Money for Nothin'...

 

Put yourself in the shoes of either: the struggling start-up businesses that are less than last 3 years old; or the owners of businesses in the hospitality sector, the majority of which have shut down since March due to coronavirus. Would you view the government’s newly formed Bounce Back Loan scheme as ‘free money’? A good source of capital to use or save for a rainy day, even if your business is stable and it isn’t really needed?

Is it always ethically and morally right to claim this £50k loan?

Source: Google Images

The Bounce Back Loan was inaugurated following the first lockdown in the UK in April, when all businesses, apart from essential shops, had to close their doors for trading. This would have been a daunting time for many employers and employees because of the developing economic, health & social uncertainties! The scheme was enacted by the Chancellor of the Exchequer, Rishi Sunak, who understood the challenges Small & Medium Sized Enterprises (SMEs) were faced with because of lockdown and hoped to offer them much needed support. The loan entitles businesses to 25% of annual turnover up to £200k with the first year of the loan interest free and 2.5% per annum after this (Thomas & Morris, 2020).

 UK banks were given reassurances from Treasury officials that all the money lent out would be guaranteed by the Government (Thomas & Morris, 2020). The banks welcomed this with open arms as it allowed them to loan out risk free capital in a market endangered by lockdown. Sunak also stated that the process involved for businesses, when applying for the loan, would be easy. He pointed out that there would be:

 “no complex eligibility criteria…a quick standard form to fill in”

 meaning it would not be a long-complicated process for these struggling businesses. This is when the alarm bells started to ring in my head. Banks soon realised the scheme was being abused on an industrial scale by fraudsters, companies saving for a rainy day and borrowers who would struggle to repay. Since March, the banks have recorded that £43bn has been taken advantage of by 1.4 million SMEs in the UK (Financial Times , 2020). They predict that 60% of this is likely to turn negative in the long run. The government may have rushed into this loan scheme and they are now looking at how they are going to foot this bill at the end of the scheme. The loans’ duration can span out to 10 years, meaning that the banks are going to be left with long loan repayments from a vast number of companies with every chance that a lot of the companies will not be able to repay. This will result in taxpayers having to cover the costs for the foreseeable future to recover the Government’s blunder.

The Association of Certified Fraud Examiners estimates global annual economic losses of £3.89tr because of fraud (Gee & Button, 2019). This is inevitably bound to rise with various loan schemes being taken advantage of by criminals around the world.

Source: Principles of Fraud Examination. (2008)

 An anonymous high street bank in the UK have reported that 15% of loan applications they received were deemed fraudulent and, in response, they had to decline these loans and report them to the relevant authorities. A mind blowing £1.1bn worth of fraudulent applications from 27000 people have being rejected between May and November (Kalyeena, 2020). Consequently, a report was given to MPs asking them to intervene. Since then, the Government has responded by telling banks to investigate fraud more vigilantly and be stricter when issuing loans. Ultimately, however, the Government is trying to kickstart the economy knowing that they will be left with the banks’ losses. An HR manager in Essex has been made an example out of by a bank as she was caught trying to steal £240k by claiming on behalf of her oblivious employees (Phagura, 2020). This example is almost a carbon copy of the Wells Fargo fraud in 2017, whereby the bank was setting up bank accounts on behalf of clients who were not even aware of such accounts until they were being charged for administration fees (Kelly, 2020). Although these cases were detected there will still be thousands of cases that the system has failed to find. This will mean that companies and employers will be receiving fraudulent capital because of the loose application criteria providing an opportunity for fraudsters. 

Reference List

Financial Times. (2020, October 7). Taxpayers face losses of up to £26bn on loan scheme, says watchdog. Retrieved from FInancial Times: https://www.ft.com/content/3f205365-f41f-482d-94d8-05518bd25d03

Gee, J., & Button, M. (2019). The Financial Cost of Fraud 2019. Crowe, 6.

Kalyeena, M. (2020, November 5). £1bn of fraudulent Covid scheme loans for businesses blocked . Retrieved from The Guardian: https://www.theguardian.com/money/2020/nov/05/1bn-worth-of-fraudulent-covid-scheme-loans-for-businesses-blocked

Kelly, J. (2020, February 24). Wells Fargo Forced To Pay $3 Billion For The Bank’s Fake Account Scandal . Retrieved from Forbes: https://www.forbes.com/sites/jackkelly/2020/02/24/wells-fargo-forced-to-pay-3-billion-for-the-banks-fake-account-scandal/?sh=30bea8f242d2

Phagura, S. (2020, November 13). 'Bounce back' loan fraudster faces jail trying to swindle £240,000 . Retrieved from MSN: https://www.msn.com/en-gb/money/other/bounce-back-loan-fraudster-faces-jail-trying-to-swindle-%C2%A3240000/ar-BB1aYYiC

Thomas, D., & Morris, S. (2020, December 20). ‘A giant bonfire of taxpayers’ money’: fraud and the UK pandemic loan scheme . Retrieved from Financial Times: https://www.ft.com/content/41d5fe0a-7b46-4dd7-96e3-710977dff81c