Fraud and COVID-19 Relief Funds

This publication is authored by and reflected the views and opinion of PT Integrity Indonesia. More information about PT Integrity Indonesia is available on www.integrity-indonesia.com

Fraud and COVID-19 relief funds

The lockdowns, border control and social distancing measures taken against COVID-19 epidemic have contributed to further worldwide economic and financial upheaval. Many countries have entered an economic recession, and had to establish various economic recovery plans for employees and Micro, Small and Medium Enterprises (MSME), the social components most impacted. Grants, loans, tax breaks, and other forms of assistance were provided.

In the midst of any crisis, the management of relief funds is always vulnerable to fraud. The enormous amount of assistance funds, the lack of a legal and risk management framework for managing those funds, and the easier access to the funds without an appropriate degree of protection altogether entice fraud perpetrators. 

The UK claims to have lost more than £16 billion in Covid loan schemes. The Furlough and Bounce Back Loan Schemes (BBLS) schemes have been reported to suffer the most losses.

The US admits to being 'robbed' of hundreds of billions of dollars from the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) schemes. 

Factors causing the loss of funds

In a disaster situation, such as the COVID-19 pandemic, the speed and precision at which relief funds are distributed is critical to rescuing millions of employees and companies. One of the initiatives taken by the UK and the US governments to speed the distribution of funds is by reducing the verification process or even eliminating it completely.

Unfortunately, ‘speed’ trumps caution and opens more doors for fraudsters, including experienced criminals. During the registration process through the BBLS scheme, for example, eligibility only depends on independent business certification without verification. Another concession is that the debtor does not need to perform a credit check against potential creditors.

The perpetrators take advantage of this leeway by executing their modus operandi, which are document falsification and identity theft. In one case in the US, the perpetrator falsified the financial information of two small businesses so that he was eligible for a loan under the EIDL scheme worth a total of 300.000 US dollars.

Several crime and bankruptcy agencies report that enormous amounts of relief funds are used to fund gambling, luxury purchases, renovation of private buildings, and even the funding of international criminal networks.

Aside from a lack of verification, another factor that raises the risk of fraud is a lack of oversight over the use of funds. Inadequate verification allows those who are not eligible for relief to receive it, leading the number of recipients to skyrocket.

The high volume, combined with a system that was not designed for monitoring, has led to an unavoidable misuse of funds. As is seen in one case where a doctor claimed to spend the cash to pay his employees' salaries, in reality, the funds were used to purchase luxury goods.

A systemic flaw is closely related to weak internal controls and lack of transparency. 

Fraud investigation and mitigation

The mind-boggling and unacceptable number of losses prompted the UK and US governments to conduct thorough investigations. The investigations involved many relevant authorities to examine each recipient. The goal was to return as much of the lost funds as possible as a form of accountability to taxpayers.

Every business and individual that has received funding must prepare to undergo painstaking and time-consuming compliance checks. Those who are proven to be involved in acts of fraud may be subject to criminal and civil sanctions in accordance with the applicable laws of their country.

This step must support improvements to the functions of verification, internal control, supervision, and transparency of reports on the use of funds. After receiving input from various related institutions that conduct fraud studies, the UK and US governments are determined to make improvements to the verification steps of potential recipients of recovery funds in the next round.

In terms of internal control, strengthening can be done by implementing a whistleblowing system. This system allows individuals within the organization to report fraud red flags. As a result, fraud can be identified as early as feasible, minimizing potential loss.

This publication is authored by and reflected the views and opinion of PT Integrity Indonesia. More information about PT Integrity Indonesia is available on www.integrity-indonesia.com