COVID-19 - loan fraud and recovery

Posted on 7 December 2021

Many businesses struggling during (and as a result of) the COVID-19 pandemic have relied on vital Government support to stay afloat. In particular, many have accessed finance through the COVID-19 Government loan schemes (namely the Bounceback Loan Scheme (BBLS), the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS)), which a number of lenders participated in. Under these schemes, which were administered by the British Business Bank, the Government provided a guarantee to lenders in respect of any outstanding facility balance - a 100% guarantee in respect of the BBLS and 80% in respect of the CBILS and CLBILS.

As we move into the next phase of the pandemic, in what we hope will be a post-lockdown era with the economy making progress in its recovery, two questions are coming to the fore in relation to these schemes:

  1. Will lenders be repaid all of the sums that they advanced under these schemes?
  2. If not, will the Government – ie the taxpayer – have to pick up the tab?

Repayment?

Recovering businesses will, on the whole, aim to repay loans advanced. Whether and when they will be able to do so will depend, in part, on the economic outlook for each individual business and the extent to which the sector in which they operate has been able to recover and return to "normal". Other economic pressures, such as those arising out of Brexit, will also need to be taken into account.

However, inevitably a proportion of these loans will not be repaid. BEIS, the Government department responsible for the loan schemes, estimates that up to 60% of loans issued through the BBLS alone may not be repaid, equivalent to £27 billion. There will be borrowers that are simply unable to pay back their loans, but there will also be businesses that choose not to repay - which have abused the schemes in place, and fraudulently misappropriated the funds advanced. It has been widely reported that these schemes have been particularly susceptible to fraud, in part due to the speed at which they were implemented and the volume of demand at the peak of the crisis.

Recovery?

Clearly, it is not an option to leave the taxpayer exposed in this way. A Public Accounts Committee report, published in June 2021, noted that "It is essential that government recovers monies paid out as a result of fraud or error to allow taxpayers’ money to be spent on those that need it most".

The question is then, how will this be achieved?

The Government ultimately expects lenders to follow their usual recovery processes in relation to these schemes. In their June report, the Public Accounts Committee had asked BEIS to clarify the steps it will take to assess whether recovery efforts of banks are reasonable, and the steps it will take to recover taxpayers' money if deficiencies are identified. The Government response, published on 28 October 2021, suggests that this is an ongoing process. They have said that:

  1. BEIS and the British Business Bank continue to work closely with UK Finance and accredited scheme lenders to implement a consistent, industry-wide approach to collection and recovery.
  2. The British Business Bank has mechanisms in place to ensure that lenders are complying with scheme rules in relation to recovery.
  3. KPMG and RSM UK are undertaking an independent audit and assurance programme on behalf of the British Business Bank. BEIS holds the British Business Bank to account in relation to this through regular governance meetings, audit committee meetings and monitoring of performance.

However, such audits only focus on lenders' activity against what is set out in the agreement in respect of the Government guarantee, a contractual agreement between the British Business Bank and lenders. The audits do not cover any voluntary, additional checks that lenders are undertaking.

Investigate?

There will be room for debate as to what voluntary, additional checks should be carried out, and how far any fraud investigation, in particular, should be taken and resourced by the lender before the Government guarantee is called upon.

At Government level, the Cabinet Office have engaged Quantexa to use their AI software to detect where fraud may have occurred.

BEIS have also engaged PwC to estimate the level of fraud and error in the BBLS, although it is taking time to carry out this exercise. The Public Accounts Committee reported that "BEIS told us that the interim work performed to date demonstrated that the number of loans that it can pick out as being “absolutely fraud” is “really quite small” and that working through the subtleties that sit behind each application is “not an easy job”". Certain frauds may, on the surface, appear to be small scale. However, it is likely that many perpetrators will have carried out sophisticated frauds where, for example, a number of companies were incorporated with a view to procuring multiple loans fraudulently from multiple lenders.

Further action?

The use of AI software and algorithms will certainly assist in speeding up this investigation process, in order to establish connections between individuals who may have participated in any fraud, as well as anomalies in their interactions with the lenders concerned.

However, this approach would need to be combined with other investigatory and legal tools to advance investigations and ultimately make recoveries. Results generated by AI software are likely to require additional forensic analysis and investigation. Further asset recovery techniques, including tracing assets located abroad, may also be required, such as:

  1. Seizing and obtaining further evidence – Applications to the Court for, for example, disclosure or delivery up orders, may need to be obtained. Where an entity has been placed into an insolvency process, the relevant insolvency professional will also have investigatory powers at their disposal.
  2. Freezing of assets – Depending on the scale of the fraud and the progress of investigations carried out, an urgent application to Court may be required to preserve assets.

In terms of further Court proceedings which can be issued against perpetrators and connected third parties, a number of fraud and dishonesty causes of action may be available, such as conspiracy, dishonest assistance and knowing receipt claims. This is in addition to breach of contract claims which lenders may bring against those businesses who have not repaid sums in accordance with the terms of the loans.

Where an entity is insolvent, a number of claims can also be brought by the relevant insolvency professional to recover monies which have been transferred to third parties, such as through transactions at an undervalue or preference claims.

Where next?

In the October response to the Public Accounts Committee, it was noted that BEIS continue to work with the British Business Bank, other government departments and law enforcement colleagues on its counter fraud enforcement activity and approach. Research published in November 2021 has shown that the Insolvency Service, in particular, has toughened its stance on fraud carried out during the pandemic, resulting in a 205% increase in director prosecutions during the period to the end of September 2021, compared with the previous 12 months.  

The discussion around the steps to be taken to detect COVID-19 loan fraud, pursue fraudsters and recover billions of pounds for the taxpayer (including how this will be resourced and funded) is set to continue.

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