Lending decisions present a particular challenge at the moment, not least because of the practical and reputational challenges arising from the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS), but also from emerging financial crime risks from opportunistic criminals.

So what are these challenges? And what more can be done to ensure CBILS, BBLS, and lending more generally, reaches the right businesses quickly to support the economy during the Covid-19 crisis? 

Background

CBILS provides financial support to businesses across the UK that are losing revenue and seeing their cash flow disrupted as a result of the Covid-19 outbreak. It gives approved lenders a government-backed guarantee (up to 80 per cent) for the loan repayments to encourage lending, with an overall business support package potentially worth £330 billion.

So far (up to 27 May) 43,000 loans have been made totalling more than £8 billion. CBILS is part of a broad range of government provisions such as the Job Retention Scheme for employee wages which has also seen significant demand.

Financial Crime challenges

With over 70 approved CBILS lenders so far, and wider access through BBLS, there is broad access to the scheme, however some customers will need to approach other lenders as their normal banking provider is not participating. This opens the door to a number of financial crime risks and some pertinent practical questions and considerations with the schemes overall:

1. Loan guarantees
   • Will the government guarantee include defaults as a consequence of fraudulent applications, or will it be limited to insolvency or non-repayment of outstanding balance events?
   • Approved CBILS lenders may be exposed to additional risk and will need to carefully consider applications on their merit and overall risk profile given customer/beneficiaries, value and business case.
2. Insolvency risks
   • There is an increased risk that either dormant, non-trading or already insolvent entities make a claim, which again may not be guaranteed by the government. This is especially acute where firms are receiving applications from new or non-customers.
   • Substantiating trading history, identifying director bankruptcies and ensuring affordability tests have accurate data will be key to ensuring application fraud is minimised, and that the government guarantee will apply to every customer and loan being granted.
3. Money laundering via CBILS
   • Increased money laundering risks exist from future repayments on both CBILS and BBLS loans being made using illicit funds, especially if the lending bank is not the primary banking partner of the applicant. Opportunistic launderers may seek to attach themselves to solvent firms and submit otherwise valid applications as a means of obtaining clean funds which are then repaid over time using illicit money. Where lenders have concerns about the source of repayments, would the government guarantee cover what might be considered an elective loss if firms were unwilling to receive payment from what they considered to be an illicit source?
   • Establishing a risk-based approach to understanding source of wealth and funds to repay loans as part of Customer Due Diligence (CDD) arrangements will be critical in ensuring a clear understanding of loan-beneficiary repayments. Proportionate and ongoing arrangements to monitor for changes in transactional, beneficiary and trading behaviour will also no doubt form the basis of core mitigation steps.
4. Sanctions risks
   • There is a risk of persons who are registered or attempt to be registered as loan beneficiaries being named on national or international list as terrorists, drug traffickers, criminals or other persons wanted by authorities. Instances of this being identified and reported on by the media would likely lead to significant adverse press coverage and reputational damage. Government and regulators would expect firms to do all they can to minimise these risks.
   • Accurate and comprehensive data within CDD records will be important to ensuring ongoing screening (sanctions and PEPs) is performed on the correct parties, and that potential matches can be investigated and discounted by operational teams without an adverse impact on the timing of lending decisions.
5. Risk based approach
   • If the Financial Conduct Authority (FCA) moves to allow a greater degree of reliance on third-party banks? CDD, firms will need to consider whether this can be sustained over time or whether firms will have to ?catch up? on missing information. Furthermore, is there an incentive to rely on others and expedite lending, rather than assume responsibility for CDD and subsequent lending decisions?
   • There is reference to a risk-based approach in the FCA's recent ?Dear CEO? letter, but approved lenders will need to provision for potential scrutiny of CDD records at periodic-driven review intervals for new customers that continue to transact once CBILS is over. Compliance teams will need to ensure that the approach adopted enables firms to manage risks and is not simply the path of least resistance. 

Next steps

In order to navigate these uncertain times, lenders will need to consider these financial crime challenges in the round. They will also need to be clear on both their appetite to accept CBILS or BBLS applications from non-customers (or those whose primary banking relationship sits elsewhere), and on the level of due diligence and risk management to be performed. Considering where reliance will be placed on others, how to ensure the right due diligence is completed, and what post event monitoring and risk/write-off reviews will be required will be key.

The answer won't be simple and may vary between active customers whose primary banking relationship is with lending firms, those who have been on-boarded for secondary services such as trade finance or lending previously, and those who are new to the firm.

In the context of constrained operational capacity and an environment where the reputational risk for getting it wrong (or not seen to co-operate fully) may have significant and long-term effects, it is important to have a reliable, scalable and risk-based approach. Firms will need to consider leveraging technology to automate the basics and to free up scarce capacity to focus on the key decisions (financial, reputational and risk) that need to be made.