Fraud and financial crime in the food & drink sector

Earlier this year, a House of Commons Treasury Select Committee report described an "upward trend" in economic crime across the UK. Instances of bribery, fraud, tax evasion and money laundering are on the rise.

This kind of criminal conduct can have significant consequences for the food & drink sector.

A prime example is frauds carried out in relation to financial support provided by the UK Government during the COVID-19 pandemic. Current figures show that an anticipated £4.9 billion has been lost in Covid-19 support fraud.

What action is being taken to address the problem?

The relevant authorities, including Police Scotland's Economic Crime Unit and the Insolvency Service, are robustly investigating fraud concerns. For instance, more than 70% of the Insolvency Service's current investigations relate to Bounce Back Loans and other Covid-19 support schemes, such as furlough payments. To date, enforcement action has included 180 director disqualifications, 70 bankruptcy restriction orders and 21 public interest winding ups.

In the first half of 2022 two pizza businesses were the subject of enforcement action.

First, in February 2022, the sole director of food business, Kleida Pizzeria Ltd, was disqualified from acting as a director for eight years after he failed to ensure that the company maintained adequate accounting records. Concerns arose following an investigation by the Insolvency Service after the company failed to pay a tax return and liquidators were appointed. The director failed to co-operate with the liquidators and failed to provide company accounting records. The investigation identified that the company received a £50,000 Bounce Back Loan during the pandemic. The director arranged for the company to transfer £90,000 to an unknown account, which included the £50,000 bounce back loan.

Second, in June 2022, the director of a pizza takeaway became the first person to be successfully prosecuted for fraudulently claiming funds through the COVID-19 bounce back loan scheme. Abdulrazag Zagroba applied for a loan of £20,000 two weeks after beginning the process of voluntarily dissolving the business. When applying for the loan, he failed to disclose to the bank that the company was in the process of being dissolved. He then used the loan funds to purchase a car and gift money to family and friends. Following a guilty plea to charges of fraud and offences under the Companies Act 2006, he was imprisoned for two years and disqualified from acting as a director for seven years. Julie Barnes, Chief Investigator at the Insolvency Service said: "Covid loans were designed to support viable businesses during the pandemic. Abdulrazag Zagroba, however, cynically sought to exploit the covid loan scheme and by dissolving his company, he intended to frustrate any attempt by the lender from taking action to recover the outstanding loan. This sentence should serve as a warning to others who engaged in this behaviour, and they should come clean and repay the money before it is too late."

"Takeaway" messages for the sector

With apologies for the awful pizza related "takeaway" pun, there are three key messages for the sector:

1. Take steps now to ensure your organisation and you supply chain maintain robust financial controls. Internal controls can be developed and implemented through tailored financial crime risk assessments, compliance policies and training to staff. Supply chain controls should include due diligence at supplier take-on, in addition to audits of current suppliers.
2. It is vital to have in place a corporate strategy to protect brand and reputation. This will involve preparing a plan mapping a response in the event of a financial crime concern.
   
3. In the event you identify a concern, seek legal support immediately. Having legal support on board in advance of regulatory investigations and enforcement action can help manage the process and limit exposure. We have significant experience of supporting organisations operating in the food and drink sector to investigate financial crime concerns. Having a specialist team working together to address a financial crime concern demonstrates to the authorities and stakeholders that the organisation has responded in an appropriate manner.
   

Given the current focus on financial crime in the food and drink sector, now is the time to act to ensure you have in place the policies and procedures that protect brand and reputation.