Since the pandemic began in March 2020, there has been a rise in fraudulent behaviour as fraudsters look to take advantage of members of the public and financial institutions (FIs). Phishing, text scams and small-scale fraudulent activity targeting the British public were up 285% in the first half of 2021; HM Revenue and Customs estimates up to £3.5 billion provided under the Coronavirus Job Retention Scheme will be lost due to fraud or error; and the National Audit Office estimates £15-26 billion provided under the Bounce Back Loan Scheme (BBLS) will be lost to fraud and defaulting payments. This has already resulted in an increase in prosecutions and investigations, a trend we expect to continue in 2022.
Reasons for increased fraud, bribery and corruption
The roll-out of the Coronavirus Business Interruption Loan Scheme (CBILS) and BBLS took place in March 2020 and May 2020 respectively. These support schemes were introduced to assist businesses struggling as a result of the pandemic; however, because of the urgent need for funds and the volume of companies in need, FIs were forced to water down their normal due diligence procedures, making them more susceptible to fraud (for example, by companies incorporated by individuals purely to access the schemes). In addition, the National Crime Agency (NCA) believes new variations in market behaviour brought on by the pandemic pose a challenge to FIs’ abilities to recognise suspected bribery and corruption payments. It states that there is a “realistic possibility” that fraudsters will take advantage of “unstable pricing to disguise bribery and corruption payments” for the duration of the pandemic.
According to the NCA, Covid-19 has also increased the insider threat to businesses from employees that are struggling financially or are threatened with redundancy. Specifically, the NCA considers that the increase in home working and reduced ability to monitor staff and identify unusual behaviour may have led to increased fraudulent behaviour.
Increase in investigations and prosecutions
As the UK continues to recover from the pandemic, regulators, prosecutors and the court system have started to adapt to the pandemic and process the backlog of cases caused by the Covid-19 restrictions. Consequently, more alleged fraud cases are reaching court than in 2020. The number of directors convicted of criminal activity rose 205% to 122 between September 2020 and September 2021, compared to 40 for the previous year, and the number of alleged fraud cases being heard in UK courts in the first half of 2021 had almost doubled compared to the same time in 2020. This trend seems set to continue throughout 2022 given the increased rate of fraudulent activity that has taken place during the pandemic.
In particular, the Insolvency Service’s announcement on 22 June 2021 seemed to make clear that it would take a tough approach to companies that abuse the Covid-19 loan related schemes through fraud by petitioning the court to wind them up. As of 16 November 2021, the Insolvency Service had petitioned the courts to wind up seven companies found to have abused CBILS and BBLS. The wind-up petition is in addition to other measures being imposed, such as director disqualifications. As of 15 December 2021, the Insolvency Service was also granted new powers to investigate and disqualify company directors who dissolve companies to avoid paying their liabilities, including Government backed loans.
However, despite there being an increase in the number of alleged fraud cases before the courts in the first half of 2021, the value of the fraud committed in those cases fell in comparison to the value of fraud committed in the first half of 2019 and 2018. This may mean that the prosecution of more complex fraud cases has been delayed, and we can expect to see an increase in such cases being brought to trial in 2022.
The impact for financial institutions
Whilst regulators and prosecutors continue to tackle the increased allegations of fraud, corruption and bribery, FIs may be asked to assist with investigations by providing any relevant data that they have. Consequently, FIs may need to consider how their data is stored now that large proportions of their workforces are working from home.
Further, there may be expectations for FIs to have in place improved due diligence and compliance systems to ensure that they can more effectively identify suspected bribery and corruption payments and report these to the authorities. Without doing so, FIs could be investigated for money laundering and other fraudulent activity and sanctioned or prosecuted by regulators, as seen recently by the fines handed down to Natwest and HSBC of £264.8 million and £63.9 million respectively.
Pamela Reddy is a white-collar crime and investigations partner based in London. She has extensive experience of domestic and cross-border fraud, bribery and corruption, market abuse and money laundering investigations, and frequently acts on some of the most serious, complex and high-profile cases involving the UK and foreign regulators, including the SFO, NCA, CPS, FCA and DOJ.
Annie Birch is a white-collar crime and investigations associate based in London whose experience includes investigations into bribery and corruption and civil and criminal law proceedings before international regulators, including the FCA, SEC and DOJ.
The authors would like to thank Matt Roderick, Norton Rose Fulbright trainee, for his assistance with this blog post and series.