Scale of Covid loan fraud leaves UK struggling to reclaim billions lost

Earlier this year Britain’s Insolvency Service banned a businessman from becoming a company director after he overstated the income of a car recovery business in order to receive a £50,000 loan from the government’s Covid “bounce back” loan programme. He spent half the loan on a truck and the remainder on class A drugs.

He was not alone in finding it easy to exploit the government’s flagship Covid loans scheme. Others included a student in Scunthorpe who claimed a £50,000 loan for a used car dealership that did not exist, and a Bolton restaurateur who secured a £50,000 loan even though his business had ceased trading several months earlier, had no premises and already owed creditors £96,000.

The bounce back scheme was set up to help businesses survive the pandemic, with the government guaranteeing loans of up to £50,000. But as much as £4.9bn of the £47bn lent by banks to 1.1m companies between May 2020 and March 2021 was lost to fraudsters, according to government estimates.

The programme was set up by the British Business Bank, which reports to the business department, with only minimal checks on borrowers as officials were under pressure to help businesses as quickly as possible.

“Lend in haste, repent at leisure,” said one government official in the wake of successive hearings in which MPs sought answers from officials, bankers and regulators about how so much could have been lost so easily.

Earlier this year, chancellor Rishi Sunak vowed that the government was “going to do everything we can to get that money back and go after those who took advantage of the pandemic”.

Rishi Sunak
Rishi Sunak has promised to target those who exploited the pandemic © Simon Walker/HM Treasury

But experts warn that the sheer scale of the fraud makes this difficult. “The volume of crimes is so high, the authorities don’t have capacity to investigate these,” said David Clarke, a former head of the City of London Police Fraud Squad and counter-fraud expert.

High-profile cases have focused on clawing back money from organised criminals who have assets that can be seized by the courts. But many of the fraudsters are either individuals with no businesses, or owners who vastly inflated their businesses’ revenues to claim the maximum loan of £50,000 from their banks.

Rather than being prosecuted through the courts, they are simply being struck off and banned as company directors, with the government relying on the Insolvency Service to pursue them.

MPs on the Commons public accounts committee warned in December that the government’s focus on pursuing large and organised crime risked leaving smaller fraudsters unpunished.

The National Audit Office said the scale of fraud and limited government capacity meant that officials had decided not to focus “investigative resources” on smaller borrowers that had overstated turnover by less than 25 per cent.

The NAO also found that the National Investigation Service, an investigative unit that protects the public sector from organised crime, only had the capacity to pursue 50 cases a year, and the business department had given it a target of recovering just £6mn of fraudulent loans over three years — a fraction of the estimated losses.

Michael Levi, a fraud expert and professor of criminology at Cardiff University, warned that the lack of capacity means many fraudsters will escape prosecution. “Just think about what increase in fraud investigators and prosecutors and court availability would be needed to produce a major step change in this,” he said.

Lord Theodore Agnew, who resigned from his post as anti-fraud minister in January in protest at the scheme’s losses, has spearheaded efforts to encourage banks, officials and the British Business Bank to do more to get money back.

Lord Agnew has cast doubt on banks’ motivation to uncover fraud because of the guaranteed payouts © UK Parliament/PA

Bank executives told MPs at recent hearings that hundreds more people were being recruited to their fraud prevention and recovery teams, but the NAO said that “commercial incentives to [investigate] are limited” for the “mid-tier” and “bottom-tier” fraud as banks can claim back loans through the government guarantee.

Lord Agnew also cast doubt over banks’ motivation to uncover fraud because of the guaranteed payouts. “There is absolutely no alignment of interest,” he said. “Once the guarantee has been paid, they’re still expected to go on chasing for another year. Well, why would they bother to do that?”

Lenders claim to have prevented more than £2bn of fraudulent applications and had detected £5.3mn of fraudulent loans, according to the NAO.

Executives from five banks — NatWest, Barclays, Lloyds, Santander and HSBC — told MPs last month that fraud levels were much lower for their loan books than government estimates suggested. They argued they had done all that they could to prevent fraud in the short period they were given to set up the scheme by officials under pressure to help businesses at the beginning of the pandemic.

“Within the first four weeks, we lent six years’ worth of volume of lending,” Hannah Bernard, head of business banking at Barclays UK, told the MPs. “The bounce back loan was a lifeline for vast swaths of businesses.”

The business department said: “Our Covid support schemes were implemented at unprecedented speed to protect millions of jobs and businesses at a time when families needed it the most. Last year lenders reported preventing nearly £2.2bn in potential fraud from the bounce back loan scheme.

“We’re continuing to work to crack down on fraud and will not tolerate those that seek to defraud consumers and taxpayers.”

But banking executives are concerned that they will be under increased scrutiny as more cases of fraud emerge. The payment of guarantees is being delayed as the British Business Bank and government officials more closely scrutinise claims being made by the banks, say industry executives. RSM and KPMG have been appointed to audit how banks are making their claims.

“It is such a sensitive issue now. We just don’t know the true level of fraud yet. It is day to day,” said one.

Banks had claimed £70mn in guarantees from the government for unpaid loans by the end of December and say they have already withdrawn thousands of claims on guarantees worth more than £240mn because of mistakes they made that allowed fraud and error to take place.

Lenders argue that the government needs to be careful about throwing them “under the bus”. “At the start of Covid we all went to a meeting with the chancellor in his office, he took a group pic of us,” said one banking chief.

“The blame game will start now. Remember MPs were begging us to save businesses in their communities. It is very frustrating . . . of course we knew there would be fraud but it was answering the call of MPs begging us to lend.”

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