Anti-fraud checks on Covid loans 'inadequate', watchdog finds

Most measures were introduced "too late" to stop fraud, with focus on prevention
Bounce-back loans were issued to businesses at risk of failing early in the pandemic. Photo: Places for Bikes/Flickr/CC0 1.0

Measures to prevent fraud in the government’s Covid business loan scheme were “inadequate”, the public spending watchdog has said, after finding £28bn was handed out before basic checks were put in place.

The Department for Business, Energy and Industrial Strategy did not introduce measures to ensure companies were not applying for more than one loan through the Bounce Back Loan Scheme until June 2020 – a month after the scheme launched.

Nearly two-thirds of the money lent through the scheme had already been paid out by this time, the National Audit Office said in a highly critical report today.

The only counter-fraud measures in place when the loan scheme launched at the height of the coronavirus pandemic in May 2020 was a requirement for lenders to make counter-fraud and “know your customer” checks on applications.

BEIS told the Treasury last December that a “high level of residual fraud risk” remained despite these up-front checks.

In March, BEIS estimated that 11% of the loans issued – totalling £4.9bn – were fraudulent. It said the number was uncertain and likely an overestimate, because it assumed any fraud leads to a total loss of the loan.

The figure has since been revised down to 7.5% by auditors, but the NAO said it had not been given time to verify the figure.

NAO head Gareth Davies said that while the government had prioritised speed, it “failed to put adequate fraud prevention measures in place”.

“One impact of these decisions is apparent in the high levels of estimated fraud. The true level of fraud will become clearer over time, but it is clear government needs to improve on its identification, quantification and recovery of fraudulent loans within the scheme,” he said.

The report noted that while the it had relied on lenders to tackle fraud initially, the department was responsible and accountable for counter-fraud activity.

Government departments introduced 13 further counter-fraud measures as the scheme went on, but most came too late to prevent fraud, the NAO said. The measures, which included a fraud hotline, aimed to detect fraud where it had already happened.

BEIS told the watchdog that adding extra anti-fraud measures earlier on would have slowed down loans, when speed was a priority as the pandemic put businesses at risk of failing rapidly.

But the NAO said the department’s counter-fraud strategy lacked both clear governance and resources when the loans began.

“We did not find any documents which set out the department’s long-term ambitions, objectives, or financial metrics to measure the impact of counter-fraud activity,” the report said.

The watchdog also took issue with the department’s current approach to recovering money, which it said “risks diminishing the deterrent effect of counter-fraud activity”. BEIS is prioritising the pursuit of organised crime, and has decided not to focus its resources on borrowers who overstated turnover by less than 25%, provided there were no other fraud risk indicators.

It has a target of recovering £6m of fraudulent loans from organised crime, which the NAO called “inadequate”.

The report urged BEIS to improve the way it identifies, quantifies and recovers fraudulent loans issued through the bounce-back scheme.

A BEIS spokesperson said the department was “working closely with lenders and enforcement authorities to minimise fraud and ensure those that have committed fraud face consequences”.

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