COVID-19 Loan Fraud: How To Deal With Financial Crime In 2021
Effective credit checks are a vital part of protecting any business. In the new year, the financial services sector will have received a wake-up call to grapple with its mounting fraud problem.
Throughout the 1960s, Frank Abagnale famously faked eight different identities, including a pilot, lawyer and a physician, to gain free flights and defraud banks. There was subsequently a film titled ‘Catch me if you can’, starring Leonardo DiCaprio, made about his life and how he conned people. Arguably his most ingenious (or in fact worrying) tactic was his ability to write personal cheques on his own overdrawn account. This, however, would work for only a limited time before the bank demanded payment, so he moved on to opening other accounts at different banks, eventually creating new identities to sustain this charade and continue to defraud financial institutions.
Although time has passed and technologies and systems have been put in place to weed out the Frank Abegnales, the issue of fraud and financial crime continues to linger. This has been made plainly obvious throughout the COVID-19 pandemic, where the Coronavirus Bounce Back Loan (BBLS) scheme has been plagued by fraudulent applications.
As a result, the National Audit Office (NAO) has estimated that taxpayers could lose as much as £26 billion from fraud, organised crime or default, as up to 60% of the loans may never be repaid.
An all too familiar story
For businesses across the UK, this may not be a surprise. Even before the pandemic, a study from PwC found that half of all UK companies had been the victim of fraud or economic crime between 2016 and 2018. The research found that for more than half of the organisations affected, criminal activity resulted in losses of around £72,000.
Fraud and financial crime, therefore, has clearly not been born as a result of the ongoing COVID-19 pandemic, nor will it diminish once the virus has passed. The case of COVID-19 loan fraud should, therefore, provide businesses, government and other stakeholders with a wake-up call and a chance to reflect on how they can reduce the risks of falling victim to financial fraud. But what lessons can these stakeholders learn and what needs to change?
Always do your homework
We understand that the issuing of COVID-19 loan schemes was a unique situation. Lenders have been under huge amounts of pressure to approve loans quickly and help support struggling businesses. Unfortunately, this simply doesn’t give them the time they need to conduct the checks that are needed to protect themselves from fraud and financial crime. Yet this echoes similar findings from PwC’s research from a few years ago: UK organisations are generally not doing enough to prevent fraud, with only half carrying out a fraud risk assessment in the last two years.
Regardless of whether your organisation is an SME, a large enterprise or a national government, basic and thorough credit checks must be in place as part of the process of protecting your business. Through establishing the validity of a customer your business is looking to establish a working relationship with, you are immediately reducing the risk of exposing yourself to fraud or financial crime. But why stop there? Compiling credit reports and verifying a business’ status on Companies House before committing to a commercial arrangement are also effective measures that can help protect your business.
These checks go a long way for business owners, particularly SMEs, as late payments and of course, fraud, can cause disruptions to business cash flow. Cash flow issues can prove fatal for smaller business owners, which is why credit checking, building credit reports and validating other businesses and its financial status is key to survival.
Ensuring a smooth recovery
When it comes to government support loans, businesses do not have to begin paying back the money from May 2021 onwards. However, this time large time period isn’t a luxury when it comes to collecting payment from customers. Consequently, implementing a responsive and robust debt recovery process is essential to minimising the risk of non and late payment issues, helping business protect their cash flow and minimise risk.
Agreeing and making a record of credit terms in advance ensures that no business transactions can be disputed, which could later lead to businesses losing out on payment from customers Under the BBLS, the government provided lenders with a 100% guarantee for the loan. For SMEs in particular, this approach simply cannot be taken, especially if debt recovery steps, such as ensuring credit terms between businesses, are not agreed and recorded beforehand.
Chasing owed payments is far easier after the checks to validate a business have been made. Businesses can take measures which include; credit holding, which involves pausing services to a client until they have paid. Issuing final notices is also essential to the debt recovery process, the final correspondence before taking up legal proceedings usually resolves any delayed payment issues. The problem facing the government is that fraudsters applying for support loans will do so illegitimately, therefore remaining anonymous and slipping through the debt recovery net. This reiterates the importance of verifying and checking recipients during the early stages of a business agreement, as this eases the rest of the debt recovery process.
A final word on SMEs
However, it is not just the initial checks before the first commercial transaction that must be invested in. To truly protect themselves, infrastructure must be put in place to continually monitor and chase customers. In larger businesses it is common to have a designated department or employee who will handle this process – usually this person will be known as a ‘credit controller’. Yet, we understand that many – particularly smaller businesses – do not have the resources readily available to continuously check the credit status of their customers and conduct due diligence.
Fortunately, this is where advancement in technology play a critical role. For example, by using technology to automate the credit control process, this can help businesses streamline this process so they can credit check and monitor and conduct due diligence, all from one place. Automating this process, firms can collate the information and identify areas of concern, without expending huge amounts of time and precious resources, ultimately helping them to limit risk and reduce fraud.
The article was originally published by Finance Monthly.