Intro
Bounce Back Loans, or BBLs (not to be confused with the more commonly known Brazilian Butt Lifts) became available during the Covid-19 Pandemic. Banks offered loans to businesses with a maximum borrowing limit of £50,000, with each loan being guaranteed by the Government. The Bounce Back Loan Scheme released £46.59 billion to businesses.
Loan applications were self-certified by the applicants, ordinarily the company directors, and the system relied on the accuracy and honesty of the information being supplied. It is estimated that £1.79 billion worth of funds released to businesses represent fraudulent loans.[1]
Fraud
Business owners, directors, and sole traders who have been investigated or charged with BBL related fraud, are most likely to be charged with Fraud by False Representation, contrary to s1 and s2 of the Fraud Act 2006.
A person commits Fraud by False Representation if they:
- Make a representation;
- The representation is false – meaning it is untrue or misleading, and the person making it knows that it is or might be untrue or misleading;
- They intend to make a gain for themselves, or they intend to cause loss to another or expose another to a risk of loss; and
- They do so dishonestly.
Dishonesty is a factual matter in criminal proceedings, and turns on the specific circumstances of any given case. Dishonesty is assessed, following Ivey v Genting Casinos UK (t/a Cockfords Club) [2017] UKSC 67, this test having been approved for application in criminal proceedings in R v Barton and another [2020] EWCA Crim 575. That test is an objective one.
A defendant’s state of mind and belief, while relevant, is not the final consideration. A jury or tribunal would have to go on to assess whether the defendant’s conduct or state of mind amounted to dishonesty according to the standards of ordinary people.
Charging and Trying Fraud in BBL Cases
Given the estimated value of fraudulent BBLs that were granted, it is unsurprising that applications are being investigated, and where the evidence supports it, being prosecuted. There has been a rise in recent years of such prosecutions being brought, a trend that is likely to continue.
Individuals may find themselves being investigated and prosecuted by the Insolvency Agency, the police and Crown Prosecution Service, or potentially privately prosecuted by the loan provider themselves.
The contents of the BBL application form are likely to be critical evidence in such an investigation or prosecution. Companies House records, official business filings, and the business(es)’ financial accounts and documents are also likely to be sought by the Prosecution and could form part of the case. Private banking documents and accounts can also be sought and can be highly relevant to a prosecution.
A non-exhaustive list of areas in which a person can be said to have committed fraud in relation to a BBL are:
- Misrepresenting the business’ turnover in the application – this figure being a key determining factor in the size of loan a business would receive.
- Misrepresenting that the loan would be used for business purposes only – in particular this may come into play where a person owns multiple businesses, and used BBL funds from one business in the furtherance of another business, or simply put the funds to personal use.
- Misrepresenting the legitimacy of a business – for example the creation of a new business simply for the purpose of being able to apply for a BBL loan where that business is not trading or intending to trade.
- Misrepresenting the number of BBL applications that had been made to other banks.
Consequences of Conviction
A Dissection of Sentencing
Frauds are sentenced in accordance with the Sentencing Council published guidelines. A key determining factor is the value of the fraud(s), but a contentious aspect is accurately identifying the culpability of the defendant. The court must consider both the harm caused (aka the financial and other forms of impact on the victim) as well as the role the defendant played in the offence. Culpability is said to be either, low, medium, or high, and is an assessment of the sophistication of the offending, and the degree of involvement the defendant had in the offending.
Factors that demonstrate a High Culpability include ‘abuse of position of power or trust or responsibility’ and ‘deliberately targeting victim on basis of vulnerability’.
Different courts in largely unreported cases are applying the guidelines differently.
There is also no definitive authority from the Court of Appeal Criminal Division on the proper application of the guidelines to BBL cases, whether the fact this was an emergency scheme guaranteed by the taxpayer aggravates the sentence, and if it does to what extent.
Some courts have applied the higher culpability factors, concluding that directors and business owners were in positions of trust or responsibility, and by filing fraudulent BBL applications they have abused that position. Other sentencing judges have not been persuaded of this, instead reserving abuse of trust for different circumstances.
It has been argued and accepted by some courts that a BBL fraud is higher culpability because the BBL scheme was vulnerable and was deliberately targeted for that reason. Reasons that the BBL scheme may be viewed as vulnerable for the purpose of sentencing are that it was hastily established, during an unprecedented global pandemic, where applications were processed at speed to ensure protection to British businesses, and that the system was fundamentally reliant on trust.
There is some guidance provided in Dagistan & Dag [2023] EWCA Crim 636, which involved a fraudulent application for a BBL, and the subsequent money laundering of that fraudulent loan. There the Court of Appeal accepted categorisation of the fraud and the money laundering as higher culpability.
The court held that the Government or major banks do not fit “the normal meaning of ‘vulnerability’ within the meaning of the [sentencing] guidelines and, similarly, that the defendants were not in a position of responsibility or trust within the normal meaning of those words in the guidelines” [42]. However, the court opined that the BBL Scheme was “an exceptionally vulnerable target at a time of national emergency” [43].
Despite these observations, the court went on to say;
“We agree with the Recorder that, although neither guideline deals specifically with the circumstances particularly relevant to culpability for fraud on the Bounce Back Loan Scheme… culpability was rightly characterised on the facts of this case [emphasis added] as high” [44]
It would appear from anecdotal reporting of cases that the BBL sentencing exercises continue to trouble the courts. Where there is disparity in the application of the guidelines across the English and Welsh courts, there may need to be more definitive guidance provided to ensure consistency of sentencing.
Trimming the Fraudulent Fat: Asset Recovery
Given the amounts of money in the balance, and the public disquiet around these specific type of frauds, asset recovery is unsurprisingly a key consideration for prosecuting authorities and the Courts.
On conviction the Prosecution can apply for compensation, to recoup the loss directly.
Alternatively, the Prosecution can apply to confiscate the proceeds of crime from the fraud(s) under s6 of the Proceeds of Crime Act 2002. The Courts also have the inherent power to instigate these proceedings of their own motion, as is being seen in some cases.
The purpose of a confiscation order is to deprive a person of the benefit of their criminality. In the case of a BBL fraud, this would ordinarily represent the fraudulent loan amount and any interest owing as the ‘particular criminal conduct’. In some circumstances, the benefit amount can be expanded to include general criminal conduct where the court finds that the defendant has a ‘criminal lifestyle[2]. Where a person has available assets, these can be confiscated to satisfy the order. Where a person has no available assets, for example through bankruptcy, then a confiscation order entitles the Court to confiscate future assets should they become available to the defendant at some future time.
Directorship under the Knife
Directors can face additional consequences on conviction, namely a Disqualification from Directorship under s2 Company Directors Disqualification Act 1986.
The court may make such an order following a conviction for an indictable offence (which includes the either way offence of Fraud by False Representation) where that offence is in connection with, inter alia, the management of a company.
The maximum length of disqualification the Crown Court can impose is 15 years. The length of disqualification will depend on which of three brackets the case falls into as established in Re Sevenoaks Stationery (Retail) [1991] Ch 164:
- 2-5 year disqualification: cases of the least seriousness.
- 6-10 year disqualification: cases that do not merit the top bracket or description of being particularly serious.
- 10+ year disqualification: reserved for particularly serious cases, which may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again.
Breaching a disqualification order is itself a criminal offence, for which the maximum penalty is two years imprisonment.
Conclusion
Fraud and financial crime are growing at an exponential rate. This is something that past, present and future governments are acutely aware of. As with many frauds, there is often not a single victim, because the effect of fraud has a broader economic impact. In many ways the tax-payer often ends up being the victim.
BBLs, like their acronym name-sake Brazilian Butt Lifts, were extremely popular and many business owners and directors jumped at the opportunity to get one (or more). It is anticipated that as more data is gathered in relation to the BBLs that were granted, and where issues are being identified with these loans, that more investigations will follow. The economic impact of BBL frauds place a significant public interest in prosecuting them. What remains to be seen is how the courts will apply the sentencing guidelines, and the available ancillary orders on conviction.
To instruct Anoushka, or a member of Chambers Fraud Group, please contact Glenn.Matthews@15nbs.com or David.Cox@15nbs.com
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[1] https://www.gov.uk/government/publications/covid-19-loan-guarantee-schemes-repayment-data-december-2023/covid-19-loan-guarantee-schemes-performance-data-as-at-31-december-2023#bounce-back-loan-scheme-bbls-performance-data
[2] s75 Proceeds of Crime Act 2002
