PAC: Government approach to Covid support “will billions and billions to taxpayer woes” in fraud and error, after basic safeguards dropped and warning signs missed

Billions of pounds of taxpayers’ money will be “lost to fraud and error as a result of the Department for Business, Energy & Industrial Strategy’s approach” to its COVID-19 business support schemes, says the PAC in a report today.

Despite providing important support to businesses across the country, BEIS’ latest estimate is that £4.9 billion of taxpayers money will be lost to fraud and error in loans issued to ineligible businesses, but the true extent of loss will only be gradually revealed “as assessments catch up with payments made”. The Committee is concerned that identifying fraud and error so late will hinder both recovery efforts and the deterrent effect in future crises.

BEIS officials did seek ministerial directions on these schemes “highlighting some of the risks posed by fraud” but “did not sufficiently identify or reflect the potential risks from organised economic crime”. The number of new companies registered in 2020-21 rose by more than 20% compared to any of the previous five years: the Committee says 170,000 new companies at the start of a national lockdown “would certainly appear to be a warning sign warranting closer scrutiny”.  Lord Agnew suggested more than 1,000 companies received emergency business support despite not trading at the start of the pandemic, referring to this as a “schoolboy error”. 

BEIS also distributed £21.8 billion of grant funding through local authorities but “lacks information on recipients” of this funding: it has only estimated the level of fraud and error in under half these grants, but already expects over £1 billion of that to be lost.

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “BEIS says it saw this risk coming but it’s really not clear where Government was looking when it set up its initial Covid response. It offered an open goal to fraudsters and embezzlers and they have cashed in, adding billions and billions to taxpayer woes. These lessons should have been learned from the banking crisis a decade ago, and could have been prepared in the Government’s pandemic exercises.  These mistakes must be written out of future crisis responses, now, and Government would do well to apply the learnings to the mounting, interrelated crises it now faces in climate change, energy supply and the cost-of-living.”

BEIS annual accounts for 2020-21 also cover the “Post Office’s mismanagement of its Horizon programme” which has “had devastating consequences for individuals wrongly accused of fraud”, with financial compensation costs “also largely falling to the public purse”. The Committee has requested BEIS formally “set out what actions are being taken to ensure Post Office Ltd remains a viable company”. 

PAC report conclusions and recommendations

8. The Comptroller and Auditor General qualified his opinion of the Department’s 2020-21 accounts due to eye-watering levels of estimated fraud and error in the COVID-19 business support schemes. During 2020-21, the Department guaranteed £79.3 billion of COVID-19 loans as part of its business support schemes and estimated that its losses to fraud and error in these schemes were £4.9 billion. In the same period, of £21.8 billion the Department provided to local authorities acting as its agents to deliver COVID-19 grants to local businesses, it estimated that over £1 billion will be lost as a result of fraud and error. The Department has only estimated levels of fraud and error in £11.5 billion of these grants and does not yet know how much will be lost to fraud and error within the remaining grants. The Department considers that while its loan schemes are substantially impacted by fraud, its grant schemes are more impacted by error. As a result of these material levels of fraud and error in COVID-19 loan and grant business support schemes, the Comptroller and Auditor General qualified his opinion. As we have observed in our examination of some of these schemes, these losses represent taxpayers’ money that could have been spent on other public services. 

Recommendation: The Department, as part of its Treasury Minute response, should detail how it will make sure that it is doing everything in its power to reduce the current taxpayer exposure to losses through fraud and error and to address the reasons why its accounts were qualified. 

9. The Department does not have a good enough assessment of the levels of fraud and error in local authority administered business support grants. During 2020-21 and 2021-22 the Department has provided funds to local authorities to distribute to local businesses in their areas through nine grant schemes. The Department has so far only attempted to assess the extent of fraud and error in the initial three grant schemes administered in Spring 2020: the Small Business Grant Fund; Retail, Hospitality and Leisure Grant Fund; and the Local Authority Discretionary Grant Fund. The Department’s sample examined only 476 grants, representing 0.05% of grants paid out by number. The Department asserts that it is refining its estimate of fraud and error in this group by expanding its sample to nearly 5,000 grants, and that the second group of local authority administered grants would be an even larger sample of 12,000 grants. However, the Department has not yet started work on the second group and success with these larger samples relies on the capacity and willingness of local authorities to cooperate. We are concerned that local authorities have few incentives to do so given that all recovered funds are to be passed to the Department, and the limitations to the estimates of fraud and error make it challenging for the Department and local authorities to assess the time and resources required to recover these funds. 

Recommendation: The Department should write to the Committee by September 2022 setting out how it will obtain full cooperation from local authorities to allow it to calculate robust fraud and error estimates for all COVID-19 business support grants, milestones for achieving these calculations, and how this information is being used to focus recovery efforts. 

10. The Department does not know whether grants distributed by local authorities on its behalf have benefited businesses, including those most in need of that funding. Although the Department set the eligibility criteria for grant schemes administered by local authorities, it delegated most grant decisions to them. The Department told us that pre-payment checks did not apply to all these schemes, and that ministers prioritised delivery of grants over faster post-payment assurance sampling work. However, with only 476 grants tested, the Department does not know where the vast majority of this £21.8 billion grant funding has gone, nor the eligibility of those in receipt of it. In the absence of more granular information, the assessment it has done is already indicative of ineligible businesses receiving grant funding, eligible businesses receiving a value of grant funding they were ineligible for, or most likely a combination of both. Fraud and error in these grant payments reduces the effectiveness of these schemes to achieve their objective of providing funds to support those businesses most in need. 

Recommendation: The Department should, alongside its Treasury Minute response, explain to the Committee how it is going to obtain greater assurance over the regularity and value for money of grant payments made on its behalf. 

11. The Department was aware of heightened fraud risks within its COVID-19 business support schemes from the outset but did not make full use of all the tools at its disposal to prevent and detect fraud. The Department expected that some potential recipients of funding for its COVID-19 business support schemes would attempt to defraud the exchequer. It sought ministerial directions on these schemes highlighting some of the risks posed by fraud, but did not attempt to quantify the potential fraud exposure. These requests for ministerial directions also did not sufficiently identify or reflect the potential risks from organised economic crime. The number of new companies being registered in 2020-21 rose by more than 20% compared to any of the previous five years. Although the Department indicated that disruption can also present opportunity, we feel around 170,000 new companies would certainly appear to be a warning sign warranting closer scrutiny. However, the Department could not tell us whether it sought or received information from Companies House on company formation trends, and so this is unlikely to have featured in the Department’s understanding of evolving fraud risks. Each new company could potentially apply for COVID-19 business support. Lord Agnew suggested more than 1,000 companies received emergency business support despite not trading at the start of the pandemic, referring to this as a “schoolboy error”. 

Recommendation: The Department should ensure that the expected scale and sources of fraud risk should be clearly communicated to ministers when ministerial directions are sought, including mitigating actions such as, for example, how the Department and Companies House would work together sharing information to prevent fraud. 

The Department should, as part of its Treasury Minute response, clearly explain how it is planning to recover funds it identifies as claimed fraudulently or paid out in error. 

12. The Department has yet to set out how it is learning lessons from managing its COVID-19 business support schemes to better protect taxpayers’ money in future. The Department now has two years’ worth of experience designing, implementing, and managing COVID-19 business support schemes, and some experience of recovery activities where fraud and error has been identified. It has identified some learning that, for example, has allowed it to refine its approach to identifying fraud and error in COVID-19 business support grants. However, this is to reduce shortcomings in existing schemes, and we would expect to see the Department demonstrating that it is learning wider lessons from these schemes which it could then apply to improve its stewardship of public funds in the future. Several of the Department’s major areas of expenditure in the coming years, such as supporting public sector decarbonisation and achieving net zero, will again require routing taxpayer funds through third parties as it did with COVID-19 business support schemes. We would expect lessons the Department has learned during the pandemic to support the design and delivery of these future schemes. 

Recommendation: The Department should continue to refine its estimates of the levels of fraud and error across its COVID-19 business support schemes, recovering monies to reduce losses to the public purse and apply any lessons learned from these to future support schemes. It should write to the Committee before the end of the year to set out how it is applying lessons learned in its ongoing activities. 

13. The Post Office’s mismanagement of its Horizon programme has had devastating consequences for individuals wrongly accused of fraud. The financial cost of compensating these individuals will largely fall to the public purse. The Horizon accounting system erroneously recorded shortfalls of cash in local Post Office branches over its more than 20-year lifetime. The Post Office considered some of these shortfalls to be caused by subpostmasters and subpostmistresses, resulting in those staff being dismissed and the Post Office taking action to attempt to recover the ‘losses’ and in some cases leading to prosecutions and people being wrongly convicted. The Department estimates that the ‘Historical Shortfall Scheme’, set up by the Post Office to compensate those who may have experienced and repaid shortfalls (for example from their own funds), is likely to cost £153 million, of which it has set aside £65 million. The Secretary of State for the Department is the sole shareholder of the Post Office, and the Department will provide sufficient financial support to Post Office to cover the scheme. The government has also committed to paying compensation for overturned criminal convictions and estimates that this may cost the taxpayer up to £780 million. The government has also committed to covering the cost of this compensation. 

Recommendation: The Department should write to the Committee alongside its Treasury Minute response to set out what actions are being taken to ensure Post Office Ltd remains a viable company. 

Where the Department (or HM Government) provides assurances to Post Office Ltd over the funding of its liabilities, it should inform the Committee at the earliest opportunity.