Prosecutions of company directors jump by 205 per cent as crackdown on Covid fraud begins
The number of company directors convicted of criminal activity during the pandemic has risen 205 per cent to 122 in the year to 30 September, up from just 40 for the same period to 30 September of last year.
This trend is set to continue as the Insolvency Service takes an increasingly tough stance on fraud during the pandemic.
The rise in prosecutions is likely to relate to the government-backed schemes introduced during the Covid-19 pandemic, including the CBILS and BBLS loan schemes, lawyers at tax and audit firm Mazars told City A.M.
These support schemes were introduced as a lifeline for businesses during the pandemic, but time pressure and the volume of demand forced banks to dilute their normal due diligence procedures, making them susceptible to fraud.
Insolvency practitioners have reported instances of companies being incorporated by individuals purely to take advantage of the government schemes for personal gain.
Anecdotal evidence includes directors paying off personal creditors and purchasing luxury items like watches and other portable assets to avoid detection. This is instead of assets like sports cars which typically come with detailed paper trails.
The full extent of the fraud is still unknown, but the National Audit Office has estimated that up to 60 per cent of BBL claims could be fraudulent or defaulted on. This represents over £27bn lost from the public purse.
The Institute of Chartered Accountants in England and Wales and the Insolvency Practitioners’ Association have urged their members to report any suspected cases of malpractice relating to Covid support schemes directly to the Secretary of State.
The lawyers pointed out that this guidance has helped increase the number of directors being investigated and prosecuted as a result of action undertaken by the Insolvency Service.
“The Insolvency Service is sending a clear message that directors will now face serious penalties, including prison sentences, in cases of gross misconduct. Covid fraud is just one example of this,” explained Michael Pallott, Restructuring Partner at Mazars and an expert in contentious insolvency investigations and asset tracing.
“The challenges of the pandemic meant that the government’s resources were considerably stretched,” Pallott told City A.M.
However, the Insolvency Service has committed itself to cracking down on Covid related fraud and is taking a much more hard-line approach; it is not afraid to pursue criminal prosecutions where necessary, he continued.
“Normally such sanctions for directors would be limited to disqualification. Given the state of public finances, it is in everyone’s interests to have an effective enforcement scheme to make an example out of dishonest business owners. Directors who have committed Covid related fraud need to take serious notice of these trends,” Pallott concluded.