How can the UK’s new Covid fraud team avoid being another toothless tiger?

Like previous administrations, the current UK government is promising to chase those who have defrauded COVID support schemes.

The newly-created Public Authorities Fraud Investigation and Enforcement Service (PAFIES) has been given significant powers, including search and seizure, compulsory information gathering, civil penalties, and direct recovery from bank accounts and earnings.

In addition, the limitation period for COVID-related civil claims has been extended from six to 12 years, giving investigators until 2032 to pursue cases.

Yet I reserve judgment over how effective this will all prove to be (see also OPINION: Failure of UK’s COVID loan fraud task force entirely predictable).

For many years, UK governments have tried to file the COVID fraud problem in the “too-hard-to-do-tray”. Granted the current Labour government inherited the problem. However, the fact remains that this latest initiative is likely to fail, too, not least due to the likely makeup of the PAFIES team (as I understand it).

Last year, the Government’s own COVID Counter-Fraud Commissioner concluded that taxpayers lost £10.9 billion ($14.7 billion) to fraud and error across pandemic support schemes. Only around £400m ($540m) has been recovered and much of the rest was “beyond recovery”according to the Commissioner, Tom Hayhoe.

Taxpayer losses

The Bounce Back Loan Scheme (a fast-tracked government-backed loan scheme to small and medium-sized businesses during the pandemic) remains the starkest example.

The National Audit Office warned as early as October 2020 that the scheme exposed taxpayers to potential losses of £15-26 billion ($20-$35 billion) through fraud and credit losses. The Public Accounts Committee later recorded that £47 billion ($64 billion) was paid out through the scheme, with £17 billion ($23 billion) expected to be lost, including £4.9 billion ($6.6 billion) to fraud.

Put plainly, while billions have been lost, only a tiny fraction has been recovered. Although the public purse was raided at speed, the subsequent recovery efforts have moved at a crawl.

In the spring of 2020, speed mattered. States had to act. But urgency alone cannot excuse poor implementation of systems that were predictably vulnerable to abuse. Nor does it excuse years of underpowered enforcement and lack of retrievals.

Working for an international asset recovery law firm, the most fundamental and basic hurdle we must overcome is delay. Delay can be fatal to any recovery effort. Today, money moves quickly and digitally, while suspect companies can be tactically dissolved without any inordinate delay.

Directors will disappear behind nominees, insolvency processes or claims of innocent confusion. Crypto assets are transferred, properties are refinanced or sold, and business records vanish. Every day lost makes recovery harder, more expensive and less likely. Delays of this magnitude mean that the new UK agency has an uphill struggle ahead.

There is a real risk that COVID loan fraud has been treated too narrowly as an insolvency problem.

Meanwhile, the power to search and seize is only useful if an investigator knows what to look for. The power to compel information is also only useful if an analyst can identify lies in loan applications, bank statements, VAT records, company filings and director conduct reports.

Meanwhile, a power to recover monies directly is only useful if lawyers and investigators move quickly enough to preserve assets before they disappear.

There is a real risk that COVID loan fraud has been treated too narrowly as an insolvency problem. Of course, insolvency practitioners have an important role to play in the PAFIES team.

They understand failed companies, director misconduct, antecedent transactions, misfeasance, compensation orders, and disqualification proceedings. They can identify abuse through liquidations and company failures.

But in this instance, I strongly believe that insolvency practitioners need to be supplemented by experienced fraud investigators.

To my mind, a serious Covid fraud recovery unit needs a core of retired detectives, accredited financial investigators, intelligence analysts, and forensic accountants. It needs people who have interviewed criminal suspects, traced money, built criminal cases, tested dishonest explanations and understood the difference between error, recklessness and fraud.

I anticipate that many suspects will rely on a defence of ignorance; that they misunderstood eligibility or made mistakes. When cornered, most fraudsters will rely on this defence to preclude criminal prosecution and jail time.

This is where those with detective experience become crucial. They will be used to separating the ignorant from those who may have lied about turnover, obtained multiple loans, used dormant companies, etc.

News outlets have reported that the now disbanded National Investigation Service recovered only £7.2m ($9.7m) against a suspected fraud pool of £1.9 billion ($2.6 billion), despite receiving £38.5m ($52m) in public funding. If accurate, that is not simply disappointing, it suggests a failure of design, oversight and execution.

What is needed

The Government cannot afford another symbolic enforcement body: it needs a functioning recovery machine with four parts.

1. Experienced investigators, likely retired fraud squad detectives, must sit at the centre alongside financial investigators, capable of triaging cases by culpability, evidence, and recoverability.
2. Insolvency practitioners should be used properly, but not exclusively. Their expertise is essential where companies have failed and director misconduct is visible through liquidation records.
3. Private-sector asset recovery lawyers should be brought into the process. They know how to utilize freezing injunctions, disclosure orders, proprietary claims, Bankers Trust orders, Norwich Pharmacal relief, third-party debt orders, charging orders, and cross-border enforcement. They appreciate that tactical agility is needed to preserve assets, force disclosure, and convert evidence into money.
4. Finally, the regulated sector must be engaged. There needs to be a new conduit that bypasses the usual hurdles and barriers that hinder and slow the intelligence and evidence-gathering process. Banks, accountants, and compliance teams hold the data. They saw firsthand the suspicious loan flows, duplicate applications, personal transfers, and likely reported them to a National Crime Agency laden down by more pressing matters. Their intelligence must be lawfully and efficiently converted into recoverable cases.

This is the perfect opportunity for the public and private sectors to work together. Public bodies have statutory powers and public-interest authority. Private lawyers have speed, tactical creativity, and recovery expertise. Insolvency practitioners have access to failed-company evidence. Regulated firms hold critical financial intelligence. Together, they would be far more effective than any one group acting alone.

The new fraud squad is therefore welcome, but only on the condition that is properly staffed, properly led, and properly integrated with private-sector expertise. Director disqualifications matter, but they do not refill the public purse.

Prosecutions matter, but they must be matched with restraint, confiscation, and civil recovery. Civil penalties matter, but only if imposed against those with recoverable assets.

Time is of the essence, and politically motivated statements must be matched by actions.

This article was originally published by GRIP