Source · Select Committees · Public Accounts Committee
Recommendation 3
3
The Bank’s approach to due diligence in accrediting Greensill was woefully inadequate.
Conclusion
The Bank’s approach to due diligence in accrediting Greensill was woefully inadequate. The Bank took comfort in Greensill having raised significant funding from global investors and its activities in managing billions of pounds in lending. In doing so, the Bank has placed too much reliance on the work of others in accrediting Greensill, including Greensill’s auditors, whose work is currently being investigated by the Financial Reporting Council. The Bank has accepted much of the information provided by Greensill in its application at face value, including its statements of who Greensill would lend to. It seems clear that had the Bank been more curious and sceptical in its accreditation process, Greensill’s application would have raised many more questions. Greensill’s default rates and exposure to key clients have both been the subject of press reports prior to, and during, Greensill’s accreditation, yet the Bank did not cast its net widely enough in gathering evidence on Greensill. For example, the Bank did not make enquiries of the companies Greensill proposed to lend to under CLBILS. The Bank also did not explore what other government departments and regulators knew about Greensill – including those who were also assessing it for access to other schemes. Neither did it make any enquiries of Greensill’s credit insurers. While there was no proven fraud at the point of accreditation, several parties subsequently raised concerns about Greensill. Ultimately, the Bank’s inadequate due diligence has put public money at risk. Recommendation: The Bank should, by the end of February 2022, review its accreditation process, particularly for non-bank lenders and write to us with the results. The review should include the Bank’s approach to: • The principles applied to streamlining an accreditation process, and how post-accreditation checks seek to deal with any risks that arise as a result; • challenging and verifying information lenders provide regarding who they plan to len
Government Response
Acknowledged
HM Government
Acknowledged
agree with the Committee’s conclusion. The department recognises the importance of managing supplier performance including the apportionment of financial and programme risk. CAAS (Cost Assurance & Analysis Service) Approvals Team help define specific estimating and scheduling evidence requirements to underpin business cases in accordance with HMT Aqua Book Guidance2. This is delivered throughout the lifecycle of programmes continually developing and improving the accuracy of estimates as the project becomes more mature, and its risks fully identified. 3.3 The department accepts that supplier underperformance has been a factor on some programmes, but the use of Firm Price contracts, Liquidated Damages, Single Source regulation reform and other measures have been effective in limiting exposure to cost increases. These measures have resulted in the financial liability for cost over-runs being borne by suppliers. Industry has posted significant losses on contracts (for example the development and production contract for A400M aircraft) as a result of work delivered by MOD programme teams to best understand where financial risk and liabilities rightfully sits between the department and supplier. The practice of government funding the development costs of new capability is well-established across the world. Demanding that most of the upfront development costs are funded by industry before a commitment is made to buy equipment would reduce investment in cutting-edge capability, damage UK industry competitiveness, and runs counter to the policy set out in the DSIS. 3.4 In addition to delivering military capability to the Armed Forces, Equipment Plan investment brings economic benefit, supporting over 200 thousand UK jobs and generating intellectual property (IP) that can be exploited by UK industry in exports. The generation of HMT Accounting Officers Assessment Guidance (2021) page 8 cutting-edge IP naturally leads to technically challenging and higher risk programmes as the Department strives to maintain operational advantage, while industry also seeks to offer market-leading equipment both for domestic export use. 3.5 The Department will write to the Committee by the end of May 2022 setting out evidence of how it holds its suppliers to account and fairly and responsibly apportions risk and reward across its contracts.