It was reported on Friday 10 July 2020 that two men were arrested in North London in connection with fraudulent applications to the Coronavirus Bounce Back Loan Scheme (the "BBLS"). In addition to the arrests, the police also obtained 10 account freezing orders over accounts which held funds in excess of £550,000. This article looks at issues that businesses need to be aware of to protect against fraud, the importance of internal investigations and where we can help.
The alleged fraud came to light when police investigating a separate offence searched a vehicle. They found documents believed to be related to applications for loans on behalf of fake companies.
The application process for the BBLS has been considered a target for fraud by commentators. In reports of Friday's arrests, Detective Sergeant Neil Stanley from the Metropolitan Police's Economic Crime Unit emphasised that the police will continue to crackdown on those that are found to have "exploited government schemes for their own monetary gain".
Warnings about fraud risks
Prior to the arrests, anti-fraud organisations and white-collar crime experts had raised significant concerns about potential loss to the public purse as a result of fraudulent claims for Coronavirus Bounce Back Loans.
On 26 June 2020, it was reported by the Evening Standard that a letter written to the Chancellor highlighted the potential for abuse of the BBLS and included signatories such as the former director of the Serious Fraud Office, criminologists and anti-fraud charities . We were told that the signatories of the letter believed that greater transparency was needed to deter fraud and asked that the Government publish the names of businesses that have used the BBLS.
Fraudulent applications could arise where those using the scheme make false representations, such as to the value of property against which loans are secured. Limited checks are said to have been made before loans are issued; applications are effectively self-certified. The Evening Standard's article also pointed to the signatories' concerns that organised criminal gangs may infiltrate or intimidate businesses in order to obtain loans and steal the money for themselves. In this article, we review the potential offences and also the impact that these allegations have for all businesses making applications under the BBLS.
Abuse of the Bounce Back Loan Scheme
The Chancellor has reportedly issued nearly £35 billion in loans to help 830,000 small and medium-sized businesses through the current crisis.
The BBLS helps participating businesses to borrow between £2,000 and up to 25% of their turnover. The maximum loan available is £50,000. Businesses established before 1 March 2020 and based in the UK can apply if they have been adversely affected by the coronavirus, providing they have not applied for other specified loans. As with any other loan, they have to be repaid but under this scheme no fees or interest is charged for the first 12 months. The Government guarantees 100% of the loan.
The authors of the letter demanded that the Government publish the names of all recipients of the loans. The signatories believe that publication of the information would deter fraudsters and lead to greater accountability as information could be checked against public records such as those retained by Companies House.
The Treasury responded to the concerns by saying that the BBLS provided a lifeline to small businesses through the COVID crisis and that any applications that were fraudulent would be "criminally prosecuted".
Government agencies have been very clear that deliberate cases of fraud can expect the full force of the law. They are keen to publicly expose those businesses that have deliberately abused the schemes during a time of crisis. The first companies and individuals to be investigated and prosecuted face significant reputational damage, in addition to criminal penalties.
However, it is important to understand that the current level of suspicion and heightened scrutiny will affect all businesses and not just those that have deliberately committed fraud.
It is crucial that businesses use this time wisely to carry out checks and conduct investigations to identify mistakes in claiming under the BBLS, and any other Government financial support that the business has accessed. Legitimate businesses should be alive to the risk that they may be infiltrated by criminal gangs in order to access the loans and steal the money. It is possible that this might happen without the knowledge that an application has been made on behalf of the company. It is perhaps most likely that someone within the legitimate business may have assisted, aided and/or abetted a fraudulent application in this scenario.
Likely criminal consequences
The Fraud Act 2006 contains a number of offences that may be relevant in relation to fraudulent applications for Bounce Back Loans:
- Section 2 creates an offence of making false representations. A person is guilty of this offence if they have dishonestly made a false representation to make a gain for themselves or another, or a loss to another. If an application is made for a loan by dishonestly misrepresenting information, then an offence may be committed under this section.
- Section 3 creates an offence of fraud by abuse of position. It is committed where a person occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person or business. If that person dishonestly abuses that position and intends, by means of the abuse of that position, to make a gain for themselves or another, or to cause loss to another, then an offence is committed. It is possible that if a fraudulent application is made for a loan by a person in a position of trust within an organisation that this offence may be considered by investigators.
- In addition to the above offences, the Fraud Act creates an offence of carrying on a fraudulent business. It must be shown that a business has been carried on with intent to defraud creditors or for a fraudulent purpose. A single large transaction may constitute the carrying on of a business for the purpose of the offence and may be used to cover the scenario where a fake business has been set up which is used to apply for a loan.
In each of the above cases, the offences are punishable with a maximum of ten years imprisonment.
Following a conviction for any of the above offences, authorities can seek the seizures and return of funds under the Proceeds of Crime Act 2002.
As with the recent arrests police are likely to use existing powers available such as applying for account freezing orders in order to prevent funds from being dissipated whilst investigations are on-going (see our recent article on increasing use of account freezing orders).
Mistakes can of course happen but in the current climate it is important that those errors are identified by businesses now and that advice is taken. Businesses need to ensure that they can show evidence of the information that has been submitted as part of any loan application as this is likely to be under scrutiny during any audit or investigation in the future.
Where internal checks uncover potential issues, it is important to conduct an investigation. Internal investigations are a crucial tool in working out what went wrong as well as what management systems need to be changed to prevent future incidents. At the conclusion of any investigation, if the business uncovers any wrongdoing or fraud, it may decide to report the findings of the investigation to the authorities. However, often these investigations uncover other issues and not necessarily those which the business may have set out to investigate.
Difficulties sometimes arise if an investigation is conducted by the business without the assistance of solicitors or external legal counsel. If the investigation uncovers wrongdoing, and a business has not considered these issues from the outset, there is a danger that the business may be required to disclose a wide range of its documents or information to investigating authorities or those mounting a prosecution. This creates a real tension between the need to properly investigate and the ability of the businesses or its directors to defend themselves in a court of law in the future.
Responding to the current risks
It is important that all businesses understand that if they have made applications under any of the schemes they are about to come under an unprecedented amount of scrutiny. Directors and business leaders must not assume that as they themselves have not done anything wrong that the businesses that they run will not be the subject of audits and investigations.
It is important that businesses review all applications now and ensure that mistakes are rectified. If concerns are raised as a result of reviews and investigations, please do not hesitate to contact us to discuss how we can assist you.