The UK Government’s Bounce Back Loan Scheme – Are There Any Lessons? | WilmerHale
The UK’s National Audit Office (the ‘NAO’) reported that around 11% – a total of Â£ 4.9bn out of Â£ 47bn issued – of the 1.5m loans made in under the government’s COVID-19 Bounce Back loan program (the âSchemeâ) were fraudulent. Although the NAO has said that Â£ 4.9 billion could be an overestimate, the potentially vast scale of the fraud is nonetheless embarrassing for the government.
It’s no surprise that the program has been operated by fraudulent applicants – it was put in place quickly, with minimal fraud prevention measures in place. The failures of the Scheme illustrate how fraudsters, whether acting through organized crime or opportunistically, can quickly exploit the systematic weaknesses of financial schemes. It is also reminiscent of the difficulties of recovering money after it fell into the hands of fraudsters – the government predicted it could only recover Â£ 6million of money lost to organized crime.
The program was one of several business support loan initiatives offered by the Ministry of Business, Energy and Industrial Strategy (âBEISâ). Between April 2020 and March 2021, he offered loans of up to Â£ 50,000, or a maximum of 25% of annual turnover, to small businesses that have been affected by the COVID-19 pandemic. Although the loans were made by commercial lenders, they were 100% guaranteed by the government.
The program aimed to make prompt payments to distressed businesses and, to speed things up, allowed potential borrowers to certify their application details themselves. Commercial lenders who made the loans were required to conduct anti-fraud checks, but still had to make payments within 24 hours, or 48 hours if additional checks were required. This, of course, made the Regime ripe for abuse.
The importance of assessing the risk of fraud
The NAO reported that BEIS did not properly assess its appetite for fraud risk or estimate the potential level of fraud expected from the program. BEIS recognized when the Plan was set up that it favored the speed of payment for checks in the event of fraud. It is understandable that at the start of the pandemic, the government wanted to provide financial support as quickly as possible to those in need. The amount that was ultimately lost under the program, however, is difficult to defend.
If BEIS had correctly analyzed the Plan’s fraud risk, it should have identified that this risk was extremely high. He could then have put in place appropriate fraud prevention mechanisms and ironed out all the weaknesses inherent in the Plan. For example, measures to identify duplicate claims, which should have been in place from the start of the program, were not put in place until June 2020 – after 61% of loans in value had already been issued. . A risk assessment should also have identified the risk of fraud posed by allowing borrowers to self-certify their claims, which would have enabled BEIS to balance this well with the legitimate need for prompt payments.
Almost all financial schemes carry an inherent risk of fraud. The Plan illustrates how important it is to assess these risks, even if payments must be made urgently and such an assessment may seem bureaucratic in the circumstances. Fraudsters are getting more sophisticated and the 4.9 billion pounds missing shows just how big the impact of fraud can be.
Throw the good money after the bad
BEIS has announced its unimpressive plans to recover money sent to fraudulent applicants. It has categorized potential fraud cases under the program into three risk levels and prioritizes high-profile cases, which involve organized crime groups and applicants who have taken out multiple loans for different companies totaling over 100. Â£ 000. BEIS uses executing agencies, including the National Investigation Service (âNATISâ) to investigate, prosecute, and recover funds for senior and high-level loans from mid-level loans. The NAO reports that NATIS ‘work through October 2021 resulted in 43 arrests in 33 investigations and more than Â£ 3million in recoveries.
NATIS’s minimum recovery target is Â£ 6million over three years, which is equivalent to the Â£ 6million that the BEIS has agreed that NATIS could spend on its workload for the program. For each pound spent to chase embezzled funds, only one pound will be recovered. It is not value for money by any measure. It’s also a drop in the ocean compared to the total amount lost on the diet.
The NAO reports that BEIS expects commercial lenders under the program to seek to recover fraudulent funds in lower level cases. This expectation seems unrealistic because the loans are fully guaranteed by the government. Lenders simply have no financial incentive to prosecute fraudsters: it is likely that most of the money lost to smaller-scale frauds will never be recovered. BEIS should have considered including an exception in the guarantees offered that would have excluded loans to fraudulent applicants. Good fraud prevention requires measures to ensure that all parties to an agreement are financially invested in both fraud prevention and in recovering funds lost to fraud.
Prevention is better than cure
The difficulty and cost of recovering funds lost by fraudsters under the program is a reminder that it is better to prevent fraud than to seek to recover funds later – a conclusion that was also drawn by the NAO.
BEIS has announced plans to recruit additional staff to its anti-fraud team and an additional investment of Â£ 32million in anti-fraud operations, but this is a paltry sum compared to the 4.9 billion pounds that have been lost. The money lost to fraud under the program illustrates how the loopholes that allow fraud can be fully and quickly exploited and underlines the importance of assessing the risk of fraud when setting up of any financial program. Once these risks have been assessed, any inherent weaknesses can be corrected before fraud occurs. The need to prevent fraud before it happens has also been demonstrated by the expected difficulty of recovering the missing Â£ 4.9bn. The government’s pessimistic predictions about the likelihood of getting that money back reflect the experiences of many victims of fraud – once the money is in the hands of fraudsters, it will often never be recovered.