The UK's National Audit Office (the "NAO") has reported that an estimated 11% – a total of £4.9 billion out of £47 billion issued – of the 1.5 million loans granted under the Government's COVID-19 Bounce Back Loan Scheme (the "Scheme") were fraudulent. Although the NAO has said that £4.9 billion may be an overestimate, the potentially vast scale of this fraud is nonetheless embarrassing for the Government.
It is unsurprising that the Scheme has been exploited by fraudulent claimants – it was set up at speed, with minimal fraud-prevention measures in place. The failures of the Scheme illustrate how fraudsters, whether acting through organized crime or opportunistically, can quickly exploit systematic weaknesses in financial schemes. It also serves as a reminder of the difficulties of recovering money after it has fallen into fraudsters' hands – the Government has predicted that it may recover only £6 million of cash lost to organized crime.
Background to the Scheme
The Scheme was one of several business support loan initiatives offered by the Department for Business, Energy & Industrial Strategy ("BEIS"). Between April 2020 and March 2021, it offered loans of up to £50,000, or a maximum of 25% of annual turnover, to small businesses that were adversely affected by the COVID-19 pandemic. While the loans were provided by commercial lenders, they were 100% guaranteed by the Government.
The Scheme aimed to make fast payments to struggling businesses and, to expedite matters, allowed potential borrowers to self-certify their application details. The commercial lenders that made the loans were required to undertake counter-fraud checks but were still expected to make payments within 24 hours, or 48 hours if further checks were required. This, of course, made the Scheme ripe for abuse.
The importance of assessing the risk of fraud
The NAO reported that BEIS failed to properly assess its fraud risk appetite or estimate the potential level of expected fraud under the Scheme. BEIS acknowledged at the time of setting up the Scheme that it was prioritizing speed of payment over checks for fraud. It is understandable that at the outset of the pandemic, the Government wanted to get financial support as quickly as possible to those in need. The amount that was ultimately lost under the Scheme, however, is hard to defend.
If BEIS had properly analyzed the Scheme's fraud risk, it should have identified that this risk was extremely high. It could then have put in place appropriate fraud prevention mechanisms and ironed out any of the Scheme's inherent weaknesses. For example, measures to identify duplicate applications, which should have been in place from the outset of the Scheme, were not put in place until June 2020 – after 61% of the loans by value had already been issued. A risk assessment should also have identified the risk of fraud posed by allowing borrowers to self-certify their applications, which would have allowed BEIS to balance this properly against the legitimate need to make fast payments.
Almost all financial schemes will include some inherent risk of fraud. The Scheme illustrates how important it is to assess these risks, even if payments need to be made urgently and such an assessment might seem bureaucratic in the circumstances. Fraudsters are increasingly sophisticated and the missing £4.9 billion shows how significant the impact of fraud can be.
Throwing good money after bad
BEIS has announced its unimpressive plans for recovering money sent to fraudulent applicants. It has categorized the potential fraud cases under the Scheme into three tiers of risk and is prioritizing top-tier cases, which involve organized crime groups, and claimants that took out multiple loans for different companies totaling more than £100,000. BEIS is using enforcement agencies, including the National Investigation Service ("NATIS") to investigate, prosecute, and recover funds for top-tier and the "higher end" of mid-tier loans. The NAO reports that NATIS' work up to October 2021 has resulted in 43 arrests across 33 investigations and more than £3 million of recoveries.
NATIS' minimum target for recovery is £6 million over three years, which is equal to the £6 million the BEIS agreed NATIS could spend on its caseload for the Scheme. For every pound spent on chasing down misappropriated funds, only one pound will be recovered. This isn't value for money by any measure. It is also a drop in the ocean compared to the total amount lost under the scheme.
The NAO reports that BEIS expects commercial lenders under the Scheme to seek to recover the fraudulent funds in lower tier cases. This expectation seems unrealistic, as the loans are fully guaranteed by the Government. There is simply no financial motivation for the lenders to pursue fraudsters: it is probable that most of the money lost to smaller scale frauds will never be recovered. BEIS should have considered including a carve-out in the guarantees offered that would have excluded loans made to fraudulent applicants. Good fraud prevention requires measures to ensure that all third parties to an agreement are financially invested in both preventing fraud and recovering any funds that are lost to fraud.
Prevention is better than cure
The difficulty and expense of recovering money lost to fraudsters under the Scheme is a reminder that it is better to prevent fraud than seek to recover funds later – a conclusion that has also been drawn by the NAO.
BEIS has announced plans to recruit additional staff to its counter-fraud team and an additional £32 million investment in counter-fraud operations, but this is a paltry sum in comparison to £4.9 billion that has been lost. The money lost to fraud under the Scheme exemplifies how comprehensively and quickly loopholes that allow fraud can be exploited and it underlines the importance of assessing the risk of fraud when setting up any financial scheme. When these risks have been assessed, any inherent weaknesses can be addressed before the frauds occur. The need to prevent fraud before it takes place has also been demonstrated by the expected difficulty of recovering the missing £4.9 billion. The Government's pessimistic predictions about the likelihood of recovering this money mirror the experiences of many victims of fraud – once the money is in fraudsters' hands, it will often never be recovered.
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