Tackling COVID-19 bounce-back loan fraud

04.15.2021 | By Mark Speyers

From March 2020 to March 2021 the UK Government provided guarantees on business loans up to £50,000 for companies impacted by the pandemic and related interruptions to normal trading conditions. The Bounce Back Loan Scheme (BBLS) was introduced with an interest rate of 2.5% with no principal repayments for the first 12 months and no fees. The initial loan term is six years, but can be extended to 10 years, and no recovery action can be taken over a principal private residence or vehicle. Applicants could apply via any lender listed on the British Business Bank website and self-certify that they are UK-based, not bankrupt, not already using another BBLS and adversely impacted by Covid-19.

These loans were issued via regulated UK banks, but due to the urgency normal due diligence and other applicant checks were relaxed. As a result, there are clear signs of significant fraudulent activity relating to these loans. The scale of the problem will become increasingly apparent over the coming months as the first repayments become due. To date, around £50bn has been lent by UK banks, double the £18-£26bn anticipated at launch. However, the National Audit Office has said that the government now faces a loss of between £15 billion and £26 billion from businesses being unable to repay the loans or through fraud.

The scale of the problem

Loans under BBLS were designed to be handed out quickly to small businesses, which left the scheme open to vulnerabilities. The estimated potential losses range widely, but the government itself has estimated it could be between 30-75% and does not rule out losses being even higher due to businesses being unable to repay the loans, loan defaults and fraud. The swift application process and limited customer checks have made the scheme vulnerable to fraudsters.

The National Crime Agency has reported numerous arrests for BBLS fraud. In January this year, three men working for a London financial institution were arrested by NCA as part of an investigation into fraudulent BBLS claims totalling £6 million. This came just weeks after the arrest of three suspected members of an organised crime group involved in high level money laundering and fraud in December 2020.

We know that undetected frauds always greatly exceed the number of detected ones, even where behaviours and typologies are well understood. To get a clearer picture of the issue, the British Business Bank has appointed PwC to analyse transactions for six months and calculate a final fraud estimate. As of Jan 2021, the British Business Bank had already identified 43,958 fraudulent loans prevented, with a total value of £1.59bn. PwC’s report is due in April 2021.

Law enforcers’ hands are tied

Due to the current scale of the challenge, the police have been told to investigate BBLS Covid loan fraud only when there is evidence of links to organised crime. It has been reported that Assistant Commissioner Angela McLaren of the City of London Police wrote to forces to say that officers should be called in only on cases that “involve clear links to serious organised crime and core policing business” and “policing will not routinely investigate or prioritise public sector fraud investigation [that is, Covid fraud] at the expense of core business”.

The letter reportedly also said that the responsibility for managing fraud originating from the public sector rested with the Cabinet Office, which could refer cases to the National Investigation Service. However, the National Crime Agency has said it had “provided red flag indicators to the banking sector to aid their detection of fraudulent applications”.

What needs to be done to address the problem?

From our experience of working with both government bodies and financial institutions to tackle financial crime there are valuable insights and techniques for reducing fraud losses and other detrimental consequences of the BBLS.

The reality is that the true scale of the problem needs to be identified by individual banks. From there, each bank can assess the suitability of the available data and tools necessary to minimise immediate losses, and also consider alternative technologies that may be suitable for identifying bad actors and their associates.

In his latest blog, Robert Harris looks at the scale of the problem behind Bounce Back Loan Scheme (BBLS) fraud, the difficulties law enforcers are facing, and what needs to be done to address the problem

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