LONDON  - Britain's government failed to guard properly against fraud in its 47 billion-pound ($63 billion) COVID emergency lending programme for small businesses, opening itself up to billions of pounds of losses, a watchdog warned on Friday.

The Bounce Back Loan Scheme launched in May 2020 and did not conduct credit checks or fully verify the identity of small businesses applying for loans, the National Audit Office, which scrutinises public-sector spending, said.

"Government prioritised getting Bounce Back Loans to small businesses quickly but failed to put adequate fraud prevention measures in place," said Gareth Davies, the NAO's comptroller and auditor general.

"One impact of these decisions is apparent in the high levels of estimated fraud."

The government launched the scheme to stop the collapse of small businesses which had to cease trading due to tight lockdown restrictions at the start of the COVID-19 pandemic.

Firms could borrow up to 50,000 pounds each via banks at a fixed interest rate of 2.5%, repayable over 10 years. Initially, lenders had to give a loan decision within 24 to 48 hours.

In March, Britain's business ministry, which ran the programme via the British Business Bank, a state lender, estimated that 37% of the loans would not be repaid, and that 11% came from fraudulent applications.

A subsequent investigation by accountants PwC in October revised the fraud rate down to 7.5%, although the NAO said it had not had time to check this estimate itself.

Other countries are also investigating the misuse of emergency loans issued during the pandemic.

The U.S. Special Inspector General for Pandemic Recovery said in June that Washington's loans programme had been plagued by "unprecedented levels of fraud".  

Meg Hillier, the chair of a cross-party Public Accounts Committee in Britain's parliament, said the government had done too little to reduce "colossal risks of fraud and error".

"It's now focusing on recovering money from organised crime, yet many of the smaller-scale fraudsters will have slipped through its fingers," she added.

A business ministry spokesperson said loans and other support had helped millions of firms avoid laying off staff.

"We are working closely with lenders and enforcement authorities to minimise fraud and ensure those that have committed fraud face consequences," the spokesperson added. ($1 = 0.7519 pounds)

(Reporting by David Milliken Editing by William Schomberg) ((; +44 20 7542 5109; Reuters Messaging: