After the horse has bolted: covid-19 and fraud prevention

News that up to £17bn of over £47bn credit provided through covid-19 related loans will not be repaid makes for depressing reading. Further reports that as much as £4.9bn of the credit was taken by fraudsters will be angrily received, not least by those who had to tighten the purse strings over Christmas. Anti-fraud measures were implemented late and appear to have been under-resourced and inadequate. Rectifying this should now be a priority, such that individuals that have abused this scheme should now fear focused investigation and, where appropriate, prosecution efforts. However, are there the resources to do so properly?

As part of the covid-19 emergency lending program, the Bounce Back Loan scheme (BBL), the Government loaned £47bn to small businesses. However, it is now reported a significant portion is not expected to be repaid – and further, a sizeable chunk, 11 per cent at some reports, has been lost to fraud.

Of course, it was right one of the immediate priorities following the covid-19pandemic was to ensure business continuity and prevent the collapse of small businesses. However, was this prioritised at the expense of implementing inadequate fraud measures, or are inadequate measures indicative of a wider issue? The situation is not helped by reported accompanied issues with an underfunded criminal justice system. Indeed, these multiple symptoms would suggest a wider problem.

Inadequate measures

A report from the National Audit Office (NAO) concludes : “Counter-fraud activity for the Bounce Back Loan scheme was implemented too slowly to be effective and the government’s activity to limit taxpayers exposure to fraudulent loans is in adequate”.

Indeed, the scheme has faced numerous criticisms, including having limited verification, and no credit checks on borrowers, which made it vulnerable to fraud and losses. Although lenders were expected to be the first line of defence and conduct due diligence, there were apparently limited commercial incentives (indeed, lenders themselves could recover overdue loans). Further, some counter fraud measures, such as duplication checks, were introduced late and all other counter-fraud measures were implemented after September 2020.

Enhanced investigation efforts

The late implementation of counter-fraud measures shows a clear case of closing the stable door following the horse bolting. Going forwards, while specific areas of improvement have been on identification, quantification and recovery of fraudulent loans, it is primarily worth noting efforts appear to be focused on organised crime rather than, for example, overstatement of turnover by a specific percentage. Therefore, some fraudulent activity will undoubtably have slipped through the stable door.

There have been some practical steps taken. Indeed the first arrests took place in October 2020 and more arrests have followed.  Further, a HMRC taskforce has been created staffed by more than 1000 employees. Finally, the Insolvency Service will be granted powers to investigate cases following the dissolution of a company.

Limited resources

However, as the NAO notes, enforcement agencies have limited capacity to investigate, prosecute and recover large-scale fraud. This is partly down to resources. Further reliance is placed on the National Investigation Service (NIS) for allegations of fraud over a certain value and where there is evidence of organised crime. Again, due to limited resources, the NIS has capability to work on only 50 cases. However, this is out of 2,000 intelligence reports received each year.

Conclusion

There will undoubtably be companies that took the loans honestly, and for whatever reason, are not currently able to make the repayments.  There will also be companies that may have made misrepresentations, whether on the spur of the moment, or motivated through desperation. Finally, there will be situations where the companies themselves have been set up for the specific purpose of fraud. Due to lack of resources, measures which should have been implemented to weed out the latter have clearly been lacking. For the same reason, adequate investigations and prosecutions currently look unlikely. Rectifying the situation will not be an easy task and will be made the more difficult by the state of the court system, which is reportedly creaking at the seams.  Some of the issues here are, without doubt, partly symptomatic of a larger resource problem – and until this is addressed, there is an increased risk money will continue to end up in the wrong hands.

Thomas Cattee is head of white-collar crime at Gherson Solicitors gherson.com