The lessons of diligence from Greensill

At least three official reports on matters related to Greensill have been published in July, namely an interim report by the Public Administration and Constitutional Affairs Committee, the Treasury Select Committee Report and thirdly the Nigel Boardman Independent Review.

Although none of them had a particular focus on due diligence, the relevance of due diligence was evident in all three reports.

If there are any conclusions to be drawn from this saga they must surely be : (i) that due diligence is more than a mere process, more than a matter of compliance, but a way of thinking, a culture; and (ii) lowering due diligence standards in a crisis can ultimately cost more than hiring extra resources to maintain standards.

The Boardman report looks back to pre-Covid events, when Lex Greensill was brought into the UK’s Cabinet Office as a Supply Chain Finance Advisor. The press have dubbed the prevailing culture facilitating this appointment as a “chumocracy.”  Clearly a “chumocracy” is not conducive to sound due diligence, as the reports have shown.

Such a culture resulted multiple times in a failure to ask questions, acceptance of representations without challenge, the making of invalid assumptions about what other people have done, and an acceptance of form over substance.  Thanks to these shortcomings Lex Greensill found himself at the apex of government with the usual controls, such as security clearance, legal contracts, or conflicts of interest checks, either being applied in retrospect (in one instance up to eight months after the event), in a way that was not fit for purpose, or not at all.

I was left wondering whether Lex Greensill’s privileged access had national security implications – not because the man himself was a threat (though he was a foreigner), but because of the extraordinary ease with which he penetrated government ? Was this a chumocracy blind spot ? Had Lex Greensill been Chinese or Gambian instead of Australian, would the same insouciance have prevailed ?

Lex’s conflicts of interest were another official blind spot, and the source of extensive comment by the Boadman report. Boardman notes Greensill Capital’s revenues grew from GBP 21 million in 2012 to GBP 116 million in 2017 whilst Lex was serving in Cabinet Office as a Supply Chain Finance Advisor. The only due diligence on his conflicts consisted of self-declarations with no testing of statements made. Some of these statements were either odd, or misleading. Not surprisingly a 2015 audit on Cabinet Office found a number of control weaknesses with respect to conflicts of interest.

Moving on from the Lex Greensill’s time in Cabinet Office, the Treasury Report probes events surrounding Greensill Capital’s access to Covid financing. Again matters of due diligence stand out. First there was the question whether government should have looked more closely at Greensill Capital before responding to its lobbying efforts.

In early 2020 Greensill was seeking access to the CCFF (Covid Corporate Financing Facility), a scheme supervised by the Bank of England, hence ultimately the Treasury. The CCFF, as the Treasury report states, “…was designed to support liquidity among larger businesses……..through the purchase of short-term debt in the form of commercial paper.” Giving Greensill access to such funding would have insured it against increasing market risks threatening its business model.

However, Greensill was not eligible under the rules of the scheme and was lobbying to have the Treasury change the rules. The Treasury entered discussions without any formal background checks on Greensill. Its concern was whether Greensill’s proposal were viable, or could help government meet the scheme’s objectives. The suggestion by one Treasury official that the Treasury should at least look at Greensill’s geographical spread of customers seems to have been ignored. This would have been necessary to see if Greensill Capital was – as claimed – benefiting important parts of the UK economy.

When asked why it did not look at Greensill itself before discussing its proposals, Sir Tom Scholar, the current Treasury Permanent Secretary, replied tellingly, “We look at the issue and I looked at the issue on the merits of it, and so the identity of the person talking about it was not relevant to the amount of attention and proper diligence that the issue got and required”. The Treasury added separately that the time they spent on the proposals was minimal, and that in any case it was an extraordinary busy time.

The too-busy-to-do full due diligence argument was employed by the British Business Bank (BBB) which comes under the BIES (Business, Industry, and Energy Strategy Committee). BBB was tasked with administering the CLBILS (Coronavirus Large Business Interruption Loan Scheme). Unlike the CCFF, this scheme was a delegated guarantee scheme which operated through a wide variety of lenders, one of whom was Greensill Capital.

A key component of the scheme was its guarantee limits (GBP 50 Million). Greensill Capital may have conspired with the Gupta Family Group Alliance (GFG) to breach the limits. The National Audit Office notes that Greensill had lent £400 million to GFG companies, structuring the loans so as to deceive the BBS. The potential loss to the UK taxpayer could be as high as GBP 334.8 million.

At the time Greensill was admitted to the scheme through an accreditation process, the BBB was operating a “stream-lined” version of its due diligence – because of the urgency arising from Covid. The Treasury Report notes, had BBS applied “…. a less streamlined and more sceptical accreditation process might have led the Bank to further question several of Greensill’s statements, including on: loan default rates; exposure to specific borrowers and product types; and its business model and ethical standards. Each were the subject of press reports prior to accreditation”.

There was plenty of information available which should have given the BBS cause for concern if it had looked. One of which was the concentration risk to GFG, the other being the probity of GFG, which was by then under investigation by the SFC.

Questions of information sharing also stand out in respect of the UK government’s approach to due diligence. The Bank of England were aware of potential concentration risk issues within the Greensill Group, as BaFin (the German banking regulator) had alerted them to such risks. However, they did not share this information with BBB on the grounds that there were no channels for sharing such information.

Mr Woods, Deputy Governor of the Bank of England for Prudential Regulation defended restrictions on sharing information on the grounds that ”….if firms felt that information passed to us would be passed in a generalised way into Government, it could quite seriously impede what we do. Parliament is being quite wise in putting quite tight constraints on this. Whether they are in exactly the right place, one can debate. Tight constraints are quite sensible for what we do”.

Going back to the Treasury’s approach to due diligence on lobbyists, the age old question arises when should due diligence be done.  Was the Treasury right to engage with the lobbyist without doing background checks first ?

Usually due diligence is performed as early in a prospective relationship as possible, and certainly before any relationship is formalised or business transacted. The risk with the Treasury’s approach was that it might have changed the rules to suit the lobbyists, then decided to do due diligence before giving any money. If it had found anything in due diligence to prevent it giving money to Greensill Capital (and there was by this time adverse news), would it have changed the rules on a false premise, and would it risk making itself look gullible ? The fact that this did not happen does not take away the risk the Treasury ran

Although Nigel Boardman has been criticised for his report by Lady Heyward, I would have dearly like to asked Lord Heyward why he pushed so hard to get Lex Greensill a CBE in 2017. Far from saving the taxpayer the billions it was falsely claimed he had done in the citation for his award, Greensill and his companies have cost the taxpayer dear, and embroiled the government in scandal. Perhaps if Heyward or the public honours committees had indulged in some meaningful due diligence themselves, they might have spared us this final insult to injury.

The author leads TSG’s Advisory Services. He has spent many years in law enforcement and banking specialising in financial crime risk and compliance. TSG is a Research (including due diligence) specialist, also offering Ethics Compliance and Advisory services to its clients. TSG offers expertise in Eastern Europe, as well as East Asia.