A Bad Bounce: Lessons from Bounce Loan Fraud

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This article was originally published in inCompliance magazine, the member publication of the International Compliance Associationthe 24thand January 2021. To download the .pdf as it appeared in the magazine to read, print or share please click here.

As the economy seeks to recover from the pandemic, the UK has been thrust into ‘plan B’. Attention had already turned to public finances, where funds were spent and how to recoup them for the public purse. What the Chancellor and the lenders did not need was the announcement from the Department for Business, Energy and Industrial Strategy (BEIS) estimating costs to the taxpayer at £27bn in bounce loan fraud (BBL).

As we enter another phase of uncertainty and companies start asking for financial support again, what lessons have we learned from the first government donations falling into fraud?

Only half the story

A report by the National Audit Office (NAO), published on December 3, 2021, revealed that the government had failed to put in place adequate measures to prevent fraudsters from stealing billions of pounds through its BBL plan. In fact, it is said that up to £17bn of over £47bn in credit given out through COVID-19 related loans will not be repaid. Other reports estimate that up to £4.9billion of the credit was taken by fraudsters.

To add insult to injury, it appears BEIS is seeking to blame the lenders who moved very quickly to produce these loans, as they stated in June that as the Treasury had given a 100% guarantee of taxpayers, the Department found itself “dependent on banks admitting they lack incentives since it’s not their money that’s at stake”.

Of all the devices made available at the start of the pandemic, the BBL1 device was particularly susceptible to fraud. The vulnerability of the scheme and the risk to the taxpayer for collection purposes is underpinned by the government guarantee of 100% of the loans. As noted, this has led to suggestions from BEIS that lenders may not have enough “incentives” to recover fraud losses, since the risks to them are mitigated by collateral. This, however, is perhaps only half the story and does not truly reflect the obligations imposed on lenders, regardless of the circumstances at the time of the loan.

These statements by BEIS do not sufficiently reflect their own role in introducing the support schemes themselves, and whether they should have done more to mitigate potential risks. Earlier this year, the House of Commons Public Accounts Committee released its report on fraud and error, which included an analysis of the implementation of the schemes, and in particular the BBL initiative.

The potential for fraud and the risks to government departments when implementing such policies has been known for some time, resulting in the establishment of the Government Fraud Function (CFF) in October 2018. The CFF brings together several thousand experts in the fight against fraud. within the government. A central part of its purpose is to assess the risk of fraud in government departmental initiatives. If ever there was a project he should have been consulted on, the BBL schema should have been at the top of the list. However, it appears that the consultation of the CFF is not mandatory, that the BEIS did not draw on its resources, which would undoubtedly have led to a reduction in the risk for public funds.

Act now, worry later

The basic objective of the BBL program was to provide businesses with capital to help them through the COVID-19 lockdown. Introduced in March 2020 as the UK entered the first lockdown, it was quickly introduced. This was understandable as the economy was vulnerable and urgent measures were being talked about to avoid collapse.

There were concerns about flaws in the approval service, but these were overshadowed by an “act now, worry later” policy. Applications for funding for amounts between £2,000 and £50,000 were invited and the government website provided application guidance suggesting that a short online application form should be completed and self-declarations for confirm eligibility would be acceptable. For those looking for quick, easy cash, it might have looked like a car left unlocked on the drive with the keys in the ignition.

Ease of access to funding and lower approvals review meant there was always risk. Fraud and exaggerated (or underreported) applications slipped into the net. A large number of applications were received in the first six weeks and 860,000 loans were approved during this period.

In order to get the money to applicants as quickly as possible, the review of applications has been reduced, with only certain conditions still being required to meet eligibility.

Since the loans have been approved and those doing the paperwork have had time to catch their breath, the Cabinet Office has identified detailed examples of different types of fraud:

  • Hard fraud – large-scale fraud, often committed by organized criminal gangs. Examples include impersonating a legitimate business or person, submitting multiple fraudulent applications to different lenders, and using financial mules to accept loans and then filing for bankruptcy.
  • Soft fraud – when an organization has exaggerated some aspect of its business to obtain a loan, normally by inflating annual turnover figures.

BEIS estimates that around £5bn of the overall losses will be attributable to fraud, which equates to just over 6% of the total amount paid out by lenders.

A powerful tool

the National Crime Agency (NCA), HM Revenue & Customs (HMRC) and the police are now on the front line to investigate pandemic-related fraud. The NCA will still focus on organized crime, while HMRC is using the additional funding and resources made available through the establishment of the Taxpayer Protection Task Force to investigate COVID-19 fraud.

However, it appears that it is actually by several less illustrious agencies, rather than the latter, that the cumulative nature and scale of fraud against these schemes is identified. The Insolvency Service is an excellent example. He praised his successes in resisting attempts to dissolve or remove companies from the register, where it was suspected that this had been done to evade investigation and the recovery of improperly obtained funding.

The Insolvency Service’s investigative powers will soon be strengthened with the passage of the Directors Rating (Coronavirus) and Disqualification (Dissolved Companies) Bill, which will allow it to specifically target and prosecute directors who chose to close their company by dissolving them to avoid unpaid debts. The new powers will now be retroactive and will apply to those who applied for dissolution in the two years before the legislation came into effect.

In an attempt to prevent the deregistration of a company directors may have unpaid BBL debts, Company directors can now reasonably expect to receive a “Notice of Objection to Company Delisting”, which will also give other creditors the opportunity to register objections.

A powerful tool in the Insolvency Service’s arsenal, it will now allow them to examine the conduct of directors in the run-up to proposed delisting, and even look back in time to examine companies that have already been dissolved. Sanctions such as disqualification of directors and collection of debts from personal assets are available retrospectively. Previously, the process had proven cumbersome and difficult.

Duties of lenders

What about the obligations of lenders in the event of suspected fraud? Can they realistically just wait for the government and other agencies to act? In many ways, while the regimes were new and transitional, the obligations of lenders remain the same. It is true that the ability of lenders to fully consider applications at the height of the pandemic may have been hampered by the lockdown measures in place, but it is important to remember that, as these have now disappeared, at least for now, attention must turn to what happened to the money made available.

At the forefront of these investigations are the lenders themselves, given the information they have in their possession following the approval and disbursement of funds. Despite BEIS’s suggestion that banks may not have an incentive to recover funds, antimony laundering (AML) obligations are more important than ever, given the scale of fraud that could have occurred. produce.

Lenders will no doubt want to comply with their regulatory obligations and avoid the heavy penalties that can follow if they fail to do so. Now that the nature and extent of fraudulent activity is being revealed, the obligation to monitor transactions becomes increasingly important.

The volume of applications accepted and the sums involved mean that this is no small feat. As we now find ourselves in plan B with the potential for increased restrictions if the Omicron variant cannot be controlled, there is every chance that the Treasury will have to spit again and support new loans. Adapting existing AML compliance procedures to potentially incorporate new markers will help recover past or future losses. Also, I for one don’t see the government allowing lenders to take a relaxed approach in these cases – not with so much risk!

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