Earlier this year, the UK Bankruptcy Service banned a businessman from becoming a company director after he overstated the earnings of a car demolition company to secure a £50,000 loan from the government’s Covid ‘bounce-back’ loan scheme. He spent half the loan on a truck and the rest on Class A drugs.
He wasn’t the only one who found it easy to take advantage of the government’s flagship Covid loan scheme. Others were a student in Scunthorpe who applied for a £50,000 loan for a used car business that didn’t exist and a restaurateur from Bolton who secured a £50,000 loan despite his business having gone out of business a few months earlier, no premises and already owed £96,000 to creditors.
The bounce-back scheme was set up to help businesses survive the pandemic, with the government guaranteeing loans of up to £50,000. But up to £4.9 billion of the £47 billion banks lent to 1.1 million companies between May 2020 and March 2021 was lost to scammers, the government estimates.
The scheme was set up by the British Business Bank, which reports to the business department, with minimal checks on borrowers as officials were under pressure to help businesses as quickly as possible.
“Lend in haste, repent in peace,” a government official said after back-to-back hearings in which MPs officials, bankers and regulators asked for answers about how so much could have been lost so easily.
Earlier this year, Chancellor Rishi Sunak pledged that the government will “do whatever it takes to get that money back and go after those who have taken advantage of the pandemic.”
However, experts warn that the sheer scale of the scam makes it difficult. “The volume of crime is so high that the authorities are unable to investigate it,” said David Clarke, a former head of the City of London Police’s Fraud Squad and fraud prevention expert.
High-profile cases have focused on recovering funds from organized criminals who hold assets that can be seized by courts. But many of the scammers are either individuals with no businesses, or owners who have grossly inflated their businesses’ earnings to demand the maximum loan of £50,000 from their banks.
Instead of being prosecuted, they are simply fired and relegated as company directors, with the government relying on the bankruptcy trustee to prosecute them.
MPs with the Commons Public Accounts Committee warned in December that the government’s focus on prosecuting big and organized crime risks leaving petty scammers unpunished.
The National Audit Office said the scale of the fraud and limited government capacity meant officials decided not to focus “investigative resources” on smaller borrowers, which overstated sales by less than 25 percent.
The NAO also found that the National Investigation Service, an investigative unit that protects the public sector from organized crime, only had the capacity to pursue 50 cases a year and the business department had given it a target of just £6million recover fraudulent loans over three years — a fraction of the estimated losses.
Michael Levi, fraud expert and professor of criminology at Cardiff University, warned that the lack of capacity means many fraudsters will escape prosecution. “Just think what an increase in fraud investigators and prosecutors and the availability of courts would take to make a big change here,” he said.
Lord Theodore Agnew, the resigned who resigned from his post as anti-fraud minister in January in protest at the scheme’s losses, has spearheaded efforts to encourage banks, civil servants and the British Business Bank to do more to get money back.
Bank executives told MPs at recent hearings hundreds more people were being recruited to their fraud prevention and recovery teams, but the NAO said “commercial incentives for [investigate] are limited” for the “mid-tier” and “bottom-tier” scams as banks can claw back loans through the government guarantee.
Lord Agnew also questioned the banks’ motivation to detect fraud over guaranteed payouts. “There is absolutely no alignment of interests,” he said. “Once the guarantee is paid they are expected to keep hunting for another year. Well, why would they bother to do that?”
Lenders claim to have done more than prevent £2bn in fraudulent claims and had uncovered £5.3m in fraudulent loans, according to the NAO.
Executives from five banks – NatWest, Barclays, Lloyds, Santander and HSBC – told MPs last month that the fraud rates on their loan books were much lower than assumed by the government. They argued they had done everything in their power to prevent fraud in the short time they were given to set up the system by officials who were under pressure to help businesses early in the pandemic.
“In the first four weeks we have lent six years of credit,” Hannah Bernard, head of commercial banking at Barclays UK, told MPs. “The bounce-back loan has been a lifeline for many companies.”
The business department said: “Our Covid support programs have been rolled out at unprecedented speed to protect millions of jobs and businesses at a time when families needed them most. Last year, lenders said they prevented nearly £2.2 billion in potential fraud through the bounce-back loan scheme.
“We continue to work to combat fraud and will not tolerate those who attempt to defraud consumers and taxpayers.”
However, bank executives fear they will face increased scrutiny if more fraud cases surface. Guarantee payments are being delayed as the British Business Bank and government officials scrutinize banks’ claims more closely, industry leaders say. RSM and KPMG were commissioned to examine how banks assert their claims.
“It’s such a hot topic right now. We just don’t know the true extent of the scam yet. It’s day by day,” said one.
Banks had received €70 million in guarantees from the government by the end of December.
The lenders argue that the government must be careful about throwing them “under the bus.” “At the start of Covid we all went to his office for a meeting with the Chancellor, he took a group photo of us,” said a bank chief.
“The blame game will start now. Remember MPs begged us to bail out businesses in their communities. It’s very frustrating. . . Of course we knew there would be fraud, but it was in response to calls from MPs begging us to lend.”
https://www.ft.com/content/e96a7a31-8148-4370-aec4-85a904be6234 Scale of Covid loan fraud leaves UK struggling to recover lost billions