How is COVID-19 affecting white-collar crime risks and enforcement?

July 2020  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2020 Issue

There is almost no aspect of life which has not been impacted by the coronavirus (COVID-19) crisis and white-collar crime and its enforcement is no exception.

This article will analyse the fraud risks that businesses may be likely to encounter during the pandemic, and also the challenges faced by law enforcement agencies both in addressing those issues and in progressing investigations that were ongoing before the current restrictions began.

New risks

What is already clear after the first two months of the UK lockdown is that there is a constantly evolving landscape of frauds being committed by those seeking to take advantage of the anxiety and uncertainty that the pandemic has created. First, industry insiders, particularly those in the financial services sector, became aware of COVID-related e-commerce frauds, most obviously involving fake or non-existent hand sanitiser or personal protection equipment.

The next stage of criminality focused on phishing, through which individuals sought improperly to elicit personal details being submitted in relation to the furlough scheme. At the present time it is understood that there is concern about the number of cloning scams involving identity theft for both individuals and corporate entities. As to the next stage of risk, it is assumed that large-scale data theft offences may be likely to occur as the crisis continues. In this respect, although the NHS COVID tracking app is still to be deployed in the UK following trials on the Isle of White, there is already discussion about the data theft risks that the app may create.

Those most likely to be affected by such frauds, particularly within the financial services sector, are aware of the position and are exercising increased vigilance to address the increased threat levels. However, the level of resource that is now required to monitor possible COVID-related frauds is raising concern that the effective monitoring of other issues, for example market abuse or insider dealing, is being placed at risk.

The approach of enforcement agencies

Understandably, there is no one-size-fits-all approach from the principal law enforcement agencies. Some of them made public statements early in the crisis, with other choosing not to do so. What does appear to be clear, however, is that enforcement agencies do want, where appropriate, to help businesses through these most extraordinary of times.

While this, in part, may reflect reduced resources that the agencies are themselves having to grapple with given staffing issues, a common theme appears to be that law enforcement agencies and regulators may be willing to find pragmatic solutions for those businesses that find themselves in genuine difficulty. However, law enforcement agencies will move to come down hard on those that seek to exploit the position for improper advantage.

HMRC, for example, has made it clear that it will not be progressing corporate investigations at the current time. Although the Financial Conduct Authority (FCA) has not gone so far, it has indicated that it may have to prioritise its resources into other areas. The Serious Fraud Office (SFO) announced in early May that it was continuing to progress its investigations, although it is understood that it is currently having difficulty with loading and then analysing data submitted to it in both hard and electronic form.

In terms of interviews, the FCA has indicated that it would be willing to conduct interviews by video conference where appropriate, but the SFO to date has not taken a similar position.

In general, those who are involved in investigations should anticipate that these will take longer to conclude than would have been the case prior to the lockdown. The possible exception to that position is investigations undertaken by the Information Commissioners Office (ICO). The ICO has taken a far more robust public approach to how it will address issues that arise during the pandemic. Given the increased data risks as discussed above, this is perhaps no surprise.

Money laundering

The Anti-Money Laundering (AML) regime remains fully intact, although agencies like HMRC and the FCA which are responsible for its enforcement may take a more pragmatic approach at the current time.

Most obviously, given the difficulty in arranging the personal meetings that are normally required to verify a person’s identity, agencies are taking the view that provided that the source of electronic identification is not in question, receiving pictures or documents on a mobile phone, for example, will be sufficient.

However, the AML regime does present two obvious risks to businesses in a number of sectors, most obviously financial services. Firstly, in light of the strained environment, which is likely to persist for some months yet, individuals may be tempted to take a more relaxed approach to AML vetting procedures in order to obtain or retain business with a view to ensuring profitability. This may be particularly so, and harder to detect, where relevant personnel are working remotely.

There is a further issue, which the authorities are alive to and may seek to investigate in appropriate circumstances. To the extent that business activity is currently restricted to those areas that the government has deemed to be essential, activities that do not fall within that bracket may be contrary to the Coronavirus Act and regulations and therefore potentially criminal offences. In the event that criminality does arise, and proceeds of such crimes then result, those who deal with, or receive, funds derived from that trade would be at risk of committing a money laundering offence if they knew or reasonably suspected that the underlying business was illicit. It is already feared that a number of unscrupulous traders are profiteering from the pandemic, and those with whom they bank or those to whom they remit funds could potentially become exposed to the risk of a money laundering offence in those circumstances.

While the position might not be an immediate priority in terms of enforcement resources, one could see that if there were to be a particularly egregious breach of the regulations, and entities were accepting funds flowing from that activity in circumstances where it must have been obvious that such trade should not have been occurring, then the authorities might well wish to take a firm line, not least to deter others from engaging in similar activity.

Business failure

In the aftermath of 9/11 and the 2008 financial crash, there were a number of high-profile business collapses where the deterioration in the economy unmasked the improper nature of businesses that were defrauding consumers, Madoff being the obvious example.

This crisis is likely to be no different, and entities that may have been allowed to cover up improper practices could well be found out in this period. If so, accounting standards, and the potential misuse of generally accepted accounting practices, may be an area of close scrutiny. In this respect, the preparation of accounts using earnings before interest, taxes, depreciation and amortisation (EBITDA) has historically raised some concerns, and if companies have used this to hide irregularities, the current market conditions may see these practices exposed. In that event, substantial law enforcement agency investigations and proceedings may then follow.

Conclusion

The harsh reality is likely to be that we are still only in the foothills of the problems that will be created by COVID. The increased fraud risks that will apply across all sectors require that all businesses ensure that they have procedures in place to mitigate those risks so that they remain fully protected.

Jeremy Summers is a partner at Osborne Clarke LLP. He can be contacted on +44 (0)20 7105 7394 or by email: jeremy.summers@osborneclarke.com.

© Financier Worldwide

BY

Jeremy Summers

Osborne Clarke LLP

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