The Government-implemented Coronavirus Job Retention Scheme (CJRS) supports companies in their attempts to ride out the COVID-19 pandemic, permitting them to place employees on a temporary leave of absence known as ‘furlough’, and claim state aid to pay furloughed staff either 80% of their usual wages or up to £2,500 per month, whichever amount is lower. Whilst furloughed, employees are not permitted to conduct work for their employer. In this blog post, Pete Duncan and Professor Nicholas Lord discuss how dishonest CJRS claims might be made and how the Government can improve and make best use of the limited data they have to better protect public funds from fraudulent manipulation.

• The CJRS creates new opportunities for a number of furlough frauds, which may be harmful to the general public, businesses and employees.
• Legitimate access to these opportunities combine with a lack of credible oversight to encourage fraud.
• Relying on anonymous reporting is highly unlikely to detect a substantial proportion of furlough fraud without effective protections or incentives for whistleblowing.
• Untargeted auditing of CJRS claims will be costly and inefficient, but rigorous research and improved data collection could inform the development of a targeting system to identify risky claims for retrospective investigation.

Whilst it comes at great cost to the taxpayer, the Job Retention Scheme provides (some) companies and workers with much-needed financial protection. It provides a lifeline to businesses whilst they tread water, ready to spring into action when the time is right. A number of drawbacks and ambiguities have been raised, but one downside that has been minimally discussed is the opportunity the Scheme creates for defrauding the state.

Furlough frauds

Fraud can be broadly defined as dishonesty or deception for illegal gain, and usually takes the form of a false representation, an abuse of position, or a failure to disclose information, as covered in the Fraud Act 2006.

For instance, an employer claiming CJRS aid for furloughed staff, but encouraging or coercing those employees to continue working when they should not (perhaps through manipulation or the threat of job losses), would constitute fraud by false representation. In this way, deviant employers transcend ‘business as usual’ into a realm where business continues as normal but usual staffing costs are drastically reduced. This would be especially easy to organise in small companies with few co-offenders and little customer interaction.

Similarly, an employer claiming aid via the Scheme but withholding some (or all) of the received funds from their employees would constitute an abuse of their specific position of power, as they would be promoting their business interests at the expense of the employees they are obliged to safeguard. This might be more difficult to organise as victimised employees would be more likely to report the fraud.

These frauds can clearly harm Government and tax payers (as public funds are illegally obtained), as well as individual employees in need of financial support. There are also likely to be harms to wider business and social interests, as ultimately these monies will be repaid through taxes and trust in business may be eroded.

 (In)credible oversight?

We expect that most employers will not pursue fraudulent claims, either on the basis of social responsibility, or through more instrumental mechanisms to prevent furloughed employees from working (eg by cutting off access to employees’ email accounts). However, it is without doubt that in some organisational contexts and with the absence of credible oversight, motivated offenders will take the fraudulent opportunities the Scheme has created. The Government has implemented some interventions to safeguard the public purse from this exploitation, but there are a number of issues that need to be considered.

As of 29 May, the anonymous CJRS fraud reporting system had received nearly 1900 reports of suspected manipulation. Whilst some reports could be duplicates entered by multiple individuals with knowledge of a single fraud, the true extent of CJRS manipulation is likely much higher due to the numerous barriers affecting an individual’s likelihood to report, even when they have been directly victimised.

For instance, even if anonymity was assured (which seems hard to guarantee, especially in smaller organisations), sanctions for companies found to be making fraudulent claims to the CJRS could end up harming those anonymously blowing the whistle. With predicted rises in unemployment on the horizon, potential whistle-blowers might decide not to report for fear that Government sanctions might put their employer out of business (especially if that business was struggling before the pandemic). For reasons such as this, in its current guise the CJRS reporting system cannot itself be considered credible oversight to safeguard against furlough fraud.

The Government has also attempted to control furlough fraud by indicating claims might be audited by HMRC, but it is unclear how this process will work. The sheer volume of demand the Scheme has attracted means auditing all claims would likely be an improbable and costly endeavour.

Improving investigations of fraud

Furthermore, the majority of fraud investigations will be conducted retrospectively as HMRC have suspended some tax investigations due to capacity issues created by implementation of the CJRS. This is inherently problematic as attempting to recoup funds lost through fraudulent claims is costly, uncertain, and politically undesirable if large fines risk putting firms out of business (amendments to the Finance Bill 2020 give HMRC powers to fine persons deliberately making incorrect claims and to hold company officers liable).

HMRC’s retrospective response should integrate harm assessment with evidence and intelligence-led investigation. First, those reports indicating the greatest harms to employees and the public purse should be prioritised. Alongside this, rigorous analysis of data on known CJRS frauds to build an understanding of associated red flags will enable HMRC to efficiently and systematically identify other reports that are more likely to be fraudulent. For instance, are there common features or patterns evident in those cases? Are certain sectors or industries more susceptible to furlough fraud? Such an approach would, of course, only build an understanding of the frauds that are actually reported. Second, therefore, tip-offs from whistleblowers should be incentivised as these ‘insiders’ are likely to provide the most credible insights into company deviance. Third, leniency should be offered to early disclosers who report their frauds to HMRC.

The CJRS has recently been extended until October. This gives the Government more time to consider how it can better collect and make best use of data to develop a systematic and effective procedure for investigating furlough fraud once economic activity has returned to some degree of normality.

Take a look at our other blogs exploring issues relating to the coronavirus outbreak.

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