The NAO said counter-fraud activity for the initiative was “implemented too slowly to be effective” and described the government’s attempts to limit taxpayers’ exposure to fraudulent loans as “inadequate”. 

It said at first, the scheme had “limited verification, and no credit checks on borrowers”, which made it vulnerable to fraud and losses. As the scheme continued 13 additional measures were brought in but NAO said “most came too late to prevent fraud and were focused instead on detection”. 

The Department for Business, Energy and Industrial Strategy (BEIS) launched the scheme on 4 May 2020, offering loans of up to £50,000, or a maximum of 25% of annual turnover, to support businesses during the Covid-19 pandemic.  

Loans were guaranteed by the government and issued through banks, building societies and peer-to-peer lenders. The department expected lenders to be the first point of defence by carrying out know your customer checks. Measures to stop people from duplicating applications were introduced in June and checks on director changes were implemented in July, but by that point 61% of the value of the loans had been provided.

Other counter-fraud measures were introduced during or after September 2020. In December that year BEIS informed the Treasury there was still a high risk of fraud even after these upfront checks.

Around a quarter of all UK businesses applied for a loan with a total of 1.5 million issues at a value of £47bn. 

Over 90% of these, or £39.7bn, went to micro-businesses with a turnover below £632,000.  

In March 2021, the government estimated that 37% of loans worth £17bn would not be repaid, but the NAO said these figures were uncertain. This figure represents borrowers who want to pay but are unable to, as well as those who do not intend to repay the loan as it was taken fraudulently. 

This figure does not include certain types of fraud such as a borrower overstating their turnover to access a larger loan. 

Due to the scale of fraud and limited resources, BEIS prioritised its counter-fraud focus on organised crime rather than on people who overstated their turnover. However, the NAO said homing in on organised crime was not enough of a deterrent for fraudulent activity. 

BEIS uses the National Investigation Service (NATIS) to investigate and prosecute fraud worth more than £100,000 with evidence of organised crime, and for other fraud of high value.  

By October 2021, NATIS received over 2,100 intelligence reports but only had capacity to pursue a maximum of 50 cases per year. BEIS set NATIS a target of recovering at least £6m of fraudulent loans over three years and as of October, the agency’s work has resulted in 43 arrests across 33 investigations and over £3m of recoveries. 

Otherwise, BEIS has depended on lenders to be able to investigate fraud, but the NAO warned that lenders were not incentivised to do so as they can reclaim losses through the government’s guarantee. 

As of 30 September 2021, the British Business Bank’s data showed £2bn worth of loans had been repaid, and £1.3bn of loans had defaulted. Around 100,000 loans, or 7% of all loans made under the scheme, are currently at least one month in arrears. 

The NAO has recommended that by April 2022, BEIS produces a formal plan for managing fraud, and measures the performance of each counter-fraud strategy. 

Gareth Davies, the head of the NAO, said: “The government prioritised getting bounce back loans to small businesses quickly but failed to put adequate fraud prevention measures in place. One impact of these decisions is apparent in the high levels of estimated fraud.  

“The true level of fraud will become clearer over time, but it is clear government needs to improve on its identification, quantification and recovery of fraudulent loans within the scheme.”