Pandemic of government repayment loans could still cost government ‘billions’ of fraud and errors

MPs have been told the government’s controversial Covid loan programs could cost taxpayers up to £3.7bn through fraudulent loans, including organized criminals, as well as illegal payments.

According to the Accounts Committee (PAC), up to eight percent of £46.6bn of loans could be lost due to fraud or errors.

The Bounce Back Loan scheme offered loans to registered and unregistered small businesses to help them weather the losses from the pandemic and lockdown.

Since May 2020, government-backed loans of up to £50,000 have been made available through the scheme. The latest estimate puts total lending at £46.6bn.

Concerned officials were so concerned about possible fraud that they requested a ministerial mandate to implement the plan. Sara Munby, a senior Commerce Department official, said most of the risks were identified by government officials before the plan was launched.

“It is important to recognize that many of the risks that emerged during the recovery process were identified early on. That doesn’t make it normal, but it’s not like we were surprised that it turned out to be a system with an unusually high level of cheating. We knew it from the beginning and that is why it was under ministerial leadership at the time,” she said.

MPs later concluded that billions of pounds of taxpayer money were at risk from fraud linked to 100 percent guaranteed loans after key director and company audits were suspended in a bid to quickly unlock loans to help businesses.

The state regulator, the Accounts Chamber, describes the program as the “largest and riskiest” government support scheme.

The Department of Business, Energy and Industrial Strategy (BEIS) has been criticized for failing to adequately balance the risk of fraud and wanting to send Covid relief funds to businesses as soon as possible.

Critics accuse the government of denying opportunities for better fraud protection and of taking a “complacent” approach to fraud risks. They argue that loans “flew out the door” because many seemed “free”. Ministers have done little to prevent debts that cannot be repaid.

Prime Minister Rishi Sunak, who was chancellor at the time, told the then MPs, “There will be no prospective tests of the company’s viability; lack of complex admission criteria; just a simple, quick, standard business form to fill out.”

Banks responsible for providing loans to applicants have said they have 48 hours to review and approve loans and simply cannot perform basic credit checks on new customers.

HSBC said it gained 71,000 new customers as people sought government-backed loans. Carl Reed, head of UK commercial bank lending at HSBC, said the terms of the agreement with British Business Bank said there was not enough time to conduct an “affordability analysis” of companies applying for loans.

He told MPs that the bank is conducting “routine onboarding” customer reviews, including director reviews, know-your-customer reviews and anti-money laundering reviews.

Retail, hospitality and wholesale were strong among the group that defaulted on loans or were already in arrears. He said this was a reflection of the wider economic problems they faced.

Other lending banks have chosen not to offer credit to new customers for fear that they will not have sufficient resources to conduct due diligence and service existing customers.

Ann Boden, founder of Starling Bank, which has had a high default rate compared to other banks, said company newness is a better predictor of defaults than bank newness as a customer. Credit checks were not permitted under the scheme. “If you didn’t do credit checks, you wouldn’t be able to tell if these loans would be repaid,” she said.

Similarly, it would mean that many small businesses would turn down loans because many had no credit history.

The previous Covid lending scheme proved to be very slow as it followed normal bank lending procedures, which included credit checks and collection of collateral from customers. But it also meant that loans weren’t made fast enough, and businesses began to fail, workers didn’t get paid, and suppliers didn’t get their money.

Carl Reid said the Bounce Back program does not include credit checks because it is the largest and slowest part of the assessment.

Andrew Harrison of NatWest Bank said they would not add new clients to the program because they want to make sure they have the operational capability to help their existing clients and also because they recognized from the start that app fraud is likely to be higher due to circuit design. “One way to cut down on this scam was to only support existing customers that we had more information about,” he said.

Geoffrey Clifton-Brown, vice chairman of the GAC, called the lack of oversight “extraordinary.” “The taxpayer handed over the money without checking it [the banks] would normally do.”

Paragon Bank said 95 percent of loans to its existing customers have been fully repaid.

British Business Bank, the wholly owned state-owned bank at the center of the loan agreement, now held monthly rather than quarterly meetings to better assess the risks on its books, the GAC said.

Sarah Munby said it was difficult to get some of the Covid loans back, partly because most of them were lost to legitimate businesses struggling during the pandemic, not due to deliberate fraud, but due to mistakes, mostly by local authorities, but not as accurate as ministers. service. She said payments based on taxable value, for example, could be out of date.

The credit rebate fraud estimate may be lower than the eight percent estimate because some companies may have taken credit on a resale basis but may repay the loan over time. The BEIS estimate of lifetime losses from fraud currently stands at 4.24 percent.

Asked what lessons the ministry learned from these events, Ms Munby said: “It’s fair to say that while there are clearly many lessons to be learned from the details, we initially thought about this plan about what happened.”