How can the corporate governance framework be reformed to help tackle fraud?

28 November 2022

Fraud accounts for up to 40% of all crime committed across the UK, according to Cabinet Office estimates, and since the onset of the pandemic it is now the fastest growing form of crime in the country.

Despite this, public sector capacity to investigate and prosecute fraud seems to be increasingly constrained, with the number of prosecutions for fraud and forgery carried out by the CPS falling by 38% in 2021 and fraud only accounting for 1.9% of all CPS prosecutions in the same year.

In light of these issues, R3 has published a paper ‘Insolvency and the fight against fraud’ which lays out our key recommendations for strengthening the UK’s corporate governance framework and highlights the important role that the insolvency profession plays in tackling fraud.

How has the Government acted to date?

In recent years the Government has taken some significant steps to attempt to reform the corporate governance framework and tackle fraud, including the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 which grants the Insolvency Service powers to investigate directors of dissolved companies, and the recently published Economic Crime and Corporate Transparency Bill.

But while we welcome these efforts, we believe there is more to be done to bring about significant and effective change to the way that economic crime is investigated and prosecuted.

How has the pandemic contributed to the issue?

When the pandemic hit in 2020, the Government were quick to respond with a number of support measures to help struggling businesses and individuals, such as the Bounce Back Loan Scheme, Coronavirus Business Interruption Loan Scheme and Coronavirus Job Retention Scheme (also known as the furlough scheme). These schemes, however, were particularly vulnerable to fraud.

At the end of 2021, the Department of Business, Energy & Industrial Strategy (BEIS), estimated that £4.9 billion of the £47 billion issued through the Bounce Back Loan scheme could be lost to fraud.

What has R3 suggested?

In light of the growing rate of fraud, and, in particular, the scale of COVID support scheme-related fraud, the fraud paper makes 16 recommendations in total. But there are two key areas which R3 believes should be prioritised to substantially improving the UK’s efforts in preventing and tackling economic crime.

1.       Reform of the company dissolution process and corporate director liability

We’ve been calling for reform to Companies House for a quite a while now, and while the Government’s proposals are welcome, , we believe that there are other key areas which are crucial to properly preventing and tackling economic crime.

In the paper, we set out a list of recommendations, such as reforming the automatic strike-off process and making the restoration of a company an administrative process.

Unless this process is reformed, the proposed reforms to Companies House will be limited in their efficacy to bring about real change to preventing and disrupting fraud.

2.       Effective public-private sector engagement to prevent and disrupt fraud

While the scale of fraud in the UK is rapidly increasing, public sector resourcing constraints have restricted the number of prosecutions and convictions for fraud in recent years.

In light of this, it is vital that, as well as providing adequate resource to law enforcement and other agencies dealing with fraud, the Government makes full use of the expertise of various suitably qualified individuals in order to supplement this lack of capacity.

Making greater use of private sector capacity and expertise to support the Government would allow more director disqualifications and prosecutions to take place. It would also allow for the ability to undertake an increased number of large cases, as well as for a focus on wider targets – such as the corporate entities through which the fraud is perpetrated and those individuals either directly or indirectly involved in the fraudulent activities.

Collaboration between the profession and public sector bodies has already led to successful investigations and prosecutions of fraudulent directors. We believe that even closer engagement with the insolvency profession will help to convict repeat offenders, deter others and return money to victims.

Download the paper

You can download it here.