The state bank in charge of two crucial UK COVID-19 support programmes warned the government in May that the schemes risked widespread fraud and poor value for money.
Keith Morgan, chief executive of the British Business Bank, twice wrote to business minister Alok Sharma in May raising concerns about the Bounce Back Loan scheme and the Future Fund.
Billions of pounds have been lent and invested under both programmes since the formal concerns were raised.
In a letter published on Wednesday, Morgan said the Bounce Back Loan scheme was at risk of “very significant fraud.” The scheme, launched in May, allows small businesses to borrow up to £50,000 with minimal checks. The loans are 100% state-backed.
“The scheme is vulnerable to abuse by individuals and by participants in organised crime,” Morgan wrote.
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Morgan added that the Bounce Back loan scheme carried “considerable credit risk” given the minimal checks on the loans and the dire economic conditions. It could leave the government with huge losses as the loans mature.
Yahoo Finance UK understands that some measures have been put in place to protect against fraud since the objections were raised. These include mandating anti-money laundering checks on loans and detection processes to spot things like recently changed company details or duplicate applications.
A spokesperson for the government said: “We’ve looked to minimise fraud – with lenders implementing a range of protections including anti-money laundering and customer checks, as well as transaction monitoring controls.
“Any fraudulent applications can be criminally prosecuted for which penalties include imprisonment or a fine or both.”
An investigation by the Mail on Sunday in August found fraudsters and criminals appear to be targeting the Bounce Back programme.
In recent months, the National Audit Office and parliament’s Public Accounts Committee have both launched investigations into the value for money and fraud risk of the Bounce Back Loan scheme.
In a separate letter, Morgan raised concerns about the Future Fund. The Fund makes loans of up to £5m ($6m) to startups struggling due to COVID-19. These loans can then be converted into equity at a later date.
“The overriding fact is that the value for money outcome from this scheme is highly uncertain,” Morgan said.
He warned that “the best companies will not use this funding route, as investors will fund those companies without HMG [Her Majesty’s Government] support. This will result in HMG investment going to the second tier of companies, which will likely result in higher associated loss rates.”
Morgan said the programme was not “well-targeted” and “companies may be supported which did not need the intervention.” The Fund also carried the “risk of perverse incentives” and could ultimately leave the government with “a sizeable portfolio of direct equity investments” it would need to manage. Morgan said the cost of the Future Fund was likely to outweigh any benefits it delivers.
The British Business Bank’s letter will raise pressure on the government to increase the transparency around the Future Fund. The government has refused to name any of the businesses receiving investment. Some have been named in the press, including a ‘craft’ soft drink company, a vegan restaurant chain, and a sex party organiser.
The state-owned British Business Bank is in charge of administering both the Future Fund, which invests government money, and the Bounce Back scheme, which relies on bank capital but carries a state guarantee.
About £38bn has so far been lent under the Bounce Back programme and the government has invested £720m into over 1,000 startups through the Future Fund.
A government spokesperson said: “Our loan schemes have provided a lifeline to thousands of businesses across the UK – helping them survive the outbreak and protecting millions of jobs.
“Our support has been targeted to ensure we help those who need it most as quickly as possible and we won’t apologise for this.”
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