How are incentives used to combat fraud?

Corona financial aid: which measures help to fight fraud

The corona crisis will significantly increase the volume of non-performing loans in commercial banks. Accordingly, the European Central Bank (ECB) has announced that it will be flexible in the discussion with the banks about reducing non-performing loans. However, regulatory relief for dealing with increased NPL rates does not offer a final solution for fraud-related defaults, as a voluntary repayment of the loans is no longer to be expected. To make matters worse, the outflowed funds are often no longer available with the addressee or borrowers try to prevent access through bankruptcy actions.

Subsidy fraud: renaissance of Section 264 of the Criminal Code

As different as the acts of deception may be, all cases have one thing in common: The successful return of wrongly paid funds requires an overarching approach that combines targeted processes for plausibility checks and a subsequent review of the application documents with criminal procedural investigative and security measures by the responsible police and judicial authorities.

The criminal offense of subsidy fraud according to Section 264 of the Criminal Code (StGB) is of central importance, as it has led a relatively shadowy existence in previous criminal law practice. For 2019, the police crime statistics show just 318 recorded cases. As a result of the Corona crisis, however, a revival of the criminal offense is to be expected. According to press reports, the Berlin State Criminal Police Office alone has now initiated over 100 investigative proceedings.

As early as the introduction of Section 264 of the Criminal Code in 1976, the Bundestag's special committee pointed this out in a forward-looking manner (BT-Drs. 7/5291, p. 4),

that certain weaknesses are characteristic of the subsidy award procedure, which require effective protection under criminal law. Often - especially in the event of a catastrophe, but also because of the rapid change in the economic situation - subsidies have to be granted quickly and unbureaucratically. It is not possible to sufficiently check the information provided by the applicant about the circumstances relevant to the subsidy for correctness and completeness.

The requirements for an initial suspicion were made correspondingly low. As an abstract high-risk offense, Section 264 of the Criminal Code only presupposes an act in the form of deception about facts relevant to the subsidy. It is also sufficient that the perpetrator acts recklessly, that is, objectively violates the due diligence to a particularly high degree. Proof of intent, which is regularly associated with high hurdles in practice, is therefore unnecessary in the case of subsidy fraud.

Section 264 of the Criminal Code thus offers a practicable basis for criminal investigations, which ultimately also benefit the injured party. For example, the financial investigations carried out by the public prosecutor and the police can be used to trace the perpetrators' cash flows and financial relationships. Ultimately, this facilitates the enforcement of restitution notices and claims for damages. Criminal procedural security measures for asset recovery ultimately benefit the injured party and strengthen the preventive effect of criminal law.

The banks' own efforts

Before law enforcement agencies can be brought in, suspected cases must be identified. To do this, the banks concerned need targeted tools and processes that can be used to identify indications of the relevant fraud patterns.

The number of funding and loan applications will continue to rise. In order to be able to cope with the volume, the manual check should be relieved by a proper automation of individual work steps. Data recorded digitally when submitting an application can be linked to professional research tools, which in turn can be used to set up interfaces to relevant registers and databases. In this way, the data records can be filtered according to defined risk classes and prioritized for further manual checking and targeted inquiries to the applicant.

Detect fraud using digital methods

In the case of emergency aid, the automated comparison with the company register maintained by the Bundesanzeiger Verlag is the first option in order to verify the existence of corporations and to identify companies that have already been deleted or that were founded shortly before the application was submitted. A comparison with the central trade register kept by the Federal Office of Justice (BfJ) provides information on trade bans or the withdrawal of permits and concessions. Applicants who were already in a lack of liquidity before the Corona crisis can be identified via the notices of the insolvency courts, which can be accessed in the federal and state justice portal, and the joint enforcement portal.

Proprietary databases from private providers can also be used to identify applicants who have already become suspicious in the past or who have connections to sanctioned parties. Examples of this are compliance databases and press archives, which are also used to prevent money laundering. IT-supported open source and social media analyzes enable additional research on the applicant's previous business activities in individual cases.

Finally, organizational structures and work processes must be set up that enable the suspected cases identified to be passed on to the responsible law enforcement authorities without a hitch. Follow-up processes for recording and processing the results of the criminal investigation ensure a tailor-made transition to the administrative and civil law measures that are to be taken in individual cases to repay the outflow of funds caused by deception. In order to coordinate the entire process cycle, affected banks are well advised to align their existing monitoring and case management systems with the current challenges.

Overall, effective fraud prevention when making use of Corona financial aid requires considerable efforts - in terms of technology, personnel and organization. However, these are not only economically worthwhile, they also result from social and moral responsibility towards society. The financial sector in particular has a central role to play in overcoming the economic hardship, which at the same time offers the opportunity to regain the trust that was lost in the course of the 2008/2009 financial crisis. Careful educational work and effective repatriation of illegally used funds can only promote this process.