Alan Munro: Covid fraud aftershocks continue to reverberate
As the pandemic’s aftershocks reverberate through the financial ecosystem, insolvency law specialists are bracing for an overwhelming influx of fraud-based legal cases, writes Alan Munro.
The pandemic required the government to provide fast and extensive support to keep businesses and individuals afloat. However, when schemes are created and implemented at such a pace, they may not be completely airtight from exploitative or fraudulent behaviour.
The dark underbelly of financial fraud cases is coming to light. More than 450 directors were disqualified in 2022–2023 alone by the Insolvency Service for abuse of pandemic support schemes, with the average disqualification length being seven years and four months, and this shows no sign of slowing.
While the whirlwind of economic challenges caused by the pandemic has mostly passed and the dust settles, we are seeing the damage of what has been left behind. Personal insolvency cases are overwhelmingly voluntary, meaning the debtor initiates the process. During the worst of the pandemic, there was a moratorium on creditor petitions, meaning debtors weren’t actively chased by creditors. That ended in October 2021 and what followed was an explosion in creditor petitions.
While many creditors have shown considerable forbearance in dealing with debtors, we can’t ignore the fact that compulsory court-ordered liquidations were up over that same period – most of which will likely be directly or indirectly due to creditor pressure.
The unprecedented nature of the pandemic overwhelmed the legal framework. The rushed implementation of these policies made them vulnerable to fraudulent claims.
The first conviction for COVID scheme fraud by HM Revenue and Customs (HMRC) was in March this year, with Mr Mohammed Ikram being jailed for over £430,000 worth of Eat Out to Help Out fraud.
Another notable example was the case of Khalid Iqbal Bhatti, who claimed Bounce Back Loans for 12 companies that were not financially entitled to the loans. At £50,000 per company, Mr Bhatti has left the taxpayer £600,000 out of pocket, which has resulted in him being disqualified from directorship of any UK organisation for 13 years.
Many knew the government schemes were open to fraudulent activity but trusted that the systems in place would bring justice, primarily through bringing that money back into the public pot.
The rampant amount of fraud is, unfortunately, putting even more sustained pressure on a court system already at capacity as it plays catch-up from the pandemic.
The same is also true for HMRC fraud investigations teams that face the double whammy of underfunding and an ever-increasing caseload. Last October, HMRC estimated that the total value of error and fraud was about £4.5 billion, or roughly 4.5% of total expenditure on these schemes.
The Taxpayer Protection Taskforce established to tackle this issue in 2021 was asked to begin winding down in March 2023 as it became clear it would not recover anything close to what was expected.
The illusion that limited liability shields directors from personal responsibility needs to be shattered. Intentionally or negligently engaging in fraudulent activities can result in disqualification, fines, and even more extensive legal action.
Transparency, compliance, due diligence, and proactive professional advice are how you avoid the worst of the troubled waters.
We have by no means heard the last of this issue. I suspect in the months, even years, to come, we’ll see more and more businesses seeking guidance through the treacherous waters of insolvency.
Alan Munro is an insolvency expert at Wright, Johnston & Mackenzie LLP