The government failed to put adequate measures in place to prevent fraudsters from stealing billions of pounds through its Bounce Back Loan scheme, the National Audit Office (NAO) has said.
Counter-fraud activity was “implemented too slowly”, which resulted in “high levels of estimated fraud”, it said.
It added the Department for Business estimated fraudulent loans were worth £4.9bn, 11% of the total, as of March.
The government said it would “not tolerate” people defrauding taxpayers.
The Bounce Bank Loan scheme was set up in April 2020 with the aim of keeping small businesses afloat during the coronavirus pandemic.
A total of 1.5 million loans worth £47bn were issued through the initiative, after about a quarter of UK businesses applied.
In its report, the NAO said the government estimated more than a third of loans, worth £17bn, may never be repaid due to both fraudulent activity and legitimate borrowers defaulting.
As of 30 September, figures from the state-owned British Business Bank, which supervises the scheme, showed £2bn worth of loans had been repaid and £1.3bn had been defaulted on. The bank said about 7% of all loans were at least one month in arrears.
But the spending watchdog said predicted losses through both fraud and businesses being unable to pay were “highly uncertain”.
Gareth Davies, the head of the NAO, said: “The true level of fraud will become clearer over time.”
Mr Davies said the government prioritised loans to small businesses quickly but “failed” to put adequate fraud prevention measures in place.
“It is clear government needs to improve on its identification, quantification and recovery of fraudulent loans within the scheme,” he added.
The NAO said the scheme had “limited verification, and no credit checks on borrowers, which made it vulnerable to fraud and losses”.
The Department for Business has set a target of recovering at least £6m of fraudulent loans over three years, and so far the agency’s work has resulted in 43 arrests and more than £3m in recoveries.
A statement from the Department for Business said it was “continuing to crack down on Covid-19 fraud and will not tolerate those that seek to defraud the British taxpayer”.
“We are pleased to see the National Audit Office recognise that our response to serious fraud has been strengthened since the scheme was first introduced,” it added.
“The government support schemes have provided a lifeline to millions of businesses across the UK – helping them survive the pandemic and protecting millions of jobs.”