The Department for Business, Environment and Industrial Strategy’s approach to Covid business support schemes “offered an open goal to fraudsters and embezzlers”, MPs have said.
The Public Accounts Committee said the department was aware of the heightened risk of fraud in its Covid-19 business loans and grants but did not make full use of all the tools at its disposal to prevent and detect it.
Billions of pounds will be lost to fraud and error because of the department’s failures, the committee said in a report reviewing BEIS’s 2020-21 annual accounts.
“BEIS says it saw this risk coming but it’s really not clear where government was looking when it set up its initial Covid response," PAC chair Meg Hillier said.
“These lessons should have been learned from the banking crisis a decade ago and could have been prepared in the government’s pandemic exercises.
“These mistakes must be written out of future crisis responses, now, and government would do well to apply the learnings to the mounting, interrelated crises it now faces in climate change, energy supply and the cost-of-living.”
During the pandemic, BEIS was responsible for government support schemes designed to prevent businesses from failing, including the Bounce Back Loans Scheme, Coronavirus Business Interruption Loan Scheme and Coronavirus Large Business Interruption Loan Scheme.
The National Audit Office said last year that £28bn was handed out before basic checks were put in place through the Bounce Back scheme alone, calling measures to prevent fraud “inadequate”.
Around £4.9bn of the £79.3bn that BEIS guaranteed through the three schemes is expected to be lost to fraud and error, according to the department’s latest estimate.
Former minister Lord Theodore Agnew quit the government in January citing officials’ “woeful” handling of fraud and error in pandemic support packages.
NAO head Gareth Davies qualified his opinion of the department’s 2020-21 accounts due to the amount of estimated fraud and error in these schemes.
MPs said one of BEIS’s key failures was the way that officials, when seeking ministerial directions on the schemes, highlighted some of the risks posed by fraud but did not attempt to estimate the potential threat.
The committee said the department should in future ensure it clearly communicates the expected scale of fraud risk, where it is likely to come from and what can be done to mitigate it, when seeking ministerial directions. This could include advice on how the department and Companies House would work together to share information to prevent fraud, PAC added.
Requests for ministerial directions also did not sufficiently consider potential risks from organised economic crime, they added.
The committee said the department should also have seen the huge rise in companies during the period as “a warning sign warranting closer scrutiny”.
The number of new companies registering in 2020-21 rose by more than 20% compared to each of the previous five years, with 170,000 companies set up in this time. Lord Agnew has claimed more than 1,000 companies received emergency business support despite not trading at the start of the pandemic, calling this as a “schoolboy error”.
The department was also criticised for its lack of knowledge about grants which were handed out by local authorities. BEIS distributed £21.8bn of support grants through local authorities but has so far estimated the level of fraud and error in less than half of these, and already expects over £1bn will be lost.
PAC said it is also concerned that local authorities have few incentives to calculate fraud and error from the grants as all recovered funds are to be passed to the department. BEIS’s poor assessment of fraud and error in these schemes makes it challenging for the department and councils to assess the time and resources required to recover these funds, MPs added.
The MPs have asked BEIS to write to them by September, setting out how it will obtain local authorities' cooperation to allow it to calculate robust fraud and error estimates for all Covid business support grants, as well as detailing milestones for achieving these calculations and how this information is being used to focus recovery efforts.
PAC has asked the department to set out in a Treasury minute response how it will:
- Make sure it is doing everything it can to reduce losses from fraud and error
- Address the reasons for its accounts being qualified
- Obtain greater assurance over the regularity and value for money of grant payments made by local authorities on its behalf
The committee has also asked BEIS to set out how before the end of the year how it will apply any lessons learned from these to future support schemes
A government spokesperson said: “We’re continuing to crack down on Covid support scheme fraud and will not tolerate those who seek to defraud consumers and taxpayers.
“These schemes were implemented at unprecedented speed to protect millions of jobs and businesses. If the government didn’t move quickly, more businesses would have failed and many more jobs lost.”