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Taxpayers can lose up to £ 26 billion in the government’s most popular Covid-19 business loan scheme due to fraud or an inability to pay it back, the Whitehall spending regulator warned.
The concerns arose in a National Audit Office (NAO) report on the 100% government-backed payback loan scheme (BBLS), which was designed to quickly distribute cheap loans of up to £ 50,000 to small businesses affected by the Covid- 19 crisis.
The watchdog warned that up to 60% of clients may default on loans due to minimal credit checks and fraudulent applications.
According to the latest figures available from the Treasury, 1.3 million businesses have borrowed a total of £ 38 billion under the scheme. Assuming loans through the plan amount to 43 billion pounds when it closes in late November, taxpayers could end up paying a bill of between 15 and 26 billion pounds to cover bad debts, the NAO warned.
Labor MP Meg Hillier, who chairs the public accounts committee, said: “The hasty launch of the scheme means that criminals may have helped themselves with billions of pounds at the expense of taxpayers. Unfortunately, many companies will not be able to repay their loans and banks will be quick to clear up the problem.
“The government estimates that up to 60% of loans could become bad – this would be a truly dazzling waste of public money.”
The NAO is now asking the government to take steps to try to avoid losing so much public money.
NAO Director Gareth Davies said: “The government will need to ensure that strong debt collection and fraud investigation agreements are in place to minimize the impact of these potential losses on the public purse. It should also take this opportunity to consider now the controls it would put in place to protect against abuse of any such scheme in the future. “
The report comes just weeks after the government extended the application deadline for Covid loans, including BBLS, by two months until the end of November, as it tries to avoid further fallout from the coronavirus crisis.
The spending regulator admitted that the BBLS program had “been able to quickly support small businesses” since May, but the quick application process, which eliminated credit checks and relied on customer reports, has come at a cost.
The NAO said the lack of affordability controls means hundreds of thousands of customers will have a hard time paying their debts, triggering the government’s guarantee that taxpayers’ money is used to cover bank losses.
Meanwhile, the decision to provide funds quickly left public money exposed to fraud, the scale of which, according to the NAO, would not be clear for months. However, the Cabinet Office’s government fraud function estimates that losses will be significantly above the typical levels of fraud associated with public sector schemes, which generally range from 0.5% to 5%.
Together, the fraud and affordability risks mean that between 35% and 60% of businesses that have borrowed may default on loans, the NAO said. However, the NAO cautioned that these estimates were “very uncertain” and that the full extent of the losses would only become clear once the loans begin to be repaid in May 2021.
Police have already made multiple arrests linked to the BBLS. In one case, two men in London claimed more than £ 500,000 from the emergency loan program by recruiting several people to set up bogus companies and bank accounts to launder the cash.
Davies warned ministers weeks ago that “there would be no excuse” if billions of pounds worth of fraud within government schemes continues under a second coronavirus lockdown. Davies told The Guardian that there had already been “significant” abuse of the licensing scheme and the BBLS, which would take months to identify.
The National Crime Agency and the state-owned British Business Bank, which oversees Covid loan schemes, also warned of fraud related to loan recovery.
A government spokesperson defended the Covid loan schemes, saying they had provided a lifeline to thousands of UK businesses. “We focus on this support to help those most in need as quickly as possible and we will not apologize for this.
“We seek to minimize fraud, with lenders implementing a variety of protections that include money laundering and customer checks, as well as transaction monitoring controls. Any fraudulent application can be criminally prosecuted and the penalties include imprisonment or a fine or both. “
