Is fraud on the uptick?

Restructuring and Insolvency

Alex Cadwallader, a Director at Leonard Curtis, responds to latest government performance data highlighting that £1.8 billion of COVID-19 loan guarantee schemes may have been used fraudulently

The COVID-19 pandemic and subsequent lockdowns saw UK businesses go through three stages: Survival, Adjustment and Recovery.

Hundreds of companies closed their doors forever just weeks after COVID hit, but some companies - including those armed with rainy day funds or permitted by law to keep operating in lockdown given their status as “essential businesses” - successfully navigated that first stage of the pandemic: Ultimately surviving the instant turbulence caused by nationwide quarantine measures.

Those who weathered the initial unrest were then awarded support in the form of government-funded schemes - which were distributed to help keep the economy ticking over. Amounting to a colossal £77 billion these agreements adopted different forms, and were under the umbrellas of the Bounce Back Loans Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The varying implementation of trading restrictions ended in the early part of 2022 with businesses entering a phase of recovery. Financial support for many companies finally ended and created a domino effect which has led to the administration or liquidation of a record number of businesses - a trend which will continue going into 2024.

However, what’s very alarming is the government’s declaration last week that £2 billion of the drawn down funds have been flagged by lenders as suspected fraud.  And that is not all.

Fraud and Bounce Back Loans

The Bounce Back Loan Scheme (BBLS) was launched to support small and medium-sized businesses in the early part of the pandemic, offering £2,000 to £50,000, with no fees or interest to pay for the first 12 months.

As the end of September 2023, the Government had paid out £8bn to lenders under the BBLS guarantee scheme with almost 20% of those loans also being subject to suspected fraud.

What the data doesn’t tell us is how or where the fraud has been committed. Was it during the application process, or in the use of funds? Once a company is placed into a liquidation or administration, there is an additional obligation on IPs to carry out BBLS specific investigations, but this is unlikely to lead to the government being repaid anything that would make a material difference.

The numbers are currently less alarming with in CBILS performance data with only £50m of £25.8 billion of CBILS fundings being flagged as suspected fraud.

What next?

It is undoubtedly a worrying trend which we are seeing across a wide spectrum of cases and sectors. One of the most high profile being at Axiom Ince  - the 700-person international law firm over which Leonard Curtis were recently appointed as Administrators following intervention by the SRA. The regulated space is often a good indicator of behaviours and themes across all sectors and this may well just be the tip of iceberg as fraud becomes more common.

Whilst the Government’s stated assumption is that the proportion of guarantee claims linked to loans with a suspected fraud flag should decline over time, there is of course no guarantee of that being the case.

As the financial headwinds continue to impact business in the UK and all forms of financing remain more expensive and harder to get access to, the government’s guarantee is likely to be called upon more often than before and it will be interesting to see what the final figures from them will be.


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