Banks that have failed to apply even the most minimal of checks when handing out loans will be challenged. That is the message from the British Business Bank which has promised to investigate and condemn any banks that have taken taxpayer money to recoup losses from fraudulent Covid loans without applying the appropriate checks to prevent these losses in the first place.
A recent Complyport article mentioned the National Audit Office (NAO)’s estimate that Bounce Back Loans (BBLs) worth £4.9 billion were fraudulent. This was the alleged result of outdated and ineffective legal requirements as well as the failure of the government to implement adequate fraud prevention measures in a timely manner—namely at the point that these loans were granted.
Moreover, it appears that the criminal actors were able to sharpen the tools at their disposal to commit fraud more efficiently and effectively than the lending organisations and government. Amidst the pandemic, it seems that these fraudsters identified the vulnerabilities and weaknesses of the loan scheme and exploited them in a speedier fashion than the regulated and government markets. Is there a lesson in efficiency here?
Why are the banks being challenged?
To date, £63 million has been paid out to banks that have suffered losses from fraudulent loans during the BBL scheme. However, the money given out could be wrested back. According to Patrick Magee, Chief Commercial Officer of The British Business Bank, the sums could be retrieved if the banks are found to have applied sub-par checks, including instances where they relied on self-certification by borrowers. This may translate in the loss of a substantial governmental crutch for these banks: lenders found not to have applied the appropriate due diligence checks on their borrowers will have to bear the burden of those loans granted to fraudsters.
It is worth noting that £240 million in claims by banks or lenders regarding losses incurred as a result of fraudulent Covid loans have already been dropped. This can also be viewed as £240 million worth of errors and inadequate regulation being admitted and recognised by banking institutions and lenders. The number is expected to rise as a further £5.7 billion is estimated to have been lost from fraud and error within the furlough and self-employment programmes.
Investigating failures
The Treasury has announced plans for the creation of a Public Sector Fraud Authority (PSFA) to supplement and reinforce the Taxpayer Protection Taskforce launched in March 2021. Staffed by “an elite fraud squad” of data experts and economic crime investigators tasked with recovering public funds, the PSFA will attempt to settle discontent and answer government critics. One of the critics, Shadow Chancellor Rachel Reeves, emphasised that ignoring warnings regarding the lack of anti-fraud measures in government support schemes resulted in £11.8 billion of taxpayer money handed over to fraudsters and criminals.
The proposed plan will cost £25 million, in addition to the £100 million that the 2021 taskforce cost, and will aim to crack down on criminal fraudsters who have taken taxpayer money. The authority will also be in charge of monitoring suspicious activity and entities trying to gain access to government contracts, and will review existing programmes to try to detect any vulnerabilities to fraud.
Misdirection or concrete counter fraud measure?
The PSFA and the way it is presented as the grand solution to the problem of fraudulent Covid loans, should be taken with a grain of salt. There is definitely a need to recover money taken by fraudsters and criminal actors, but it must be recognised that this is a reactive position; the proverbial horse has already bolted. There needs to be a concentrated effort to act and implement appropriate counter-fraud measures to prevent this type of orchestrated criminal activity occurring again—not just at this grand scale but at any level where a criminal actor will seek to take advantage of the vulnerable or innocent to make a personal gain for themselves.
Several questions emerge the more we examine details surrounding the PFSA. Firstly, the PFSA’s budget of £25 million can be equated to only 5% of the National Crime Agency (NCA)’s. If the NCA, with the much greater budget (and admittedly much wider scope of control and activity), has been unable to effectively manage and mitigate the risks associated with fraudulent loans, it begs the question of how effective the PFSA can be—or how effective we can reasonably expect them to be. Secondly, should the PSFA be effective in recovering public funds, prosecutors like the Serious Fraud Office have not received any additional funding to help recover funds under their investigation. This means that the backlog of approximately 50,000 Crown Court cases will remain a great obstacle for “the system” to process and overcome. Finally, the initial responsibility of distributing Covid loans sat with the Treasury itself. As the PSFA will report to the Chancellor, is it therefore likely that the PFSA will look, or at least look closely and publicly report, as to the actual root cause of the fraudulent losses?
Next steps
Recovering the money that has been lost will rely on cooperation between national and international authorities to investigate fraudsters based locally and abroad. Moreover, discussions on increasing the resources available for the relevant authorities would greatly benefit counter-fraud efforts.
We must also remember that the overall costs to the public purse are ever-increasing: it covered the administration of the loan in the first place, then the losses to fraud, and will now cover the cost of recovering those losses. Regulating the distribution of loans effectively and appropriately in the first place would have potentially prevented either the majority of the fraudulent loans now sought to be recovered, or a further loss from occurring. If ever there was a case to prove that an investment early on in effective and proportionate controls being the key to incurring costs in remedial and reparative actions later on – this seems to be it.
Anti-Financial Crime Support – How can Complyport Help?
Our experienced Financial Crime and Forensics team led by Martin Schofield—one of the world’s leading specialists in the field—brings a wealth of experience to every project we are engaged in. Our highly experienced financial crime professionals and forensic experts, in subjects such as anti-money laundering, counter terrorist financing, anti-bribery and corruption and fraud and regularly help our clients navigate the complexities of the financial crime and money laundering environment. Services offered by Complyport include:
- Financial crime health checks and audits,
- Implementation of financial crime, AML, CTF, ABC, Fraud and market abuse controls and frameworks,
- Ongoing advice on financial crime, AML, CTF, market abuse and fraud prevention,
- Authoring/reviewing financial crime policies,
- Outsourced MLRO support
- Outsourced KYC and CDD support,
- Assistance in identifying Politically Exposed Persons (PEPs),
- Assistance in navigating international sanctions,
- Support with preventing market abuse and insider dealing,
- Expert Witness in Financial Crime cases
- Forensics and Investigations
- Design and/or delivery of online or face to face financial crime training
If this article has raised any questions, or you think your firm may require assistance, please contact either Martin Schofield via martin.schofield@complyport.co.uk or Jan Hagen via jan.hagen@complyport.co.uk to book in a free consultation.
About Complyport
Complyport is the City’s market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight, and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.
We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.
Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.
Day to day, we conduct audits and reviews of a firm’s products, processes, policies, and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.
