Bounce Back Loan Fraud Post Pandemic

The Government started to offer support to business owners soon after Covid 19 in April 2020. The level of due diligence carried out by those offering these loans was very little and so it was easier for directors and business owners to obtain these loans relatively quickly and without the need to provide too much financial information.

For anyone who has an outstanding Bounce Back Loan (BBL) and is familiar with the way in which one can make an application online, will know that it took little over 15 minutes to type in a handful of figures and voila, you had confirmation that your application was successful, and that the money would be in the bank within 7 days!

There were clearly inadequate measures in place to prevent fraud. This I read from the report of the National Audit Office (NAO). This report also found that the government took too long to act against the fraud and to stop any further fraud from taking place. The process of recovery for these loans also needs to be improved.

The NAO’s report (link provide at the end of this blog), on the handling of the loan scheme’s counter-fraud activity investigated how the government’s attempts to set up a “simple, quick, easy solution for those in need in of smaller loans” was fraudulently exploited.

Over £47billion were obtained in loans, and billions were lost to fraud. The Department for Business, Energy, and Industrial Strategy (BEIS) estimated in March 2021 that 11% of BBLs worth £4.9bn were fraudulent. But this estimate excluded some frauds such as where a borrower overstates their turnover to get a large BBL.

The department also estimated that 37% of BBLs worth £17bn will not be repaid. However, this percentage included those wanting to repay, but who can’t and those who took the money fraudulently.

Loans and repayments

When the loans schemes were initially on the market, the most important thing was to get the funds out to business owners as urgently as possible and so the department relied on the lenders to carry out appropriate measures in relation to the due diligence before the loans were granted to the applicants. As far as it is reported the only checks carried out were know your customer checks and the loans were paid out within 7 days and some cases within 48 hours.

The NAOs report shows concern in relation to the lack of checks carried out in terms of affordability, in fact it seems to suggest that these checks may have been removed and that it was easy to self-certify as this made the application process quicker. By the time certain measures were put in place it was too late as much of the fraud had already taken place.

Additional counter-fraud measures were introduced over time, but by then it was too late, and these measures focused instead on detecting fraud that had already taken place, with the launch of a fraud hotline which didn’t really tackle the issue.

Understandably the more due diligence around obtaining the BBLs would have slowed down the process BUT at least the number of fraudulent loans would have been a lot less. The NAO also found that the BEIS didn’t get round to inspecting the fraud data until a few months after the scheme had been launched and by then so many fraudulent applications had already been made.

Although the counter-fraud measures changed over several months, the government scheme “lacked clear governance at the outset and sufficient resources” and the auditors did not find any documents setting out the department’s ambitions or metrics to measure the impact of counter-fraud activity.

Pursuing organised crime

As a result of the extent of the fraud and limited resources, the department is focusing its efforts on pursuing organised crime, where sums more than £100,000 were involved. The BEIS has set a target to recover at least £6m in fraudulent loans from organised crime over three years, but the NAO has called this inadequate.

So far, the agency’s work has resulted in an estimated 43 arrests across 33 investigations and more than £3m of recoveries.

With much attention on organised crime, the department chose not to investigate borrowers who overstated their turnover by less than 25% if there were no other fraud indicators.

While the department has given a low priority to this bottom-tier fraud, and is hoping lenders will pick up the slack, the NAO warned that lenders have limited commercial incentives to do so.

The theme of overstretched government departments continued throughout the report, with enforcement agencies enlisted to recover loans, also stretched by the potential fraud levels across all the other government Covid support schemes.

Recommendations

The NAO signed off its report with recommendations that the department should implement by April 2022.

Top of the list of recommendations was to produce a formal strategy for measuring BBL fraud and to measure the performance of each counter fraud measure, adapting its approach as necessary.

Other recommendations include the need to develop a robust business case for detecting and preventing loan fraud, refreshing its fraud risk assessment at least every six months and evaluating options for controls against any new fraud risks on a cost-benefit basis.

It should be noted that BBL is not the only post pandemic support which was exploited. There was fraud surrounding Furlough, Coronavirus Business Interruption loans (CBILS) and Coronavirus Large Business Interruption Loan.

For more information on National Audit Office report, click below:

https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf

Vee Bharkhada

Founder - Navigate Business Recovery
https://www.navigatebr.com
vee@navigatebr.com
07961 116321