The UK government’s pandemic support schemes – from Bounce Back Loans (BBLs) to the Coronavirus Job Retention Scheme (CJRS) – helped millions of businesses and individuals stay afloat during turbulent times. But the scale and complexity of the schemes, and the speed with which they were implemented, means they have also been vulnerable to exploitation.
According to HMRC, 8.7% of the £60 billion given out in furlough payments in 2020/21 was either fraudulently claimed, or otherwise incorrectly paid. And estimates from the Department for Business, Energy and Industrial Strategy and its advisors PwC have suggested that somewhere between 7.5% and 11% of BBLs were fraudulent.
The scale and severity of the problem is illustrated in a recent case reported by the National Crime Agency where two money launderers were jailed for a total of 33 years. Of the £70 million laundered by the men and their criminal network, £10 million came from fraudulent BBLs alone.
When the launderers were already on bail, they started to claim fraudulent BBLs for multiple shell companies they had set up. These businesses claimed up to £50,000 at a time, generating more than £10 million.
The sentencing judge said the criminals’ exploitation of the BBL scheme had played a part in “undermining the government and financial institutions” and noted that the “the British taxpayer will be staggered and upset that part of their hard-earned tax contributions was going into the pockets of criminals”.
The key COVID-support schemes may have closed, but evidence of the extent of fraudulent activities is still emerging. To address this, the focus for law enforcement and other agencies has inevitably moved from prevention to detection and reporting. And in this context, the accountancy sector is well placed to contribute, particularly as firms examine their clients’ year-end accounts.
“The BBLs and furlough payments have come to an end,” says Sandy Price, AML Manager, Professional Standards, ICAEW. “But, for our firms, it's still very much a live issue because they're only now really seeing what's been happening as they examine clients’ accounts.”
Since the schemes began, ICAEW has been urging its firms to stay alert to the potential for fraud, and to exercise the necessary professional scepticism. So, what should firms be looking out for specifically now that they are starting to dig deeper into clients’ accounts? And how should they respond if they suspect COVID-support fraud?
The first step is to remain mindful of the ICAEW Code of Ethics which includes the requirement to act with objectivity and integrity, and ensure you are not knowingly being associated with false or misleading information. You need to pause and reflect, and make sure that you are not aiding your client in any wrongdoing.
The next step is to assess the severity. If a client has misinterpreted the rules and an error is unintentional, encourage them to correct the situation straightaway. If the situation appears deliberate, you may need to report. For example, if you think there is an Anti-Money Laundering (AML) aspect - if you suspect the client of fraudulent or criminal conduct and there are proceeds of that crime - you may need to make a Suspicious Activity Report (SAR).
The specific issues you need to look out for depend on the scheme. For example, with the CJRS, clients may have made furlough claims for employees who were not eligible or claims for hours for which they were not entitled.
Where a claim has been submitted, and proceeds received, there is no need to report if this was an innocent error and the client amends the claim and returns the money. “If clients haven't deliberately claimed when they shouldn’t have, but made a mistake and declared the mistake, then that's okay,” says Price. “But if they haven't declared it and you have grounds to suspect the claim was fraudulent, you will need to report them by submitting a suspicious activity report to the NCA.”
With BBLs, the loans were only made for business purposes only. Where loans were used for personal or other non-business purposes, they do not meet the criteria. It is not your firm’s responsibility to find out what a loan was used for. But if you receive, or come across, information “during the course of business” that the loan was misused, you may have an obligation to report.
Red flags associated with BBLs include accounts showing minimal business activity before receiving the loan, fund transfers to personal accounts or third parties, rapid cash withdrawals, or multiple loan applications using different business names.
“Something to look out for,” says Price, “is when money goes into the company account as a loan, and then goes straight back out again to the directors. If you think the money's gone in and it hasn't been used for the purpose for which it was intended, which was to support the business, then you should report it.”
Another potential indicator relates to the loan as a percentage of turnover. “A company could only claim a BBL of 25% of its turnover,” says Price. “If you’ve got a client turning over £100,000 and they've claimed an £50,000 loan, that is likely to be a fraudulent claim (unless it has been rectified by a repayment). And you’d have to report that, because the client must have been misleading when it filled in the application forms.”
A final point to make is that there could be only one BBL within a group of companies. “So if a group client claimed a BBL for each member of the group,” says Price, “that’s fraud, unless they paid the money back in full and rectified it.”
A firm-wide risk-based approach is key to mitigating all AML risks, and this applies equally to uncovering specific COVID-related fraud. “A risk-based approach is always going to be relevant to BBLs and furlough fraud,” says Price.
“You might take a special look at certain clients that might more vulnerable, for example those you know were already financially struggling,” she explains. “When you're looking at risk, think about how vulnerable your client is and whether they are more likely to commit fraud because of that vulnerability.”
“We keep reiterating the need to think about risk, because how our firms view risk makes a difference to how likely they are to identify money being laundered or other activities,” she adds. “Accountants always know more than they realise; most have no concept of how much information they’ve got on their databases, how that can be used and how valuable that information could be if reported in a suspicious activity report.”
“They are really on the frontline when it comes to uncovering economic crimes and bringing the perpetrators to justice in ways you wouldn't necessarily expect,” she emphasises. “It’s not really what you think of when you think about what accountants do, but it is part of the responsibilities that come with the role.”
Be the first to know when articles like this are released by following us on LinkedIn and subscribing to our monthly newsletter, Regulatory & Conduct News.