NAO report warns of alarming levels of fraud and defaults on Bounce Back loans – but how much is too much?

Skilled with numbers? Good at filling out forms? No moral compass? Covid-ravaged Britain has afforded you the opportunity to make a fortune.

The downside of the government’s understandable desire to buttress the economy by throwing money around like confetti is that a substantial proportion of it will have found its way into the hands of white-collar crooks, as a report published this morning by the National Audit Office (NAO) makes abundantly clear.  

It covers the government’s Bounce Back Loan Scheme, which was hastily designed to get financial support out to small businesses and prevent a mass collapse of the sector in the midst of the pandemic.

Some of the numbers are ugly. The scheme is expected to have lent up to £48bn by 4 November, when it is slated to close, substantially exceeding the £26bn upper estimate when it was launched.

The need for speed meant that the government made it a lot easier than it usually is to borrow from the banks that are administering the loans, a lot easier to borrow than through its other Covid-19-related lending too.

Small businesses are allowed to self-certify application details with limited verification and no credit checks if they’re already customers of whichever bank they apply to.

It’s a bit more difficult for new customers: they’ve sometimes had to wait for up to three months to get their funds because of the high volume of applications that banks have received and the operational constraints they’re under because of the pandemic.

Of course, limited checks, lots of applications and operational constraints are manna from heaven for fraudsters.

The Cabinet Office’s counter-fraud function estimates that between 0.5 and 5 per cent of the money for public sector schemes typically finds its way into criminal hands. This is a tad disturbing if you think about the larger of those two figures. Based on that, crooks could have netted up to £2.4bn through Bounce Back loans they have no intention of repaying.

However, it admits that the levels of fraud are likely to be “significantly above” a more normal scheme.

HM Revenue & Customs told MPs on the Commons Public Accounts Committee that up to £3.5bn may have been fraudulently claimed via the Job Retention Scheme – 10 per cent of the total.

As a result, the government is going to make the replacement Job Support Scheme tighter.

While I know we’re not comparing like for like here, if you take that number and apply it to the Bounce Back loans, you get another £4.8bn going to fraudsters. Add the two numbers together and you get £8.3bn. At that point, you could be forgiven for shuddering.

Of course, fraud is one of two contributors to what is expected to be an extremely high default rate with these loans – a preliminary estimate from the British Business Bank and the Department for Business, Energy & Industrial Strategy (BEIS) puts the number at between 35 and 60 per cent.

The other is businesses simply not being able to repay them because the continuing economic fallout from the pandemic makes it impossible, or because their businesses were already looking sticky before it got going.

The range in that estimate is so wide that it’s best described as a guesstimate.

But let’s look at the higher of those figures, the reasonable worst-case scenario, again. A 60 per cent default rate applied to £48bn in loans gets you to £29bn of taxpayers’ money poured down the toilet.

The banks that have advanced these loans are supposed to pursue recovery if borrowers default, so some of the taxpayers’ losses may be recouped. But will they do so robustly given that it’s not their money on the line? Would you willingly play Mr or Ms Nasty to get somebody else’s cash when you don’t stand to lose anything if you fail?

The NAO concludes that the scheme largely achieved its aim of getting money out quickly.

But its report raises a difficult question: given the level of fraud and the good money thrown at doomed businesses, has too much been sacrificed on the altar of speed?

The chancellor, Rishi Sunak, would probably answer that by asking us to imagine how bad it might have got had the government not acted as it did. That’s basically what the Labour government in charge during the financial crisis said after bailing out the banks. 

It’s a fair point given the horrible economic numbers flowing from the pandemic.

But once the dust has settled, a robust inquiry will be due  to consider ways to reduce the level of fraud with future schemes, and to make sure the money is better targeted should there be a repeat.

The way we’re mucking up the environment will potentially expose us to more novel viruses, and more of the ensuing economic turmoil. So a repeat is quite possible.