Ramsay Hall: Fraud and COVID-19 – seven ways to manage risk

Solicitor Ramsay Hall outlines the cost of fraud to the construction industry and reveals how businesses can minimise risk.

Ramsay Hall: Fraud and COVID-19 – seven ways to manage risk

Ramsay Hall

Fraud has been estimated to cost the construction sector £8 million a year. The impact of COVID-19 suggests that cost will rise significantly. The consequences for construction organisations are serious and include:

  • Enforcement action by regulators
  • Damage to reputation and prohibition on bidding for certain works
  • Impact on staff morale
  • Loss of confidence from shareholders, investors and supply chain organisations
  • Financial loss.

There are multiple ways in which fraud can occur in the construction sector – but there are also ways to manage the risk.

What is fraud?

In the UK, fraud covers a range of conduct including the deliberate use of deception or dishonesty to disadvantage or cause loss. There have been various UK court cases over the past two years involving individuals in construction organisations who have been prosecuted for fraud, including Avril Elliott, a director of Scothouses Ltd, who was imprisoned for submitting false VAT claims to HMRC worth £275,000.

The circumstances in which fraud may arise include:

  1. Procurement fraud – deliberately including false information in tender bids and being awarded work on that basis
  2. Supply chain fraud – professing goods/services to be of the required quality standard when they are not
  3. Invoice fraud – (a) a genuine supplier submits a false or inflated invoice for goods and services; or (b) an individual or organised crime group impersonates a genuine supplier and submits a false invoice or provides false bank account details
  4. Tax fraud – false declarations on tax due to HMRC
  5. Embezzlement – an employee accesses company funds to which they are not entitled.

The current climate has also given rise to the risk of COVID-19 related fraud including:

  1. False claims on HMRC’s Job Retention Scheme, or furlough scheme as it’s commonly known. Recent figures suggest up to £3.5 billion may have been paid out in incorrect or fraudulent claims
  2. Testing fraud – Scotland’s First Minister spoke recently about false COVID-19 test results being provided, with demands for money to offer medical assistance. This issue is worth following as workforces may be targeted.

The risks in a COVID-19 world

The construction sector is exposed to a high risk of fraud and other financial crime, including bribery and corruption, due to large supply chains, tight deadlines and challenging profit margins. The risk is particularly prominent in the current climate where:

  • Business budgets are cut and compliance slips down the boardroom agenda
  • Changes occur to operations and personnel – this should trigger a review of an organisation’s compliance regime. Without that review, change increases the risk that compliance procedures cease to be effective
  • Working from home poses challenges for effective supervision and increases the risk of embezzlement. Home working also increases reliance on technology and provides more opportunity for cyber fraud
  • Individual financial hardship is likely to grow, creating a motive for fraud.

Addressing the risk

In a 2018 case involving UK company Skansen Interiors Ltd, the courts indicated that they expect responsible organisations to have tailored compliance policies and procedures in place to combat corruption. Implementing an effective anti-fraud system will help to address the risk of fraud – and can be addressed by following seven steps:

  1. Identify a member of senior management with ultimate responsibility for financial crime compliance
  2. Risk assess the new challenges posed by the current economic climate and, where risks are identified, adapt existing policies and procedures
  3. Stress test compliance policies and procedures – do they take into account recent changes in the business?
  4. Engage external professional support to independently help prepare and/or review your systems
  5. Train your staff – compliance training can be provided to everyone, with additional training provided to areas of the business that are ‘higher risk’
  6. Engage with external suppliers/contractors/agents and hold them to the same compliance standards that you’ve set for your organisation
  7. Record the steps taken and regularly monitor your compliance approach. The economic position changes day-to-day in the current climate and businesses should be prepared to adapt to reflect an ever-changing landscape.

If there is a fraud concern within an organisation or its supply chain, professional support should be sought. If a regulator investigates, one of the first questions they will consider is whether the business has an effective anti-fraud system. In the current climate, it’s more important than ever that construction organisations can answer ‘yes’ to that question.

  • Ramsay Hall is a senior associate at Brodies LLP and specialises in corporate crime and investigations

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