NAO recommends formal strategy for managing BBL fraud

In the spending watchdog’s report The Bounce Back Loan Scheme: an update, it’s recommended that by April 2022, the Department for Business, Energy and Industrial Strategy (BEIS) produces a formal strategy for managing BBL fraud. As well as this, it has to measure the performance of each counter-fraud measure, adapting its approach as necessary.

The BEIS launched the BBL scheme in May 2020, offering £50,000 or a maximum of 25% of annual turnover to support businesses during the pandemic. Banks, building societies and peer-to-peer lenders were accredited by the British Business Bank to pay these loans, which were guaranteed by the government.

Around a quarter of UK firms have applied for the scheme, and 1.5 million BBLs worth £47bn have been made. Of these, 90% - or £39.7bn - went to micro-businesses with a turnover below £632,000.

In March 2021, the BEIS estimated that 37% of BBLs worth £17bn will not be repaid and that 11% worth £4.9bn were fraudulent, although both these figures are, according to the NOA, uncertain.

The 37% represent both borrowers who would want to repay but are unable to, and borrowers who took out a loan fraudulently. The 11% estimate, meanwhile, excluded some types of fraud and is also likely to overestimate some losses as it assumes that all fraudulent BBLs are a when some of these funds should be recoverable.

As the scheme progressed 13 additional counter-fraud measures were introduced, but according to the NAO most came too late to prevent fraud and were focused instead on detection.

And, due to the scale of the possible fraud and its limited resources, the BEIS is prioritising the pursuit of organised crime and has decided not to focus its investigative resource on borrowers who overstated turnover by less than a certain percentage. This approach, according to the NAO, reduces the deterrent effect of counter-fraud activity.

The BEIS uses the National Investigation Service (NATIS) for fraud worth more than £100,000 with evidence of organised crime, and for other fraud of high value. NATIS received more than 2,100 intelligence reports by October 2021, but only had capacity to pursue a maximum of 50 cases per year.

According to the spending watchdog, the BEIS relies on lenders to investigate other fraud with the scheme, but their commercial incentives to do so are limited. Additionally, scheme rules and regulatory obligations required lenders to conduct counter-fraud checks with each application, using a recovery process in line with its business-as-usual standards.

Lenders can reclaim fraudulent BBLs through the government guarantee, provided they follow the scheme’s rules. The NAO says this offers a limited commercial incentive for the lender to go beyond the scheme’s rules to seek a full recovery of overdue loans.

Commenting on the research, the NAO’s comptroller and auditor general Gareth Davies said: “Government prioritised getting BBLs to small businesses quickly but 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 the government needs to improve on its identification, quantification and recovery of fraudulent loans within the scheme.”

In response to the NAO’s findings, credit reporting agency Equifax UK’s managing director of debt services Phil McGilvary said: “Lenders will do their bit to recover the money but the government does not have to just give up on £17bn of taxpayers’ money. If the government collects just 10% more than the banks manage, it can pay for another 100 projects in the levelling up fund.”