How the UK Government lost £4.9bn to Covid loan fraud | economic policy

In the closing days of April 2020, bankers and Treasury officials sat in front of laptops in makeshift home offices across the country, negotiating the terms of the government’s fastest-moving pandemic rescue plan.

The country was in its sixth week of national lockdown following the Covid outbreak, and the Treasury Department’s head of banking and credit, David Raw, was on video calls with more than 20 senior officials from across the government and the city –– including the big banks HSBC. NatWest, Barclays and Lloyds, Santander, Virgin Money and AIB — to try and push through Chancellor Rishi Sunak’s ambitious plan for a more accessible, 100% government-backed small business lending program.

After ordering the closure of all offices and non-essential shops and services, Sunak had promised financial help. But the first program introduced, requiring loans of up to 5 million, to provide personal collateral, usually in the form of their own homes. So the Treasury introduced a second scheme, bounce-back loans, designed to provide companies with cheap money in just 24 hours.

It was a “hectic, difficult time,” said a senior bank executive. After almost 11 days of round-the-clock meetings, a final agreement was signed in the early hours of May 4th.

But the strategy agreed in those discussions to speed up disbursements was so controversial that it led to the shocked resignation two years later of Lord Agnew, a joint cabinet and finance minister whose job included fighting fraud. He resigned on Monday, berating the government for its “pathetic” anti-fraud efforts.

In 15 months, from March 2020, the three main Covid lending schemes – Bounce Back, CBILS and a larger lending scheme, CLBILS – have lent almost £80bn to businesses.

Bounce Back was the largest scheme, distributing £47 billion to 1.6 million recipients who could borrow up to £50,000 each. In the meantime, Fraud losses were estimated at £4.9bn at the end of March – although PwC, the government-hired accounting firm, has since reduced their estimate to £3.5bn.

Shadow Chancellor Rachel Reeves said the heist of taxpayers’ money by criminal gangs should be “a source of enduring shame for the Chancellor”.

Banks, keen to protect their finances, typically apply rigorous credit checks to avoid fraud and ensure customers can repay their loans, but what was finally agreed under pressure from the Treasury to speed up lending was that checks would be dispensed with altogether.

“British Business Bank has made it very, very clear to lenders – and it is very clear throughout the documentation – that banks are not allowed, if not forbidden, to conduct credit reviews,” said a senior bank executive. “But then the compromise was against a real need to get that money into the economy really quickly.”

There were rules: borrowers had to confirm they had been affected by Covid and were based in the UK, that they were in business on 1 March 2020 and not insolvent on 1 December 2019. However, applicants were left to self-certify that they met these criteria.

While lenders would have to make reasonable efforts to collect the debt, a government guarantee would make taxpayers liable for 100% of losses related to defaults or fraudulent claims.

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

The government has repeatedly been warned that the approach leaves it vulnerable to fraud. The economics department, which ran the programs, has revealed that its top official sought ministerial orders to enforce the three loan programs because they did not meet usual standards for government spending.

Industry insiders said the fraud risks involved in scrapping credit checks and turning bounces into a one-page form have been discussed at length with the Treasury Department. In fact, the former head of the British Business Bank – which was responsible for overseeing the program – wrote to the business secretary at the timeAlok Sharma, two days before the bounce-back launch, to warn that the program was “vulnerable to abuse by individuals and by organized crime participants”.

A month later, in June 2020, Sunak received a joint letter from three anti-corruption groups calling for the names of the recipients to be made public – a request that has not yet been met and is being challenged in a court.

Eventually, speed trumped caution and opened doors to experienced criminals.

Bankruptcy Service records show that some borrowed to fund gambling or forex trading — money the government will likely never recover — while others spent it on things like home improvement, car raffles or personal luxuries.

Other cases are more startling and point to serious problems with banks’ basic know-your-customer requirements. The National Crime Agency in December reported the case by Artem Terzyan, 38, from Russia, and Deivis Grochiatskij, 44, from Lithuania. They have been sentenced to 33 years in prison for laundering £70million – including £10million in repayment loans – on behalf of criminal gangs from around the world.

Police arrested the couple in June 2018 after they followed an Audi through UK truck parks and petrol stations to pick up dirty cash. But when the pandemic hit while on bail, both began claiming £50,000 in loans in large numbers. An unnamed British bank loaned them £3.2million.

Some banks have been more cautious than others. While Agnew didn’t name the lenders, he said that 87% of bounce-back loans paid to already-defunct companies came from just three lenders, while two banks accounted for 81% of the cases in which loans were made to companies that were established after the outbreak of the pandemic.

British Business Bank did not confirm the figures, saying it was too early to draw any conclusions about payback dates.

Some banks tried to mitigate the risks by prioritizing their own customers, whom they had already screened, over new customers.

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

Questions remain as to how resolutely the government will pursue any fraudulent claims, but some changes have been made, including measures to ensure all companies being wound up by their owners are systematically screened for outstanding loans.

Resources are relatively scarce when it comes to investigating the loan programs. While the business department asked the Treasury for an additional £32million for anti-fraud operations, the National Audit Office said even that sum was “unreasonable”.

A Treasury Department spokesman said: “Fraud is totally unacceptable and we are taking action on multiple fronts to take action against anyone who has attempted to exploit our systems and bring them to justice.”

The government also relies heavily on banks to prosecute smaller scammers. While banks must make reasonable efforts to collect debt before they can call on the government guarantee, anti-corruption activists are concerned about the lack of commercial incentives to do so; Your credit losses are 100% covered while chasing money incurs significant costs.

Susan Hawley, executive director of Spotlight on Corruption, said the scale of the fraud highlighted long-standing problems in the UK’s crackdown on white-collar crime, including repeated delays in reforming Companies House.

“The government just doesn’t put their money where their mouth is,” Hawley said. “These are really chickens coming home to settle because they can’t fund it.”