Proof is in the pudding – The Unavoidable fraud being paid for Covid backed loans
From March 2020 to March 2021, the three main Covid loan programmes – bounce back, CBILS, and a larger loan scheme, CLBILS — distributed roughly £80 billion to businesses over a 15-month period.
The largest initiative, Bounce Back, distributed £47 billion to 1.6 million people who could borrow up to £50,000 each. Meanwhile, fraud losses were estimated to be around £4.9 billion at the end of March, though PwC, the government’s hired accounting firm, has subsequently revised its estimate to £3.5 billion.
Banks that want to preserve their finances generally do extensive credit checks to prevent fraud and ensure that consumers can repay their loans. However, amid pressure from the Treasury to speed up loan distribution, it was eventually agreed that checks would not be as stringent as normal.
Over the past weeks it has been clear that the pressing need to get that money into the economy took priority over lengthy CDD and AML checks. Borrowers had to affirm that they were affected by Covid and were based in the United Kingdom, that they were in business as of March 1, 2020, and that they were not insolvent as of December 31, 2019. However, applicants were required to self-certify that they met these requirements.
According to industry insiders, the Treasury was well briefed on the fraud risks involved with removing credit checks and converting bounces back into a one-page form. Indeed, two days before the bounce back launch, the former head of the British Business Bank, which was in charge of regulating the plan, wrote to the then-business secretary, Alok Sharma, warning that the scheme was “susceptible to exploitation by individuals and by participants in organised crime.”
While lenders would be required to make reasonable efforts to collect the debts, a state guarantee would make taxpayers responsible for all losses resulting from defaults or fraudulent applications.
It is believed that some accepted loans to fund gambling or currency trading — money the government is unlikely to ever recover – while others spent it on house improvements, vehicle raffles, or luxury personal items, according to Insolvency Service data.
According to Gov.uk an estimated 9,733 companies in England, Wales and Scotland that entered insolvency between 1 May 2020 and 31 October 2021 that had taken out a BBL facility. This includes companies that entered compulsory liquidation, creditors’ voluntary liquidation, administration, and administrative receivership.
Banks will still be depended on to track down small scale fraud, so this could lead to additional support in terms of resource staffing. The government relies heavily on banks to seek down smaller-scale criminals. Banks are required to make reasonable efforts to collect debts before claiming the government guarantee. Additional support for collections will be needed for lenders to ensure that adequate due diligence was conducted and collection efforts increased.
During this time, brand awareness and thus reputational damage will be critical, especially for businesses receiving government-backed COVID-related loans. There will be a fine line to walk for many when it comes to avoiding reputational damage and ensuring that collections efforts and complaint handling are handled with empathy and care.
The collections specialists
Momenta specialises in quickly assembling small or big teams of individuals for specialised business tasks, and we’ve been doing so for financial services clients in the UK and around the world for over 30 years.
We enable you to give a cost-effective comprehensive solution – or particular elements thereof – that match your current capacity and skillsets.
Our associates are knowledgeable, customer-focused individuals who understand how the COVID-19 pandemic has affected both individuals and businesses.
They have the necessary skills and experience to ensure that customers agree to compliant repayment procedures and plans in a way that is consistent with both your brand values and regulatory requirements.
Works cited:
Jolly, J. and Makortoff, K. (2022). How the UK government lost £4.9bn to Covid loan fraud. [online] the Guardian. Available at: https://www.theguardian.com/politics/2022/jan/29/how-the-uk-government-lost-49bn-to-covid-loan [Accessed 12 Feb. 2022].
