UK Finance blog considers financial crime challenges of lending amid coronavirus (COVID-19)

UK Finance blog considers financial crime challenges of lending amid coronavirus (COVID-19)

UK Finance has published a blog post explaining the financial crime challenges posed by lending decisions in the current environment and describes what action can be taken to ensure that lending, including the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS), reaches the correct businesses efficiently to help the economy during the coronavirus (COVID-19) crisis.

CBILS offers financial support to UK businesses that are losing revenue and suffering from a disrupted cash flow due to coronavirus. Approved lenders receive a government-backed guarantee for the loan repayments to encourage lending with an overall business support package. For further information on CBILS, including recent statistics, see: LNB News 03/06/2020 61.

Financial crime risks

Loan guarantees

It is uncertain whether the government guarantee will include defaults as a consequence of fraudulent applications, or if it will be limited to insolvency or non-repayment of outstanding balance events. Approved CBILS lenders will have to carefully consider applications on their merit and overall risk profile given customer/beneficiaries, value and business case.

Insolvency

There is an increased risk that either dormant, non-trading or already insolvent entities make a claim which may not be guaranteed by the government, particularly when firms receive applications from new or non-customers. Essential to decreasing application fraud will be ensuring affordability tests have accurate data, trading history evidence and identifying director bankruptcies.

Money laundering through CBILS

There are increased risks of money laundering from future repayments on CBILS and BBLS loans being made using illicit funds. Is it not certain whether the government guarantee covers what could be considered ‘an elective loss’ if firms are unwilling to receive payment from what they believe is an illicit source. Mitigation steps include proportionate and ongoing arrangement to monitor for changes in transactional, beneficiary and trading behaviour, in addition to establishing a risk-based approach to determining source of wealth and funds to repay loans.

Sanctions

Individuals who are registered or attempt to be registered as loan beneficiaries could risk being named on national or international lists as terrorists, drug traffickers, criminals or as other individuals wanted by authorities. They could also risk reputational damage if identified and reported by the media.

Risk based approach

If the Financial Conduct Authority (FCA) decides to permit greater reliance on third-party banks’ customer due diligence arrangements, firms will have to consider if this can be sustained. The approaches adopted by firms will have to manage risks and not be the ‘path of least resistance’.

Next steps

• it is advised that lenders consider the above financial crime challenges

• lenders should 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’

• firms should consider where reliance will be placed on others, how to ensure the correct due diligence is completed and what post event monitoring and risk/write-off reviews will be necessary

• a ‘reliable, scalable and risk-based approach’ is important in the context of constrained operational capacity and an atmosphere where there are significant reputational risks for getting it wrong

• firms should consider ‘leveraging technology’ in order to automate the basics and free up capacity to focus on the most important decisions

Source: Lending in the current environment – financial crime challenges

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