The state bank in charge of running emergency business loan schemes during the pandemic warned the Government its Bounceback Loan Scheme could spark a wave of fraud days before the programme launched.
Keith Morgan, then chief executive of the British Business Bank, wrote to Alok Sharma, the Business Secretary, that the scheme to support small businesses through the pandemic carried “very significant fraud and credit risks”.
The bank’s boss said: “The scheme is vulnerable to abuse by individuals and by participants in organised crime.”
A draft review by PwC had classified the risk of fraud as “very high”, he added.
Small businesses have taken about £38bn of bounceback loans worth up to £50,000 each from banks since it was launched on May 4, two days after Mr Morgan’s letter to the business secretary.
The Government guarantees 100pc of any losses banks suffer if borrowers fail to repay loans issued under the scheme, which was rolled out in a hurry to help more than a million businesses survive the Covid-19 lockdown.
In a formal notice of the bank’s concerns about the scheme, Mr Morgan said the imposition of a uniform 2.5pc interest rate for all bounceback loans could reinforce the dominance of big banks because smaller competitors would be unable to compete.
The rush to get the scheme up and running had hurt the feasibility of delivering the bounceback scheme, he said, adding the industry did not have time to agree a system to prevent businesses making duplicate applications to multiple lenders.
In another letter on May 18, Mr Morgan raised further concerns from the business bank about the Government's Future Fund, which invests in start ups.
A government spokesman said: “Our loan schemes have provided a lifeline to thousands of businesses across the UK – helping them survive the outbreak and protecting millions of jobs.
“Our support has been targeted to ensure we help those who need it most as quickly as possible and we won’t apologise for this.
“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.”