Save content
Have you found this content useful? Use the button above to save it to your profile.
Covid-19 virus
istock_blackjack3d_covid_19

Insolvency Service steps up to tackle Covid fraud

by

The Insolvency Service is doing its part to punish fraudsters who took advantage of lax Covid-loan rules. But critics say the role banks played in lending out the money needs more scrutiny.

28th Jul 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

The Insolvency Service has used its new powers for the first time against directors who terminate businesses to avoid debts, as it fights abuse of the government’s emergency Covid-19 loan schemes.  

Fraudsters have bilked the state-backed business aid for approximately £6bn, according to the government’s best estimates, but attempts to recover the funds have been slow and “unfocused”.

Last year, new laws gave the agency authority to investigate and punish directors that defrauded the system by deliberately collapsing their companies, then setting up nearly identical businesses to avoid paying customers, creditors and HMRC.

The legislation has been used successfully to target fraudsters who exploited the liberal checks around the government's Bounce Back Loan (BBL) scheme, officials said. 

Unprecedented support

Business minister Lord Callanan said the government had provided “unprecedented support to businesses to help them through the pandemic, but unfortunately a minority of people abused this support for personal gain”.

He said the Insolvency Service used the powers for the first time in recent weeks to ban three directors for “dissolving their companies to avoid repaying their bounceback loans”.

“We have been clear that we will not tolerate those who seek to defraud the taxpayer,” he said. The first directors to be banned under the new rules include a plumber who received a 10-year ban for a BBL application that contained falsified turnover. 

Bans for defrauding the BBL scheme are common, and have included sanctions for a hair and beauty retailera grocer, and takeaway owner, but the new powers allow the government body to investigate directors without a formal insolvency process.

Punishments include disqualification as a company director for up to 15 years or, in more egregious cases, prosecution. 

Weaknesses undermined effectiveness

Industry experts said while stopping any fraud was a bonus, the scheme’s weaknesses have undermined its effectiveness, and there are unanswered questions regarding the role lenders played in doling out billions to criminals with minimal checks. 

“Banks perhaps need to get their act together as so far there have only been a few successful prosecutions,” said Rick Smith, managing director at Forbes Burton. “The powers are there, but more people need to make use of them.” Courts can pursue a director's personal money, Smith added, which could become more of a flashpoint over time as more cases are uncovered.

Uncertainty still surrounds how the insolvency services and HMRC pursue cases where fraud is not overtly clear, he told AccountingWEB, for example in genuine accidental overclaims.

“For quite some time, we will see ‘published easy pickings’,” Smith said. “Commercial viability will come into the decision making and most cases will fall in the non-viable to collect and therefore swept under the carpet.”

Avoidable and inept

“The banks didn’t have independent HMRC verification available for more than eight months,” said Jeremy Asher, consultant regulatory solicitor at Setfords. “That is eight months of taxpayers being exposed to risk of fraudulent applications being granted with the associated losses. Totally avoidable. Totally inept. Easily preventable. Heads really should have rolled.”

Lisa Thomas, licensed insolvency practitioner at Neville & Co added that banks must shoulder part of the blame “as they were able to carry out a level of due diligence, and I hear in many cases they failed to do so”.

Critics have pointed to the lack of data around banks’ handling of the BBL scheme, which the government argued was part of the trade-off for the speed at which it acted in dispensing cash for businesses affected by the pandemic. 

The British Business Bank has repeatedly delayed publication of a report on lender performance, which is expected to deliver only “limited and inconclusive data” on the handling of the scheme.

Minimal checks

“There were also minimal checks or none at all performed on a majority of applications,” Smith said. “If there had been more thought into the application process, how the money was going to be distributed and to whom, the outlook of fraudulent cases may not be so high. This will also not be solved quickly, the sheer volume of loans given out is astounding so working through these will take an inordinate amount of time if convictions are to be made."

Goodwill over the handling of financial support for Covid-affected businesses is evaporating as the unprecedented scale of the fraud becomes clear. 

In a televised Tory leadership debate, contender Kemi Badenoch accused former Chancellor Rishi Sunak of failing to take warnings about mass fraud seriously.

In January, Treasury minister Lord Agnew resigned at the dispatch box over the “schoolboy errors” in allowing “thousands of companies to receive Bounce Back Loans that were not even trading when Covid struck”.

Agnew slammed the government and said he couldn’t justify the Treasury “writing off” £4.3bn in stolen Covid support payments, later accusing the Treasury of being a “Dad’s army” for fraud failures.

Both the Treasury and HMRC have denied accusations they are not doing enough to stem Covid-related fraud, despite admitting that it is likely only £1 of every £4 in taxpayer cash stolen from nearly £5bn will ever be recovered.

Replies (17)

Please login or register to join the discussion.

the sea otter
By memyself-eye
28th Jul 2022 15:01

The words 'After' 'horse' and 'bolted' come to mind.

Thanks (5)
By kenny achampong
28th Jul 2022 16:18

That's a bit like coming down hard on bank robbers, by banning them from robbing banks for 15 years.

Thanks (7)
Replying to kenny achampong:
By Nick Graves
29th Jul 2022 11:55

kenny achampong wrote:

That's a bit like coming down hard on bank robbers, by banning them from robbing banks for 15 years.

Depends which side of the counter the bank robbers sit - if they're behind it, it's usually a slap on the wrist fine. cf. Deutsche et al...

Thanks (1)
avatar
By Justin Bryant
28th Jul 2022 16:22

I would bet a large sum of money that they recover less than 5% of total BBL fraud (after the IP's fee if any).

Thanks (0)
avatar
By Hugo Fair
28th Jul 2022 20:05

Business minister Lord Callanan said: “unfortunately a minority of people abused this support for personal gain”.
I sincerely hope that mathematically that is correct (fewer than 50% of claims were fraudulent); but I rather doubt that the intended message ('only a relatively few claimants did this') is at all true.

As anyone knows it takes far less resource to hole a boat below the water-line than it does to pump out the bilges (let alone stop the further ingress of water).

Thanks (3)
avatar
By GHarr497688
28th Jul 2022 20:20

I have a good memory. On "BBC's question time" government where badgered into giving out these loans. In my view they were similar to SEISS Grants or JRS Grants apart from the fact they had to be repaid and some point. The criteria of simplicity to claim and low interest rates and self certification would obviously lead to fraud. Surely the Government and Banks would be well aware of that at the time. I claimed a loan ( since repaid in full) . The process to get the loan was chaos and the banks would just pay anyone anything they asked for without any checks at all. With my loans they got just about everything wrong in the process with multiple errors in processing and incorrect agreements etc. I note that recently many business entities are saying that the loans should not need to be repaid. From what I can see HMRC receive Accounts and they will see examples like a hairdresser making £45000 profit when they usually are £10000 or a Take-away making £150,000 rather than £30,000 or an Accountant making £20000 when they usually make £100,000. I am afraid HMRC where unprepared , banks unprepared , business unprepared . Systems where wrong , funding inaccurate and now it comes home to roost. No one case is the same and looking into these cases will be to tip of the iceberg. Why not move on learn and put the investment in a plan for the possibility of this happening in the future. I am not condoning fraud or illegal activity however I am trying to apply a common sense approach. Spending a fortune looking into a fraud for the end result to be a Director ban is just wrong as it throws good money after bad. Fraudsters are opportunist who look for loopholes - they don't care about jail or bans as they are greedy. The blame rests and stops with Government and the Banks for not being prepared . I believe the Country will send this message to The Government at the next General Election.

Thanks (1)
Replying to GHarr497688:
avatar
By Justin Bryant
30th Jul 2022 10:41

Rubbish. Some banks were far worse than others. See link above.

Thanks (0)
avatar
By LondonAccountants
28th Jul 2022 21:41

This is one of the reasons Rishi Sunak should not be prime minister.

In my time its the one of the worst examples of incompetence I have known when implementing a system irrespective of how urgent it was. I don't know why Liz Truss didn't make more play on this.

If people knew they would just get disqualified by illicitly claiming Bounce back loan most would have claimed. The reason all these delinquent directors are only getting disqualified is:

A) Too many Cases
B) They cannot be bothered to investigate
C) Director has spent the money or the IPS have taken a large chunk.

Claiming duplicate bounceback loans or obtaining BBL when not trading is THEFT and CRIMINAL charges should be brought. What message does it give to everyone else that crime pays ?

If I lie on my car loan application to obtain funds I would be expected to get prosecuted so whats the difference apart from they hide behind the corporate veil ?

Thanks (13)
avatar
By anthonystorey
29th Jul 2022 10:47

“We have been clear that we will not tolerate those who seek to defraud the taxpayer,” he said. The first directors to be banned under the new rules include a plumber who received a 10-year ban for a BBL application that contained falsified turnover.
Have they got any money back? Was the plumber trading as a company before applying or was he a sole trader who will just carry on as a sole trader. It's a pathetic response which is just a further waste of public funds.

Thanks (1)
avatar
By Planetkiller
29th Jul 2022 11:13

Why don’t they pay a fee to insolvency practitioners to look at all business then any money they can get back they receive a further payment. These people who abused the system need bringing to justice by either paying the money back or prison simple as that! The banks need to be accountable too as they lent the money to anyone without checking at all!! Nothing will happen and all this money will have to be paid back with higher taxes. Who says crime doesn’t pay complete joke!!

Thanks (0)
Replying to Planetkiller:
the sea otter
By memyself-eye
29th Jul 2022 11:43

I blame the Romans I do, they started all this.

Thanks (2)
Profile
By indomitable
29th Jul 2022 12:15

He said the Insolvency Service used the powers for the first time in recent weeks to ban three directors for “dissolving their companies to avoid repaying their bounceback loans”.

Oh wow that's a real deterrent a Director ban! When will these people running our great country wake up.

This is one of a long line of failures in my opinion of the government and civil service:

- £440BN covid support
- An estmated £17BN bounce back loans won't be repaid
- I think £44Bn track and trace that didn't work
- Multiple millions or billions on PPE equipment that was not fit for purpose

And Government spins its COVID response a success?

Thanks (2)
avatar
By sphilpott
29th Jul 2022 15:02

I remain amazed that the banks literally handed out these loans like confetti without any basic checks - surely they could have looked at account activity history if nothing else which would have immediately prevented significant amounts of fraudulent loan applications. Despite the pressures at the time these sort of checks would have taken seconds - I know of companies that got £50k for companies that hadn't traded for 2 years. At the same time the High street banks stopped opening new business bank accounts because they were "too busy" dealing with bounce-backs apparently - not sure what they were actually doing though, certainly not checking anything. If I was in Government I'd refuse to provide the guarantee on loans given in these circumstances and make the banks pay but as ever they will get away with it and the honest taxpayer will just pick up the tab as usual.

Thanks (2)
avatar
By Ian McTernan CTA
29th Jul 2022 19:12

One part of this did make me laugh:

'Totally avoidable. Totally inept. Easily preventable....The banks didn’t have independent HMRC verification available for more than eight months'

Eight months must be the fastest HMRC have ever moved!!

Anyone expecting them to move at anything more than 'dead slow' clearly has had no experience in dealing with them.

I consider it a minor miracle that they got anything out of HMRC at all.

Just look at the complete mess MTD for IT is becoming, and they've had 5 years to get that into some sort of shape.

Fraud was inevitable, given the limited timescale. Hindsight is a wonderful thing...

Maybe the right way to measure to measure the schemes is to look at how many companies did they save, how many jobs, how much CT/IT/VAT generated and how much that saved the Govt rather than paying out for massively higher unemployment etc.

But this is the UK, so let's focus solely on the negative...

Thanks (0)
Replying to Ian McTernan CTA:
avatar
By Planetkiller
29th Jul 2022 20:52

Can’t see many positives your way either to be honest! Damned if you don’t damned if you do

Thanks (0)
Replying to Ian McTernan CTA:
avatar
By LondonAccountants
30th Jul 2022 12:34

It makes me sick that some loser could have started a company before the Pandemic and not a penny to the company name yet they received a £50K cash bonanza, spent the money on a nice car, holiday or deposit for a house probably didn't even bother to pay taxes on it. Told his mate what he has done, they did the same.

Then the government, banks and HMRC bury their head in the sands. IP comes along fantastic we can some good fees on this and just liquidate the company (though I think few companies would just get struck off for convenience). If the director is really unlucky he could actually get disqualified whoopee.

In the meantime, an employee of a company who works a good 12 hour shift for minimum wage struggles to keep his or her head above water and pay their bills then see their mates enjoy their "winnings" without any repercussions.

Its not just morally or ethically correct but is blatant fraud. Either pay it back or face criminal proceedings.

There should be a bounceback fraud hotline.

Thanks (1)