Experience shows that corporate fraud rises when the financial going gets tough, and lawyers are already seeing an increase in cases of fraud and battles to recover losses.
You don't have to go far to find someone who has received a call or email from someone impersonating a trusted organisation in a bid to scam them.
The individuals responsible for making these calls are often based out-with the UK and represent their own problem. But perhaps more troubling is the increase in frauds committed by companies set up and established in the UK.
The fraudsters continue to adapt their methods, but history tells us that in a time of financial turbulence, fraud increases.
Accurate records of the amount of money lost to fraud are difficult to obtain – for obvious reasons. However, reports recognised by the UK Government estimate that £4.5bn is lost each year through fraud and misappropriation.
Of this sum, Reuters estimate that £1.1bn of Covid relief was handed out during the pandemic to small businesses which have subsequently been classified as fraudulent claims. And, so far as the bounce back loans are concerned, this could be the tip of the iceberg.
Around £47bn in loans was handed out to small business to support them through the pandemic.
The corporate veil has always provided a shield for certain activities. Within eight to 10 days and for fees starting from as little as £12 it is possible (for those so minded) to set up a company through which loans can be obtained and money laundered.
Once established, there is less scrutiny of directors of small companies where there are no shareholders or other independent members of a board to review decisions.
Further, as part of a noble move to free up UK entrepreneurship and encourage growth, in 2011 a plan of deregulation aimed at saving companies money commenced and has continued. The reforms have removed the need for small firms to produce audited accounts.
During the period 2021/2022 only 802 directors were disqualified, for an average period of five years, 10 months, and 52 companies were struck off in the public interest. To put this in context, by the end of last year, more than five million companies were registered at Companies House.
Most directors therefore escape punishment and appear to be untroubled by the threat of the penalties which might be imposed.
While the banking and finance industry already invests billions tackling fraud, it is generally accepted that they cannot tackle this subject on their own. This raises the question, has UK corporate regulation been relaxed too far?
Alternatively, is there a need for a greater focus (and likely investment) on enforcement?
A wider discussion about the regulatory regime, the organisation and funding of the agencies responsible for enforcement, and the penalties for non-compliance should take place now. It seems likely that both adjustment of the regulatory regime and better enforcement are required.
In the absence of a review of the regulatory regime, in a market where fraud is on the rise, lending to companies could be tightened, wrapped with further administrative burdens and delays which could stifle the conditions for growth – and that is the last thing that businesses and our economy need right now.
Claire Thornber (global investigations) and Lynsey Walker (finance litigation) are partners in the commercial litigation team at Addleshaw Goddard
