Introduction
£47 billion of loans given out of taxpayers’ money.
£4.9 billion estimated to be lost to fraud.1
Under the government Bounce Back Loan Scheme (BBLS), small businesses struggling due to the pandemic could obtain a fully government-secured loan of up to £50,000 with no repayments required for the first 12 months.2
The conditions? Principally, the business must have been established by 1 March 2020, trading at the date of the application, and while a minimum of £2,000 was on offer irrespective of a business’s performance, the maximum that could be borrowed was 25% of the annual turnover (capped at £50,000).3
Sadly, fraudulent use of the scheme has resulted in over 800 director disqualifications,4 as well as arrests and criminal convictions under the Fraud Act 2006.5
There has been significant commentary about whether the government-issued requirements adequately addressed the risk of fraud. However, there has been less discussion about the role of lenders in the scheme. Therefore, this article will address the following: (i) the inherent risks in the BBLS guidance and their impact on lenders, (ii) the responsibilities of lenders, and (iii) the actions available to lenders going forward.
What Were the Risks Inherent in the Scheme?
Rapid and makeshift responses were the name of the game during the pandemic, and the BBLS fits this mold. While no one was expecting a perfect solution, the risk profile of the scheme was highlighted from inception.
Two days before launch, the British Business Bank warned ministers that the BBLS posed “very significant fraud and credit risks” and that it was “vulnerable to abuse by individuals and organised crime.” Less than a month into the scheme, a survey by the Business Banking Resolution Service revealed that 43% of borrowers had no intention of repaying their loan, either because they expected to go bust within the year or that they did not think the government would pursue repayment.6
Below we discuss three elements of the scheme that appear to have contributed to this risk of fraud.
Self-assessment
To maximise speed and efficiency, the BBLS relied on businesses self-assessing their eligibility for a loan. Applicants were required to fill out a “simple online form, with only seven questions,”7 giving the name of the business, confirming its eligibility, and stating the business’ annual turnover upon which the level of credit available was calculated.8
Self-assessments are inherently high-risk because they are prone to manipulation and error. Investigations into BBLS have revealed instances where declared turnover was falsified,9 the applying business was not trading at the time of application,10 and applications for loans were made using the stolen details of existing businesses.11
Exemption from affordability checks
The FCA usually requires lenders to check the creditworthiness of a borrower before entering into a loan agreement in part to minimise the risk of loss. This involves assessing a borrower’s ability to make payments as they fall due.12
However, under the BBLS, requirements to conduct affordability and credit checks were expressly waived.13 This was justified to make finance available to businesses that would not be able to obtain it under normal commercial arrangements, such as those classified as a “business in difficulty.” However, this policy removed a critical tool that lenders use in conducting customer due diligence, increasing the risk of fraud going undetected.
Time scale
For the scheme to be effective, money had to be in bank accounts as soon as possible. Therefore, applications for the scheme were opened just one a week after the initial announcement, with businesses told to expect the money in their bank accounts “within a matter of days.”14 This time pressure drove the decision to rely on self-assessment and to cut credit and affordability checks,15 leading to the risks discussed above. In addition, many lenders did not have prior procedures in place to deal with a high volume of applications to be turned around quickly. A lack of process and strain on resources is a recipe for undetected error and fraud.
What Were the Responsibilities of Lenders?
While designed by the government and administered by the British Business Bank, the BBLS was ultimately implemented by a network of accredited commercial lenders with the following responsibilities.16
To undertake standard customer fraud, AML and KYC checks
Every application was to be subject to standard anti-fraud, anti-money laundering (AML) and Know Your Customer (KYC) checks.17This includes obtaining valid proof of identity of the person(s) with ultimate control over the applying business,18 assessing the borrower for high-risk factors, and comparing obtained details to those stored on Companies House.19
Beyond these checks, there does not appear to be further responsibilities to verify customer eligibility. The BBLS guidance states that eligibility is to be assessed through self-certification alone. A report issued by the Committee of Public Accounts reinforces this, saying that “the Scheme did not require lenders to check a businesses’ [sic] claimed turnover against its records for existing customers” which enabled some borrowers to receive a larger loan than they were entitled to.20
To investigate unpaid debts
The BBLS guidance makes clear that the borrower always remains 100% liable for the debt.21 While the loans are fully guaranteed by the government, lenders are required to pursue unpaid debts in line with their business-as-usual recovery processes.22 This could include utilising debt collection agencies, which many lenders have already begun to do.23 While requirements under the scheme do not appear to incentivise lenders to pursue debt beyond the minimum period,24 lenders are likely to be wary of bad press and criticism if they fail to adequately investigate losses before seeking recompense from the government.25
The guidance also states that borrowers suspected of fraud could be subject to investigations by HMRC, the Insolvency Service and the National Investigation Service (NATIS).26 This suggests that the government is willing to investigate and prosecute fraud as well as requiring lenders to pursue those who default.
What Now?
It remains to examine what actions lenders might consider moving forward.
Review KYC and AML processes
As of 31 July 2022, lenders had reported preventing over £2.2 billion in fraudulent applications through standard customer fraud, AML, and KYC checks.27
However, such checks were not always successful. In oral evidence, lenders explained that despite various fraud measures and checks, money was still lent to businesses that were dissolved or dormant at the date of application.28 In a stark example, £10 million in bounce back loans were utilised in a £70 million money laundering scheme. These loans were obtained by members of a criminal network setting up fake companies, with £3.2 million coming from one bank alone.29
It is expected that the standard checks required of lenders should identify such fraud. The presence of such incidents suggests that there may have been deficiencies in these checks. Lenders may benefit from an independent review of their standard processes and the design of a fast-track version for when crises arise.
Investigate fraudulent borrowers
As above, lenders are required to use their usual recovery processes to pursue unpaid bounce back loans. Such inquiries should be sufficiently comprehensive to maximise the chances of recovering debts, or at least demonstrate that a thorough effort has been made to recoup losses before making a claim under the Treasury agreement.
Where there is a potential large-scale fraud such as the money laundering scheme above, an independent investigation service may be of assistance. Investigators can identify fraudulent activity through forensic accounting techniques and pattern detection. Where fraud is identified, specialists in asset tracing can sift through complicated schemes to locate relevant assets and ascertain their recoverability, aiding the recuperation of losses.
[1] https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf; https://f.hubspotusercontent30.net/hubfs/9134784/BBLS%20Case%20Study%20v2.pdf.
[2] https://www.gov.uk/government/news/small-businesses-boosted-by-bounce-back-loans.
[3] https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan.
[4] https://www.gov.uk/government/news/more-than-800-company-directors-banned-for-abusing-covid-support-scheme.
[5] https://www.constructionnews.co.uk/legal/father-and-son-builders-guilty-of-covid-fraud-25-07-2024/.
[6] https://thebbrs.org/wp-content/uploads/2020/05/BBRS-The-impact-of-covid-19-schemes-on-buisness-banking-dispute-resolution_21_05_2020.pdf; https://smallbusiness.co.uk/nearly-half-of-small-businesses-do-not-intend-to-repay-bounce-back-loans-2550396/.
[7] https://www.gov.uk/government/news/new-bounce-back-loans-to-launch-today.
[8] https://www.british-business-bank.co.uk/finance-options/legacy-programmes/bounce-back-loan-scheme-bbls/faqs-small-businesses-bounce-back-loan.
[9] https://www.constructionnews.co.uk/legal/father-and-son-builders-guilty-of-covid-fraud-25-07-2024/.
[10] https://www.gov.uk/government/publications/fact-sheet-bounce-back-loans/fact-sheet-bounce-back-loans.
[11] https://www.bbc.co.uk/news/uk-54187581.
[12] https://www.fca.org.uk/firms/creditworthiness-and-affordability-common-misunderstandings.
[13] https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update-Summary.pdf, [4].
[14] https://www.british-business-bank.co.uk/finance-options/legacy-programmes/bounce-back-loan-scheme-bbls/faqs-small-businesses-bounce-back-loan.
[15] https://committees.parliament.uk/work/622/covid19-bounce-back-loan-scheme/news/137935/risk-of-uk-taxpayer-bailout-on-up-to-26-billion-of-covid-bounce-back-loans/; The Bounce Back Loan Scheme: an update (Summary) (nao.org.uk), [4].
[16] https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf, p 58.
[17] https://www.gov.uk/government/news/new-bounce-back-loans-to-launch-today.
[18] https://www.gov.uk/government/publications/know-your-customer-guidance/know-your-customer-guidance-accessible-version.
[19] https://www.fca.org.uk/firms/financial-crime/money-laundering-regulations.
[20] https://committees.parliament.uk/publications/22002/documents/163618/default/, p 6.
[21] https://www.british-business-bank.co.uk/finance-options/legacy-programmes/bounce-back-loan-scheme-bbls/faqs-small-businesses-bounce-back-loan.
[22] https://www.nao.org.uk/wp-content/uploads/2021/12/The-Bounce-Back-Loan-Scheme-an-update.pdf, p 40.
[23] https://www.ft.com/content/52f6ad43-abee-4a5b-929e-921dc4278122.
[24] https://committees.parliament.uk/publications/22002/documents/163618/default/, p 6.
[25] https://smallbusiness.co.uk/banks-may-call-in-debt-collectors-to-recoup-unpaid-bounce-back-loans-2551364/.
[26] https://www.gov.uk/government/publications/fact-sheet-bounce-back-loans/fact-sheet-bounce-back-loans.
[27] https://www.gov.uk/government/publications/covid-19-loan-guarantee-schemes-repayment-data/bounce-back-loan-scheme-performance-data-as-at-31-july-2022.
[28] https://committees.parliament.uk/oralevidence/9918/html/.
[29] https://www.bbc.co.uk/news/business-59761294.
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