How the UK government lost £4.9bn to Covid loan fraud | Economic policy

In the final days of April 2020, bankers and Treasury officials were huddled together on laptops in makeshift home offices across the country, negotiating the terms of what is fast becoming the most controversial of pandemic bailouts. of the government.

The country was in its sixth week of nationwide lockdown following the Covid outbreak, and Treasury Banking and Credit Chief David Raw was conducting video calls with more than 20 senior officials across government and of the city – including major banks HSBC, NatWest, Barclays and Lloyds, Santander, Virgin Money and AIB – to try to push through Chancellor Rishi Sunak’s ambitious plan for a more accessible and supported small business loan program at 100 % by the government.

After ordering the closure of all offices and non-essential businesses and services, Sunak promised financial assistance. But the first scheme to launch, which offered loans of up to £5million and was known as the Coronavirus Business Interruption Loan Scheme (CBILS), had been criticized by lobby groups companies and MPs as too expensive, too slow and too risky – borrowers were required to give personal guarantees, usually in the form of their own accommodation. So the Treasury introduced a second program, bounce loans, designed to provide businesses with cheap money in as little as 24 hours.

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Timeline: Covid-19 Loan Fraud

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March 23, 2020 – The UK is entering its first nationwide lockdown. Banks end the Coronavirus Interrupt Lending Scheme (CBILS) at 3 a.m. on launch day. The partial unemployment program is also launched.

April 2, 2020 – The Chancellor is banning banks from requiring personal guarantees due to fears that CBILS is not delivering fast enough.

April 16, 2020 – The government is extending the CBILS to cover large companies in the CLBILS.

April 27, 2020 Sunak announces the Bounce Back Loan Scheme (BBLS) for £50,000 loans for those who have certified they are qualified.

May 2, 2020 – British Business Bank chief executive Keith Morgan writes to business secretary Alok Sharma that the rapid launch of the program poses “very significant fraud and credit risks”.

May 4, 2020 – The sales department launched the rebound loan, with 80,000 requests on the first afternoon.

October 7, 2020 – The National Audit Office warns taxpayers stand to lose £26billion on BBLS and up to 60% of customers could default on their loans. HSBC is closing the program to new customers.

November 2, 2020 – The Treasury extends BBLS, CBILS and CLBILS until the end of January 2021.

March 3, 2021 – Sunak is announcing £100million for a Taxpayer Protection Task Force of over 1,200 HMRC staff to tackle Covid19-related fraud.

December 3, 2021 – The National Audit Office report describes government funding for tackling bounce loan fraud as ‘inadequate’ and highlights the BBLS’ estimated £4.9bn fraud losses.

January 24, 2021 – Treasury and Business Minister Lord Agnew is resigning at the House of Lords dispatch box, citing frustrations over the lack of action on Covid-19-related fraud.

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It was a “frenzied and difficult time,” said a senior banking executive. After nearly 11 days of round-the-clock meetings, a final agreement was signed in the early hours of Monday, May 4.

But the strategy agreed in those talks to speed up payments was so controversial that it would lead, two years later, to the shock resignation of Lord Agnew, a joint Cabinet and Treasury minister whose dossier included the fight against fraud. He resigned on Monday, lambasting the government for its “dismal” efforts to control fraud.

In the space of 15 months, starting in March 2020, the three main Covid loan schemes – rebound, CBILS and a larger loan scheme, CLBILS – distributed nearly £80bn to businesses.

Bounce back was the largest scheme, distributing £47bn to 1.6m beneficiaries, who were able to borrow up to £50,000 each. During this time, fraud losses were estimated at £4.9billion at the end of March – although PwC, the accountancy firm hired by the government, has since reduced its estimate to £3.5billion.

Shadow Chancellor Rachel Reeves said the raid on taxpayers’ funds by criminal gangs should be “an enduring source of shame for the Chancellor”.

Rebound Loan Requests Graph

Banks keen to protect their finances typically enforce strict credit checks to prevent fraud and ensure customers can repay their loans, but what was eventually agreed to rebound, under pressure from the Treasury to speed up the distribution of loans is that checks would be waived. absolutely.

“British Business Bank has been very, very clear with lenders – and it’s very explicit in all documentation – that banks were not allowed, in fact prohibited, to carry out credit checks,” said one. senior bank executive. “But then the trade-off was against a real need to get that money into the economy very quickly.”

There were rules: borrowers had to confirm they were Covid-affected and based in the UK, that they were in business on March 1, 2020 and not insolvent on December 1, 2019. But applicants had to certify themselves that they fulfilled these conditions. Criteria.

While lenders should make reasonable efforts to chase debts, a state guarantee made taxpayers responsible for 100% of losses related to defaults or fraudulent claims.

Fraudsters targeted the bounce loan program

“From the lenders’ perspective, they did what they were asked to do,” said a banking executive.

The government has been repeatedly warned that this approach opens it up to fraud. The Business Department, which managed the programs, revealed that its senior official had sought ministerial instructions to push through the three loan programs because they did not meet normal standards for public spending.

Industry insiders said the fraud risks associated with removing credit checks and turning the bounce into a one-page form were fully discussed with the Treasury. Indeed, the former head of the British Business Bank – which was responsible for overseeing the scheme – wrote to then Business Secretary Alok Sharma two days before the rebound was launched to warn that the scheme was “vulnerable abuse by individuals and by participants in organized crime”.

A month later, in June 2020, Sunak received a joint letter from three anti-corruption groups, calling for the publication of the recipients’ names – a request that has yet to be met and is being challenged in court.

In the end, speed won out over caution, opening the doors for experienced criminals.

Insolvency Service records show some took out loans to finance gambling or currency exchanges – money the government is unlikely to ever get back – while others spent it on things like home renovations, car raffles or luxury personal items.

Other cases are more puzzling and suggest serious problems in banks’ basic KYC requirements. In December, the National Crime Agency reported the cases of Artem Terzyan, 38, from Russia, and Deivis Grochiatskij, 44, from Lithuania. They were jailed for 33 years for laundering £70m on behalf of crime gangs around the world – including £10m in bounce loans.

Barclays was the largest loan distributor with rebound

Police had arrested the couple in June 2018 after they followed an Audi through truck parks and petrol stations across the UK picking up dirty money. Yet when the pandemic started, while they were out on bail, they both started claiming £50,000 loans in droves. An anonymous British bank lent them £3.2 million.

Some banks have been more cautious than others. Although Agnew did not name the lenders, he said 87% of rebound loans disbursed to previously dissolved companies came from just three lenders, while two banks were responsible for 81% of cases where loans were granted to companies incorporated after the pandemic.

The British Business Bank did not confirm the figures and said it was too early to draw conclusions on reimbursement data.

Some banks tried to mitigate the risks by prioritizing their own customers – on whom they had already carried out checks – over new customers.

“From a fraud detection perspective, we were more confident that our fraud checks would be stronger with an existing customer versus a new customer,” a banking executive said.

Questions remain about how determinedly the government will be able to chase down all fraudulent claims, but some changes have been made, including taking steps to ensure that all businesses dissolved by their owners are systematically checked for outstanding loans.

Resources are relatively scarce when it comes to investigating loan programs. While the Business Department has asked the Treasury for a further £32million for fraud-fighting operations, the National Audit Office said even that sum was “insufficient”.

A Treasury spokesperson said: ‘Fraud is completely unacceptable, and we are taking action on multiple fronts to crack down on anyone who has sought to exploit our schemes and bring them to justice.’

The government also relies heavily on banks to try to hunt down small-scale fraudsters. While banks are required to make reasonable efforts to cover their debts before they can claim the government guarantee, anti-corruption campaigners worry about the lack of commercial incentive to do so; their loan losses are 100% covered, while chasing money adds considerable costs.

Susan Hawley, executive director of Spotlight on Corruption, said the scale of the fraud highlights long-standing problems in Britain’s approach to white-collar crime, including repeated delays in Companies House reforms, UK Companies Registry.

“The government just doesn’t put its money in its mouth” to fight fraud, Hawley said. “It’s really chickens coming home to roost unable to fund it.”

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