The rising problem of government grant fraud

Grants are an important tool for central and local government to support citizens and businesses, and improve lives, the economy and society.

Grant spending accounted for 13% of total UK government expenditure in 2019/20, at £118 billion. However, with such large amounts of funds on offer, grants also attract fraud, which government grant makers need to spot and mitigate against.

Doing this, when relying mainly on manual processes, can be extremely time consuming and not particularly effective, as some risks cannot be identified without the use of data and analytics tools. There are also many different types of external fraud to be aware of, which require different controls:

• False application: The applicant does not meet the criteria so falsely provides data in an attempt to gain access to funds
• Account takeover: A fraudster takes control of a genuine application to illicitly access funds
• Altered/counterfeit: Fraudulent evidence is provided at claim stage to either inflate genuine expense or falsify data to meet requirements
• Phishing: Applicants unwittingly provide access to fraudsters who then attempt to gain access to funds
• Cyber-attack: Distributed denial of service attacks can help fraudsters to access funds. 
   

Of course, with any process that involves money, there is also a risk of internal fraud and bribery. To protect grants and ensure they get into the right hands, government grant makers need to carry out stringent identity and due diligence checks and ensure their systems have sufficient online security. They also need thorough audit and access controls, alongside reporting mechanisms in place to highlight patterns in claiming behaviour that could help them to identify potential fraud. All of this places significant burden on teams and is open to human error. But the importance of carrying out sufficient checks cannot be underestimated.

This has been heightened during the pandemic as some government grants that were created and distributed quickly have been subject to fraud. Only a few months after the activation of the government furlough scheme, Jim Harra, the chief executive of HMRC, which is responsible for issuing the funds, stated that it had assumed an error and fraud rate of between 5% and 10% within the scheme amounting to £3.5bn. The British Business Bank and the Department for Business, Energy and Industrial Strategy have estimated that between 35% and 60% of the loans distributed through the Bounce Back Loan Scheme may not be repaid due to fraud or credit issues caused by self-certification, multiple applications, lack of legitimate business, impersonation and organised crime.
 
This level of fraud can impact severely how much of the money that the government has available is put to good use. The Head of the National Audit Office, Gareth Davies said: “Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse.”

It’s clear that a balance needs to be struck between speed and due diligence to protect against the risk of fraud.

Protecting grants from central government to local government

Increasingly local government departments are being asked to distribute grants from central government to their local communities. In 2019/20 for example, the Ministry of Housing, Communities and Local Government paid out nearly £14bn in grants to local authorities. This means councils are having to spend more time and resources on compliance and reporting to mitigate the risk of fraud.

Our recent report with The Chartered Institute of Public Finance and Accountancy (CIPFA) found that; “Smaller, shorter duration and less flexible grants challenge the limited resources of many councils, particularly when they are competed.” These challenges can lead to inconsistencies in the way councils distribute grants to their communities. During the pandemic councils used a range of criteria to distribute grants to local businesses, some simply distributed money to companies that had been paying business rates to get it to them quickly, while others spent much more time on due diligence checks.

So, having identified that there is a rising problem and a tangible risk of fraud in government grant making, in my next article I’ll take a deeper look at how government grant makers can mitigate against some of those risks through technology, automation and reporting.