United Kingdom: first arrests made in connection with suspected fraud in the coronavirus rebound loan program

It was reported on Friday July 10, 2020 that two men were arrested in North London in connection with fraudulent applications to the Coronavirus Bounce Back loan program (the “BBLS”). In addition to the arrests, the police also obtained 10 orders to freeze accounts on accounts which held funds in excess of £ 550,000.

The alleged fraud came to light when police investigating a separate offense searched a vehicle. They found documents that were said to be related to loan applications on behalf of bogus companies.

The BBLS application process has been viewed as a target of fraud by commentators. In reports of Friday’s arrests, Detective Sergeant Neil Stanley of the Metropolitan Police’s Economic Crime Unit noted that police would continue to crack down on those who were found to have “exploited government ploys to their own monetary gain ”.

Fraud risk warnings

Prior to the arrests, anti-fraud organizations and white-collar crime experts had raised concerns about potential losses to public funds as a result of fraudulent requests for coronavirus rebound loans.

On June 26, 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 charities. anti-fraud. We were told that the signatories of the letter believed more transparency was needed to deter fraud and asked the government to release the names of companies that have used the BBLS.

Fraudulent claims can arise when those using the scheme make false statements, for example about the value of the property against which the loans are secured. Limited checks were said to have been carried out before the loans were issued; the applications are effectively self-certified. The Evening Standard article also highlighted the concerns of the signatories that organized criminal gangs could infiltrate or intimidate businesses in order to obtain loans and steal money for themselves. In this article, we review the potential breaches as well as the impact these allegations have on all businesses making requests under the BBLS.

Abuse of the Bounce Back loan program

The Chancellor has reportedly granted nearly £ 35 billion in loans to help 830,000 small and medium-sized businesses weather the current crisis.

BBLS helps participating businesses borrow between £ 2,000 and up to 25% of their turnover. The maximum loan available is £ 50,000. Businesses established before March 1, 2020 and based in the UK can apply if they have been affected by the coronavirus, provided they have not applied for other specified loans. As with any other loan, they must be repaid, but under this scheme no fees or interest are 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 loan recipients. The signatories believe that the publication of the information would deter fraudsters and lead to greater liability, as the information could be verified against public documents such as those kept by Companies House.

The Treasury responded to concerns by saying the BBLS had provided a lifeline for small businesses during the COVID crisis and that any fraudulent claims would be “prosecuted in criminal matters.”

Increased risk

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 companies that have deliberately abused schemes in times of crisis. The first businesses 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 surveillance will affect all companies and not just those who have deliberately committed fraud.

It is crucial that companies use this time wisely to conduct audits and conduct investigations to identify claim errors under the BBLS and any other government financial support that the company has had access to. Legitimate businesses need to be aware of the risk of being infiltrated by criminal gangs in order to access loans and steal money. It is possible that this will occur without it being known that a request has been made on behalf of the company. It may be more likely that someone within the legitimate business aided, aided, and / or abetted a fraudulent app in this scenario.

Probable criminal consequences

The Fraud Act 2006 contains a number of offenses that may be relevant to fraudulent requests for Bounce Back loans:

  • Section 2 creates an offense of making false statements. A person is guilty of this offense if he has made false statements for the purpose of making a gain for himself or for others, or a loss for others. If a loan application is made by misrepresenting information in a dishonest manner, an offense may be committed under this section.
  • Section 3 creates an offense of fraud by abuse of position. It is committed when a person occupies a position in which he is supposed to safeguard, or not act against, the financial interests of another person or company. If that person dishonestly abuses that position and intends, by means of the abuse of that position, to gain for himself or for another, or to cause loss to another, then an offense is committed. It is possible that if a fraudulent request is made for a loan by someone in a position of trust within an organization that this violation will be considered by investigators.
  • In addition to the above offenses, the Fraud Act creates an offense of operating a fraudulent business. It must be shown that a business has been carried on with the intent to defraud creditors or for a fraudulent purpose. A single material transaction can constitute carrying on a business for the purpose of the offense and can be used to cover the scenario where a bogus business has been set up and used to apply for a loan.

In each of the above cases, the offenses are punishable by a maximum prison sentence of ten years.

Following a conviction for any of the above offenses, the authorities may request the seizure and return of funds under the Proceeds of Crime Act 2002.

As with recent arrests, police are likely to use existing powers, such as requesting account freeze orders to prevent funds from being wasted while investigations are ongoing (see our recent article sure increasing use of freezing orders).

Surveys

Mistakes can of course happen, but in today’s climate, it is important that these mistakes are identified by businesses now and that advice is taken. Businesses should make sure that they can prove the information that has been submitted as part of any loan application, as this is likely to come under close scrutiny during any audit or investigation in the future.

When internal controls reveal potential problems, it is important to investigate. Internal investigations are a crucial tool in determining what went wrong as well as the management systems that need to be changed to avoid future incidents. At the end of any investigation, if the company uncovers wrongdoing or fraud, it may decide to report the findings of the investigation to the authorities. However, these investigations often reveal other issues and not necessarily those that the company may have set out to investigate.

Difficulties sometimes arise if an investigation is conducted by the company without the assistance of outside lawyers or legal advisers. If the investigation reveals wrongdoing and a company did not consider these issues from the start, there is a risk that the company will be required to disclose a wide range of its documents or information to the authorities responsible for investigation or those who initiate proceedings. This creates a real tension between the need to properly investigate and the ability of companies or their managers to defend themselves in court in the future.

Respond to current risks

It is important that all companies understand that if they have applied under one of the programs, they are on the verge of unprecedented scrutiny. Directors and business leaders should not assume that, having done nothing wrong themselves, the businesses they run will not be subject to audits and investigations.

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