COVID-19: The risk of fraud in a crisis

27 April 2020

Many, if not all, businesses are feeling the economic repercussions of COVID-19 as they struggle to remain financially liquid. This means that often businesses are seeking new trade and business opportunities, and offers of such are therefore hard to turn down.

With rising fear that the economic fallout due to COVID-19 will be likened to the Great Depression, business are accepting new opportunities with haste. This can, however, leave businesses at serious risk of fraud.



Lessons from history

In the 2008/2009 financial crisis, fraud increased significantly. It was reported by KPMG that the UK courts saw cases of more than £1.1billion worth of fraud in this period, which at the time was the second highest amount in the survey's history.

Moreover, during 2009 the overall level of fraud increased by 9 per cent according to CIFAS (a major UK anti-fraud body). The rise in fraud in 2009 was attributed to three main factors: identity fraud, false insurance claims and a rise in misuse of funds made available to try to help the financial crisis. The UK Financial Services Authority warned that more than 12 million people may have been targeted by salesmen selling shares in worthless, non-existent or near bankrupt companies.

It appears that history is repeating itself. In the US, the National Fraud Intelligence Bureau reported that 105 cases of fraud recorded in February - March 2020 have caused losses totalling almost £1 million. Many of the cases related to coronavirus-themed phishing emails, which include: claiming to be from a research group mimicking the World Health Organisation, offering fake insurance schemes and trading advice, and pretending to be from the government, offering tax refunds.

In more recent news, on 14 April 2020 Interpol released a statement saying that they had intercepted a multinational face mask supply fraud worth £1.3 million. The scheme involved the use of compromised emails, advance payment fraud and money laundering.

While some of the issues raised above are relatively minor in financial terms, the true levels of fraud, and the biggest cases, are often only revealed years after the crisis.

Case examples of fraud arising from crises

There are many examples of crises historically generating significant frauds:

2001: UK Foot and Mouth Crisis

The foot and mouth crisis of 2001 generated a significant logistical exercise for UK agriculture. However, it was also reported that a number of frauds arose in that time.

Indeed, the National Audit Office published a report in 2002, which noted that the first four months of the crisis placed a huge strain on the government's financial control systems, as they tried to respond to control the disease. This led to a process of subsequent correction of overpayments and irregularities, and resulted in a number of disputes.

2004: Indian Ocean Tsunami

In 2004, the Indian Ocean Tsunami resulted in international aid of more than $6.25 billion being advanced to assist those affected. It was however reported that those funds were the targets of significant fraud. The Sunday Times wrote an article in relation to fraudsters targeting UK charities.

Indeed, our firm was involved in one case of suspected misuse of international aid funds worth over €50 million, resulting in a major investigation many years after the crisis.

2005: Hurricane Katrina

In August 2005, Hurricane Katrina hit Louisiana, it was the most destructive natural disaster in U.S history.

Nonetheless, fraudsters began to take advantage of the situation within hours of the hurricane landing. The FBI estimated that within a week, there were approximately 2,300 fraudulent Hurricane Katrina-related internet sites.

More significantly, more than $110 billion was set aside by the US for reconstruction. The relief money was handed out at a rate of more than $500 million per day, and the speed in which contracts were handed out was unprecedented. It was reported that bills arrived for deals that were sealed with a handshake, with no formal documentation to back them up, and 80% of the $1.5 billion in contracts were awarded without bidding. It was suspected that substantial sums were been lost to fraud in this way.

2010: BP Oil Spill

Following the 2010 Gulf oil spill, a couple engineered a complex scheme to move funds from businesses they owned so it would appear as if they had made a financial loss due to the oil spill.

They subsequently received $2.1 million in compensation for revenue loss, which they were later ordered to return.

2017: Grenfell Fire

The Grenfell tower block fire was one of the worst disasters to affect the UK in recent memory. It did not prevent fraudsters trying to capitalise though.

In March 2020, two individuals were convicted of fraud. They claimed (wrongly) to be living in the flat of a deceased Grenfell Tower resident at the time of the fire, and defrauded the local council out of £47,802 in doing so. They were not alone. It was reported that around £1 million was lost to fraudsters seeking to benefit from aid intended for victims of the fire.

Comment

In times of economic hardship fraud comes to the fore. The same is true in times of natural disaster. The present COVID-19 crisis looks set to bring elements of both: it is a global pandemic, which will most likely leave a legacy of global recession in addition to the health issues it has created.

This is likely to create a perfect storm for fraudsters. The state authorities, anti-fraud bodies, legal and accountancy professions as well as companies and the wider public will all need to be vigilant to limit the damage that could be caused through fraud in these times.


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