In the final days of April 2020, bankers and Treasury officials were huddled over laptops in makeshift home offices across the country, negotiating the terms of what is fast becoming the most controversial of the government’s pandemic rescue schemes. The country was in its sixth week of national lockdown after the Covid outbreak, and the Treasury’s head of banking and credit, David Raw, was leading video calls with more than 20 senior staff from across government and the City – including the big banks HSBC, NatWest, Barclays and Lloyds, Santander, Virgin Money and AIB – to try to push through the chancellor Rishi Sunak’s ambitious plan for a more accessible, 100% government-backed small business loan scheme. After ordering the closure of all offices and non-essential shops and services, Sunak had promised financial aid. But the first scheme to launch, which offered loans of up to £5m and was known as the coronavirus business interruption loan scheme (CBILS), had been criticised by business lobby groups and MPs as too costly, too slow and too risky – borrowers were required to give personal guarantees, usually in the form of their own homes. So the Treasury introduced a second scheme, bounce back loans, designed to get cheap money to firms in as little as 24 hours. It was a “frenetic, difficult period of time,” one senior banking executive said. After nearly 11 days of round-the-clock meetings, a final agreement was signed in the early hours of Monday 4 May. But the strategy agreed in those discussions for accelerating payouts was so controversial that it would, two years later, lead to the shock resignation of Lord Agnew, a joint Cabinet Office and Treasury minister whose brief included counter-fraud. He stepped down on Monday, lambasting the government for its “woeful” efforts to control fraud. In the space of 15 months, from March 2020, the three main Covid loan schemes – bounce back, CBILS and a scheme for larger loans, CLBILS – handed out nearly £80bn to businesses. Bounce back was the biggest scheme, distributing £47bn to 1.6 million recipients, who were able to borrow up to £50,000 each. Meanwhile, fraud losses were estimated at £4.9bn at the end of March – although PwC, the accountancy firm hired by the government, has since reduced its estimate to £3.5bn. The shadow chancellor, Rachel Reeves, said the raid on taxpayer funds by gangs of criminals should be “a source of enduring shame to the chancellor”. Banks intent on protecting their finances usually apply stringent credit checks to help avoid fraud and ensure customers can repay their loans, but what was eventually agreed for bounce back, amid pressure from the Treasury to speed up loan distribution, was that checks would be dispensed with altogether. “The British Business Bank was very, very clear with the lenders – and it’s very explicit in all the documentation – that the banks weren’t allowed, actually were prohibited, from undertaking credit checks,” one senior banking executive said. “But then the trade-off was against a real need to get that money into the economy really quickly.” There were rules: borrowers had to confirm they were affected by Covid and based in the UK, that they were in business as of 1 March 2020 and not insolvent as of 1 December 2019. But applicants were left to self-certify that they met these criteria. While lenders would have to make reasonable efforts to chase down the debts, a state guarantee put taxpayers on the hook for 100% of losses linked to defaults or fraudulent applications. “From the lenders’ point of view, they’ve done what they were asked to do,” one director from the banking industry said. The government was repeatedly warned that the approach was leaving it open to fraud. The business department, which ran the schemes, has revealed that its top civil servant sought ministerial directions to push through the three loan schemes because they did not meet the usual standards for government spending. Industry insiders said the fraud risks associated with scrapping credit checks and turning bounce back into a one-page form were fully discussed with the Treasury. Indeed, the former head of the British Business Bank – which was in charge of overseeing the scheme – wrote to the then business secretary, Alok Sharma, two days before the bounce back launch to warn that the scheme was “vulnerable to abuse by individuals and by participants in organised crime”. A month later, in June 2020, Sunak received a joint letter from three anti-corruption groups, calling for the names of recipients to be published – a request that has not yet been met and which is being challenged at a tribunal. Ultimately, speed trumped caution, opening the doors to experienced criminals. Insolvency Service records show some took loans to fund gambling or currency trading – money the government is unlikely to ever recover – while others spent it on things such as home improvements, car raffles or luxury personal items. Other cases are more astonishing, and suggest serious problems in the banks’ basic know-your-customer requirements. The National Crime Agency in December reported the case of Artem Terzyan, 38, from Russia, and Deivis Grochiatskij, 44, from Lithuania. They were jailed for 33 years for laundering £70m on behalf of criminal gangs from around the world – including £10m in bounce back loans. Police had arrested the pair back in June 2018 after following an Audi around the UK’s lorry parks and service stations picking up dirty cash. Yet when the pandemic started, while they were on bail, they both started to claim £50,000 loans in huge numbers. One unnamed UK bank leant them £3.2m. Some banks were more cautious than others. While Agnew did not name the lenders, he said 87% of bounce back loans paid to already dissolved companies came from just three lenders, while two banks were responsible for 81% of cases where loans were granted to companies incorporated after the pandemic hit. The British Business Bank did not confirm the figures and said it was too early to draw conclusions on repayment data. Some banks tried to mitigate the risks by prioritising their own customers – whom they already had run checks on – over new clients. “From a fraud detection perspective, we were more confident that our fraud checks would be stronger with an existing customer versus a new customer,” one senior banking boss said. Questions remain as to how determinedly the government will be able to chase all fraudulent claims, but some changes have been made, including taking steps to ensure that all businesses that are dissolved by their owners are systematically checked for outstanding loans. Resources are relatively meagre when it comes to investigating the loan schemes. While the business department asked the Treasury for an extra £32m for counter-fraud operations, the National Audit Office said even that sum was “inadequate”. A Treasury spokesperson said: “Fraud is totally unacceptable, and we’re taking action on multiple fronts to crack down on anyone who has sought to exploit our schemes and bring them to justice.” The government is also relying heavily on banks to try to chase smaller-scale fraudsters. While banks are required to make reasonable efforts to chase down debts before they can claim the government guarantee, anti-corruption campaigners are concerned about the lack of commercial incentive to do so; their loan losses are 100% covered, whereas chasing money adds considerable costs. Susan Hawley, the executive director of Spotlight on Corruption, said the scale of the fraud highlighted longstanding problems in the UK’s approach to white-collar crime, including repeated delays to reforms of Companies House, the UK’s corporate register. “The government is just not putting its money where its mouth is” on fighting fraud, said Hawley. “This is really chickens coming home to roost in the failure to fund it.”