Warning of fraud risk in Covid-19 business loans

The government was warned of potential ‘very significant fraud and credit risks’ with its coronavirus emergency loans for small businesses just days before the scheme’s launch, but decided to go ahead because of the ‘unprecedented situation’ created by the pandemic

The warnings were raised by the head of the British Business Bank, the state body charged with managing the support programme.

At the beginning of May, in the run-up to the launch of the bounce back loan scheme (BBLS) and the Future Fund for investment in innovation, Keith Morgan, British Business Bank CEO and accounting officer wrote to business secretary Alok Sharma highlighting a number of issues.

Morgan’s letter about the rapid launch of BBLS details what he calls ‘the very significant fraud and credit risks associated with it’, and references a draft review by PwC which classified the fraud risk as ‘very high’.

It highlighted the extensive reliance on customer self-certification and the corresponding fraud risk as a key concern.

Morgan said: ‘The scheme is vulnerable to abuse by individuals and by participants in organized crime.

‘Alongside the fraud risk, there will be considerable credit risk in the current economic environment, which will be exacerbated by removing significant elements of the credit checks that would otherwise have been undertaken.’

Additionally, Morgan said the scheme could potentially market distortion as with an interest rate for BBLS of 2.5% across the market, many smaller providers will not be able to compete with BBLS in the sub £50,000 lending market, leaving the large banks as the main providers.

He also noted: ‘The compressed timetable has created huge operational challenges for delivery partners, who are facing considerable challenges to stand up systems ahead of launch on Monday. ‘As an example of the compromises made to meet the timetable in order to avoid derailing the builds of the large banks’ systems, it has been impossible to agree a methodology to prevent duplicate applications.’

In response to Morgan’s concerns around value for money, feasibility and propriety risks, the Department for Business, Energy & Industrial Strategy (BEIS)  provided a ministerial direction stating ‘that these risks notwithstanding, the unprecedent situation facing the country meant that it was essential to proceed with the scheme.’

So far BBLS has supported over 1.2m UK smaller businesses to access significant volumes of emergency finance, with £38bn drawn down to date.

In an update, the British Business Bank said that since the launch, it has worked alongside the government and the finance industry to mitigate the issues it raised.

The concerns relating to the fraud risks have been mitigated by accredited lenders undertaking standard fraud, anti-money laundering (AML) and know your customer (KYC) checks as part of the Scheme’s application process. In addition, the Bank, the government, fraud prevention services, fraud bureaux and the banking and alternative finance sectors have acted swiftly post-scheme launch to put in place additional measures, beyond the standard checks, to further mitigate fraud risks.

The Bank has also worked with lenders and government to accredit a range of diverse lenders to implement BBLS.

In his letter regarding the Future Fund, Morgan said that ‘the value for money outcome from this scheme is highly uncertain’.

This was based on concerns that the best companies will not use this funding route, as investors will fund those companies without government support. As a result, government investment would go to the second tier of companies, which will likely result in higher associated loss rates. The impact of investors not putting forward their best investments could reduce very considerably the average expected return from the investments made into companies.

Morgan also noted difficulties in reconciling the Chancellor’s announcement of a fixed budget (an initial £250m allocation) with a rules-based scheme, and said there were concerns about the lack of funding available to allow for government to make follow-on investments in subsequent funding rounds and therefore avoid the risk of its stakes being diluted, impacting on its returns.

In response, BEIS said it would monitor use of the scheme closely, paying particular attention to any evidence of adverse behavioural effects.

Reservation notices and ministerial directions

British Business Bank Reservation Notice and Ministerial Direction for the Future Fund

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