Last week the National Audit Office published its findings following an investigation into the Bounce Back Loan Scheme.

Although the story was widely reported in the press, and one of our team, assisted the press to gain a better understanding of the issues that surrounded the report, a fascinating angle has gone unreported.

In addition to the headlines, that perhaps as much as 10% of the Bounce Back Loan Scheme – now valued at £48 billion – has already been transferred to fraudsters, the report provides an insight into the decisions that were made by the Government and how it is proposed to deal with those businesses that either go into default or which are involved in fraud.

Firstly, the Government’s primary motivator was speed; it wanted to support SMEs as quickly as possible. It was aware that Germany and Switzerland had already put in place Bounce Back Loan schemes of their own, both of which offered safeguards in that businesses were not allowed to self certify; were not allowed to use the loans to repay existing lending, and could only in certain circumstances use the loans to pay dividends. Contrast those safeguards with the British Government’s system, where no such safeguards were imposed, because the Government wanted to release funds to businesses within 48 hours of the application being made, whereas the usual time it would take for banks to process such applications is between four and 12 weeks.

The Banks and intelligence agencies were not ready for the launch of the scheme – it took about a month for them to get up to speed, by which time vast sums of money were already being lent.  Gradually the banking system of safeguards, including fraud referral agencies such as CIFAS, lender due diligence and post-accreditation audits, started to kick in. However, the reporting system (Portal) the banks use does not highlight fraud risk. The British Bank provided training to the banks on best practice, but there was insufficient time to prevent duplicate applications being made. The self-certification process meant there were no credit checks where banks were going to lend to existing customers. Unviable businesses were able to access the loans. The British Bank highlighted that they were most concerned about fraud arising out of self certification; multiple applications; lack of legitimate business; impersonation and organised crime.

It was only in October that the banks started to provide the British Bank with monthly fraud reports through the Portal. Since bank credit fraud checks are interrelated (they don’t distinguish between fraud and default risk) we won’t know until May 2021 – when the loan repayments are due to commence – how many businesses will have gone into default.

Lenders use their existing recovery programmes and then claim from the Government after a reasonable period when loans go into default. The banks are not being paid to recover defaulted loans – responsibility for that falls on the British Bank.

The report highlights that the 100% loan guarantee reduces lenders’ incentives to recover the money. The report reveals that SME borrowing currently stands at £165 billion, of which 65% is owed to the big five banks. Those big five banks are responsible for lending 89% of Bounce Back Loans. It is therefore obvious that the big banks are encouraging their clients to take out additional 100% Government-backed lending to refinance their businesses. We have already heard reports from clients that this is the case, and it probably explains why lending through the Bounce Back Loan Scheme is much higher than originally estimated – the report suggests the figure could reach £75 billion.

Whilst banks assessed fraud risk early, and some fraud risk can be mitigated, the risk of fraud remains “very high”.

So what does this mean for businesses and company directors going into default? Because the banks were not allowed to use the usual credit checks for own customer lending, they relied on their anti-money laundering, KYC and anti-fraud measures.  This has led to a large number of CIFAS fraud markers being identified by the banks – such markers sit behind credit ratings and are used by the banks for their benefit. Invariably customers only find out about them after they have been refused credit. Once an application for a Bounce Back Loan has been flagged as fraudulent then it is likely that fraud markers will be issued. Therefore many businesses may not be aware that they have potentially stored up trouble for themselves by making multiple applications, and had they not availed themselves of the 90 day honesty window they were offered, directors could find themselves black listed from obtaining credit for up to six years.

Where businesses have a board of directors, banks check against each director, so if one of them has a CIFAS marker it will also hamper the business itself from obtaining credit. It is possible to challenge such markers and businesses should take legal advice immediately they become aware of markers.

The National Investigation Service (NATIS) commenced investigating Bounce Back Loan fraud cases at the end of September. The lenders are now producing monthly fraud reports. The National Audit Office reported that the default level could be as high as £43 billion – when the scheme was originally devised the Government estimated between 35% and 60% would default; that estimate has been revised to between 15% and 80%.