Risks that the scheme could be hijacked by organised crime or impersonators are among those identified in an NAO report.
Taxpayers face losses of as much as £26bn on coronavirus “bounce back” loans that cannot be repaid or are the subject of fraud, the spending watchdog has found.
The scheme provides rapid access to 100% government-backed finance worth up to £50,000 to struggling small firms, with fewer checks than other COVID-19 business loan initiatives.
It has proved much more popular than anticipated when launched in May, with the total value of loans now expected to be £38-£48bn, up from an initial estimate of £18bn-£26bn.
But it relies on firms self-certifying details of their applications and no credit checks by lenders on existing customers, increasing the risks of losses to taxpayers, the National Audit Office (NAO) said.
Senior officials raised formal concerns about it from the start which were overruled by the Treasury, according the NAO.
It also found that officials were not able to put in place measures to prevent duplicate loan applications to different lenders until nearly a month after the initiative launched.
The NAO concluded that the government “acted decisively” when launching the scheme to save small businesses from running out of money.
But Gareth Davies, head of the NAO, said: “Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct.
“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.”
The department for business, energy and industrial strategy (BEIS) and the British Business Bank (BBB) estimate that “as a result of credit and fraud risks” 35% to 60% of borrowers may default on the loans, the NAO’s report said.
That would imply, based on the scheme lending £43bn, a loss of £15bn to £26bn, though the estimates were “highly uncertain”, the report added.
Under the BBB’s “downside scenario” the level of default could be as high as 80% – if the pandemic lasts longer than expected and efforts to curb loan losses prove ineffective.
Within the overall loss, the extent of fraud on the scheme was “likely to be significantly above” the usual 0.5%-5% estimated for public sector fraud, the NAO report said.
Fraud risks included multiple applications from the same borrower, loans being made to people without a legitimate business, impersonation and organised crime.
These were among issues raised by BEIS and the BBB with ministers.
They were also “concerned that the lower level of credit checks may result in lenders making loans to businesses which are unable to repay, leading to the loss of taxpayer money”, the NAO found.
However the Treasury “felt on balance it was necessary to increase delivery speed”, the report said.
Details of the BBB’s warning to the government about the potential for fraud, in a letter from then-boss Keith Morgan, were first revealed last week.
On Friday, the National Crime Agency said it would investigate serious and organised crime linked to the bounce back scheme after intelligence suggested it was being exploited.
A government spokesperson said: “We’ve looked to minimise fraud – with lenders implementing a range of protections including anti-money laundering and customer checks, as well as transaction monitoring controls.
“Any fraudulent applications can be criminally prosecuted for which penalties include imprisonment or a fine or both.”
Applications for new loans remain open until 30 November.