How governments are combating Covid bailout fraud

  • Describe how vulnerable the Covid stimulus measures could be to fraud
  • Explain how various governments are trying to combat this
  • Identify why some governments are likely to better placed than others
How governments are combating Covid bailout fraud

HM Revenue & Customs made its first arrest for alleged fraud relating to the UK government’s furlough scheme in July.

As more reports come to light, with inevitably strong political and public support, governments are preparing to crack down aggressively on Covid relief fraud.

These abuses arise from gaps that arose in the race to launch stimulus packages at the early stages of the outbreak.

Whether through furlough programmes or guaranteed loans, most governments have thus far relied on lenders’ ex-ante controls or whistleblowers exposing misuse.

UK solicitors have anecdotally reported an “avalanche” of complaints likely to foretell significant whistleblower activity.

As the dust settles, regaining public confidence through accountability for the use of public funds will become paramount for policymakers. 

The UK’s anti-fraud efforts 

The Covid-19 Counter Fraud Response Team established in March 2020 published a set of principles to guide public bodies in preventing fraud during the pandemic.

However, there is a lack of clarity as to how the UK government expects these controls to be performed in practice and it has yet to announce a comprehensive framework for controls and audits for the disbursed funds.

Whilst the government has established a range of relief programmes for companies, we consider the schemes most vulnerable to false claims, to be addressed as a priority, are: 

  • the Coronavirus Job Retention Scheme (CJRS)
  • the Coronavirus Business Interruption Loan Scheme (CBILS)
  • the Coronavirus Bounce Back Loan Scheme (CBBLS)

due to their broad applicability and undemanding eligibility criteria

The CJRS has been available since March 2020 to all UK employers with payroll schemes established before February 28, 2020.  Employers can claim 80 per cent of furloughed employees’ salaries not worked, up to £2,500 monthly, plus certain other contributions. 

With the CJRS, the UK government appears to be relying heavily on ex-post controls and whistleblowing, employees are encouraged to report employers who are forcing furloughed staff to work.

It reserves the right to retrospectively audit claims and has clawback mechanisms in place in case of fraudulent or erroneous claims.

Draft legislation currently with Parliament will also give HMRC the power to inspect whether claims have been overpaid, that payments were used to pay furloughed employees, and to hold company officers jointly and severally liable where they have made false claims. 

How the HMRC intends to deliver is unclear. 

Second, CBILS also introduced in March 2020 and administered by the British Business Bank, provide loans of up to £5m to SMEs via specified lenders.

The loans are 80 per cent guaranteed by the government, applicants must have UK-based business activities with a maximum turnover of £45m, and the lender must believe the financing will enable the business to trade out of any short-to-medium term difficulty. 

The third scheme is the CBBLS, introduced in May 2020 to support smaller enterprises.

It enables authorised lenders to provide loans of up to 25 per cent of turnover or £50,000, with an annual interest rate of 2.5 per cent. The government covers the interest for the first year and guarantees the loan in full.