two years. 

Of the £21bn, it is estimated that £7.3bn related to temporary COVID-19 schemes. The significant increase in fraud detected in the accounts shows how easily the various COVID-19 schemes could be exploited for financial gain, bringing into question the level of government oversight and scrutiny of such schemes. 

In April 2024, the Insolvency Service published information indicating that more than 800 company directors have been disqualified for abusing COVID-19 support schemes. Specifically, during 2023/24, a total of 831 directors were banned for COVID-19 financial support scheme misconduct, with an average disqualification period of more than nine-and-a-half years.

Of note was The Bounce Back Loan Scheme, introduced at the start of the pandemic in 2020. It helped small and medium-sized businesses borrow between £2,000 and £50,000 at a low interest rate, guaranteed by the government. Businesses were entitled to a single loan of up to 25% of their turnover under the scheme. Individuals could only use the loans for the economic benefit of the business and not for personal purposes. 

Directors banned

The Insolvency Service has successfully applied to have 1,430 directors banned for abusing COVID-19 support schemes since it started investigating potential financial wrongdoing in this area in 2021. While this development is welcome, it would also be useful to understand what actions and repercussions have occurred targeting those who engaged in fraudulent activity involving larger amounts of money. 

Measures taken by the government to recover wrongly acquired funds and punish the perpetrators are welcome, but the scale and speed of the recovery of funds is insufficient to pose a concrete deterrent. A Public Accounts Committee report published in September 2023 found that, three years on from the provision of £22.6bn in business support schemes in the pandemic, the government had, by May 2023, recovered only £20.9m – or less than 2% – of an estimated £1.1bn in fraud and error losses. 

The report further noted that it was likely that underinvestment as a result of financial pressures faced by local authorities made it harder to deliver COVID-19 schemes for some councils. The report highlights that central government’s distance from the practical realities on the ground meant confusion, delays and uncertainty for small businesses and local authorities.

The COVID pandemic was an unprecedented challenge for public and private sector organisations alike, as well as having a significant impact on the wider business environment. However, while acknowledging the scale of the challenge, lessons must also be learned for future crises that may require significant state intervention, and which could also be open to abuse. 

For example, the Public Sector Fraud Authority, established in large part as a response to concerns about fraud during COVID-19 and the lack of a coordinated response, has a broader estimate that includes both fraud and error but excludes expenditure specific to the pandemic. 

Need for coordination

It estimates that in 2020/21 there was between £33.2bn and £58.8bn of fraud and error in government spending and income unrelated to the pandemic. Coordination across government departments and law enforcement is critical to the public sector’s ability to successfully counter fraud. In 2024 the NAO released a further report examining lessons learned for tackling financial impropriety during a time of national emergency.

A further change in the approach to tackling fraud will be the upcoming Failure to Prevent Fraud offence, due to come into force after an implementation period, which was introduced as part of the Economic Crime and Corporate Transparency Act 2023. Under the offence, large organisations may be prosecuted with the potential for an unlimited fine where fraud is uncovered and the company shown to have failed to have taken reasonable steps to prevent it. 

This could also apply if the organisation is not based in the UK. Currently, small and medium-sized businesses are exempt from the new law, but they may face extra requirements as part of a large organisation’s supply chain. ICAEW will be issuing explanatory notes as the timescale towards implementation of the offence becomes clear, as well as working closely with the Home Office to clearly communicate the sector’s concerns. 

Further resources, such as webinars, will also take place following the publication of the Home Office guidance and further clarity around specific timescales and requirements for businesses; see here for further information about the UK’s current fraud strategy and the details of the Failure to Prevent Fraud legislation.

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