Many businesses took advantage of the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to help them stay afloat and survive during the early stages of the Covid-19 pandemic. However, the rapid creation of the schemes, and the potential misuse of the available funds, has left the Government exposed to fraud.
In line with your professional standards and the anti-money laundering regulations, qualified accountants are expected to remain professionally skeptical when reviewing their clients financial transactions. So, we’ve highlighted the key ways that our Monitor client intelligence software can help you to keep tabs on fraudulent CBILS or BBLS activity.
An expensive response to an unforeseen pandemic threat
Final data from the British Business Bank shows that £79.3bn of Coronavirus loans were made to 1.67m businesses between March 2020 and the closure of the schemes in March 2021.
Expenditure on Coronavirus business loans totalled:
- £47.4bn paid out in BBLS loans
- £26.4bn paid out in CBILS loans
- £5.6bn paid out to larger corporates via the Coronavirus Larger Business Interruption Loan Scheme (CLBILS)
The significant size of these sums shows the potential problem that large-scale fraud and non-payments of loans could create. With the UK economy still in an unpredictable state, failure to repay these loans equates to taking huge sums out of the Government’s pocket, at a time when the Chancellor is still facing a challenge to balance the books.
Increased strike-offs and the impact on repayments
Paying off a CBILS or BBLS loan begins 12 months after the facility was taken out. But with revenues and cashflow still so unpredictable for some SMEs, there’s the possibility that a small number of your clients won’t be in a financial position to begin making these repayments.
Lenders have a clear expectation that companies will repay the money loaned to them. But there are several elements that have increased the potential for non-payment of the loan, or fraudulent activity to escape these repayments.
- Government guarantees against the loans – Both the CBILS and BBLS loans were government-backed schemes, meaning that the state would repay any defaulted amounts to the loan lenders, not the company.
- No personal guarantees – The BBLS and smaller value CBILS didn’t require any personal guarantees prior to taking out the loan, meaning that company directors can’t have their personal assets seized in order to repay any outstanding loan debts.
- Minimal credit and customer checks – The BBLS also had a low level of credit and customer checks, increasing the chances of businesses being unable to repay the loan. A recent report into the use of the BBLS even went so far as to call the counter-fraud protections ‘inadequate’.
- Increases in the number of company strike-offs – striking off the company to avoid paying back the loan is clearly against the CBILS/BBLS rules. But the number of firms closing after being struck off the Companies House register increased by 743% in the first quarter of 2021, compared to the same period in 2020.
This trend for fraudulent strike-offs is something that should be on your radar as an adviser, particularly now that retrospective HMRC investigations are looking more likely.
Defaulting companies will be retrospectively investigated
Research from the Office for Budget Responsibility (OBR) has suggested that up to 40% of BBLS borrowers may default on their loan. With the Government guarantee in place, defaults on this scale could lead to losses of as much as £33.7bn.
To combat this potential loss, the Government has introduced the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. Once brought into legislation, this will allow retrospective investigation and action to be taken against directors. This could lead to disqualification and personal liability for any directors that are found to have intentionally dissolved their company with outstanding debts.
If companies have misused the loan funds provided to them, or directors have closed companies while still owing money, clients are likely to face investigation, fines and even the possibility of prosecution and being struck off as a director.
With this in mind, it’s vital that you can spot the signs of fraud at an early stage.
Monitor: Helping you spot the signs of fraud
Being able to spot the signs of CBILS or BBLS misuse or fraud across your entire client base may sound like a complex and time-consuming task. But with Monitor, our client intelligence software solution, in place, you can quickly scan your portfolio to check for red flags.
Our platform’s automatic facility detection and facility insights can detect clients' bank and lending facilities, including if they have taken out a CBILS or BBLS loan. Once you’ve identified the clients with outstanding CBILS/BBLS debts, you can then review their company accounts and balance sheet to check for any signs of potential misuse.
The best way to dig further is to open up a conversation directly with the client, so you can find out more about the background of the loan, their repayment status and current financial health.
Our suggested process would be to:
- Schedule a meeting – book a face-to-face meeting, video call or phone chat with the client and let them know that this is a standard catch-up to ensure everything is running smoothly with their existing loan facilities.
- Check in on the loan status – talk to the client in more detail to find out the status of their existing CBILS/BBLS facility and whether there are any issues around misuse of funds or non-repayment.
- Explain the potential for investigation – if red flags become evident from this conversation, give the client the lowdown on the new bill and highlight the potential for investigation, fines and actions against them as a director. Consider whether you’re required to submit a Suspicious Activity Report (SAR) to the National Crime Agency and resign from acting for the client. The professional standards office of your regulatory body can provide further information about your obligations if you have any specific concerns.
- Discuss alternative options for repaying the loan – where clients are unable to repay the loan, due to poor cash flow, talk through other available options. This could include exploring the Recovery Loan Scheme, amending the terms of the facility after discussion with the original lender, deferring the loan for 6 months, or making use of the other Pay As You Grow (PAYG) options which are now available for the BBLS scheme.
- Have a general conversation about funding – talk through the client’s current financial status and aim to come up with a clearer, more effective funding strategy. Could they make use of existing assets to open up a new route to finance, allowing them to pay off their existing loan?
Monitor acts as your eyes and ears in these scenarios, keeping you on top of each client’s status and flagging up where funding needs may be causing a problem.
Where additional external funding is needed, Capitalise can provide your clients with multiple routes to finance facilities, giving your SME clients further options to explore.
If you have any questions about Monitor or our business finance options, please do get in touch
Call us on 020 3696 9700