Friday, May 27

How the UK government lost £4.9bn to Covid loan fraud | Economic policy

In the last days of April 2020, bankers and Treasury officials huddled over laptops in makeshift home offices across the country, negotiating the terms of what is fast becoming the most controversial of bailout schemes. government pandemic.

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

After ordering the closure of all non-essential offices and shops and services, Sunak had promised financial aid. But the first scheme to be launched, offering loans of up to £5m and known as the coronavirus business interruption loan scheme (CBILS), had been criticized by lobbying groups. corporate and parliamentarians as too costly, too slow and too risky: borrowers were required to provide personal collateral, usually in the form of their own homes. So the Treasury introduced a second scheme, catch-up loans, designed to get businesses cheap money in as little as 24 hours.

Fast guide

Timeline: Covid-19 Loan Fraud


March 23, 2020 – The UK enters its first national lockdown. Banks complete the Coronavirus Interruption Loan Scheme (CBILS) at 3am on launch day. The work leave scheme is also launched.

April 2, 2020 – Chancellor bars banks from requiring personal guarantees amid concerns CBILS is not delivering fast enough.

April 16, 2020 – The government extends CBILS to cover large companies in CLBILS.

27 April 2020 Sunak announces the Catch-up Loan Scheme (BBLS) for £50,000 loans for those who certified they qualified.

May 2, 2020 – British Business Bank chief executive Keith Morgan writes to business secretary Alok Sharma that the rapid launch of the scheme posed “very significant credit and fraud risks”.

May 4, 2020 – The commercial department launches the rebound loan program, with 80,000 applications for the first afternoon.

October 7, 2020 – The National Audit Office warns taxpayers that they stand to lose £26bn on BBLS and that up to 60% of customers may default on loans. HSBC closes the scheme to new customers.

November 2, 2020 – The Treasury extends BBLS, CBILS and CLBILS through the end of January 2021.

March 3, 2021 – Sunak announces £100m for a taxpayer protection task force of over 1,200 HMRC staff to combat Covid19-related fraud.

December 3, 2021 – The National Audit Office report describes government funding for fighting fraud in recovery loans as “inadequate” and highlights the BBLS’ estimated fraud losses of £4.9bn.

January 24, 2021 – Treasury and Business Minister Lord Agnew resigns at the House of Lords dispatch box, citing frustrations over a lack of action on Covid-19-related fraud.

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It was a “frantic and difficult period of time”, said a senior banking executive. After almost 11 days of 24-hour meetings, a final agreement was signed in the early hours of Monday, May 4.

But the strategy agreed in those discussions to speed up payments was so controversial that, two years later, it would lead to the surprise resignation of Lord Agnew, a joint Treasury and Cabinet Office minister whose briefing included fighting fraud. He resigned on Monday and criticized the government for its “regrettable” efforts to control fraud.

In the space of 15 months, since March 2020, the three main Covid lending schemes (recovery, CBILS and a scheme for larger loans, CLBILS) have handed out nearly £80bn to businesses.

Rebound was the largest scheme, distributing £47bn to 1.6m recipients, who were able to borrow up to £50,000 each. Meanwhile, Fraud losses were estimated at £4.9bn at the end of March, although PwC, the government-contracted accounting firm, has since lowered its estimate to £3.5bn.

Shadow Chancellor Rachel Reeves said the assault on taxpayer funds by criminal gangs should be “a source of lasting embarrassment for the chancellor”.

Recovery Loan Applications Chart

Banks trying to protect their finances often apply strict credit checks to help prevent fraud and ensure customers can repay their loans, but what was ultimately agreed to recover, amid pressure from the Treasury to speed up distribution of loans, was that checks would be dispensed with. total.

“British Business Bank was very, very clear with lenders, and is very explicit in all the documentation, that banks were not allowed, actually prohibited, from running credit checks,” a senior bank executive said. “But then the offsetting went against a real need to get that money into the economy very quickly.”

There were rules: Borrowers had to confirm that they were Covid-affected and UK-based, in business as of March 1, 2020, and not insolvent as of December 1, 2019. But applicants were required to self-certify that they met these criteria.

While lenders would have to make reasonable efforts to pursue debts, a state guarantee would put taxpayers on the hook for 100% of losses related to defaults or fraudulent claims.

Scammers targeted the payback loan scheme

“From the lenders’ point of view, they’ve done what they’ve been asked to do,” said a banking industry director.

The government was repeatedly warned that the approach left it open to fraud. The business department, which ran the schemes, revealed that its top official sought ministerial instructions to push through the three loan schemes because they did not meet the usual standards for public spending.

Industry experts said the fraud risks associated with eliminating credit checks and turning the bounce into a one-page form have been fully discussed with Treasury. In fact, the former head of the British Business Bank, who was in charge of overseeing the scheme, wrote to the then commercial secretary, Alok Sharma, two days before the bounce launch to warn that the scheme was “vulnerable to abuse by individuals and by participants in organized crime.”

A month later, in June 2020, Sunak received a joint letter from three anti-corruption groups asking for the names of the recipients to be published, a request that has yet to be fulfilled and is being challenged in court.

Ultimately, speed trumped caution, opening the doors to experienced criminals.

Insolvency Service records show some took out loans to finance gambling or currency trading, money the government is unlikely to get back, while others spent it on things like home improvements, car raffles or personal items. deluxe.

Other cases are more surprising and suggest serious problems in banks’ basic KYC requirements. The National Crime Agency in December reported the case of Artem Terzyan, 38, from Russia, and Deivis Grochiatskij, 44, from Lithuania. They were jailed for 33 years for laundering £70m on behalf of criminal gangs around the world, including £10m in recovery loans.

Barclays was the largest distributor of recovery loans

Police arrested the pair in June 2018 after following an Audi around UK truck parks and service stations collecting dirty money. However, when the pandemic hit, while out on bail, they both started claiming £50,000 loans in large amounts. An anonymous British bank lent them £3.2 million.

Some banks were more cautious than others. While Agnew did not name the lenders, he said that 87% of turnaround loans paid to already dissolved businesses came from just three lenders, while two banks were responsible for 81% of the cases where loans were made to incorporated businesses. after the pandemic hit.

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

Some banks tried to mitigate risks by prioritizing their own clients, which they had already controlled, over new clients.

“From a fraud detection perspective, we were more confident that our fraud checks would be stronger with an existing customer than with a new customer,” said a senior bank chief.

Questions remain about how determined the government will be able to pursue all fraudulent claims, but some changes have been made, including taking steps to ensure that all businesses that are broken up by their owners are systematically checked for outstanding loans.

Resources are relatively scarce when it comes to researching loan schemes. While the trade department asked the Treasury for an additional £32m for anti-fraud operations, the National Audit Office said even that sum was “inadequate”.

A Treasury spokesman said: “Fraud is totally unacceptable, and we are taking action on multiple fronts to crack down on anyone who has tried to exploit our schemes and bring them to justice.”

The government also relies heavily on banks to try to go after smaller-scale fraudsters. While banks are required to make reasonable efforts to chase down debts before they can claim the government guarantee, anti-corruption campaigners are concerned about the lack of business incentives to do so; your credit losses are covered 100%, while chasing money adds considerable costs.

Susan Hawley, executive director of Spotlight on Corruption, said the scale of the fraud highlighted long-standing problems with the UK’s approach to white-collar crime, including repeated delays in reforms of Companies House, the registry UK corporate.

“The government just isn’t putting its money where its mouth is” in the fight against fraud, Hawley said. “These are really chickens coming home to sleep because of lack of funds.”

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