Specialist teams have been established to try to recover money
A classified Cabinet Office dossier has revealed that over £28billion in public funds ended up in the hands of terrorists, hostile foreign powers and criminal organisations during a six-year period.
The internal assessment, covering 2015 to 2021, represents what is believed to be the first comprehensive evaluation of how British taxpayer money has inadvertently financed threats to national security.
Foreign aid payments and pandemic relief loans were exploited on a massive scale by Britain's adversaries, with the funds now unrecoverable and those responsible facing no consequences.
Security officials commissioned the report in 2023 but it was subsequently suppressed by the previous Government, The Telegraph has revealed.
Sources indicated the document was deliberately kept from public view to shield ministers from the political fallout of disclosing such extensive misallocation of government resources.
The dossier documents grants awarded to firms with connections to the Russian state, Covid relief funds channelled to Islamic State militants in Syria, and research investments flowing to companies tied to China's military apparatus.
One particularly striking case involved a British dual-use technology firm that worked on sensitive defence systems. Shortly after receiving a substantial grant from UK Research and Innovation, a Kremlin-linked entity acquired a significant stake in the company.
"It meant that as well as [Russia] having access to our intellectual property, we were directly paying millions to the Russian state," a source with knowledge of the matter told The Telegraph.
Counter-terrorism funding was also inadvertently directed to extremists promoting anti-Western ideology.
Criminal enterprises received the bulk of the misappropriated money, including people-smuggling networks that fraudulently claimed housing benefits and disability payments.
Intelligence sources identified an Eastern European organised crime group, allegedly supported by a hostile state, that systematically targeted British public funds whilst facilitating illegal migration.
Rebecca Harding, from the Centre for Economic Security, described the findings as a wake-up call, arguing that "economic warfare and economic security are more important than ever before there have been threats from adversaries, state actors and non-state actors that go through the business system".
She warned that Britain had been complacent in assuming other nations shared its values. "It is economic warfare, and we have been naive about all of this," she added.
Tom Keatinge of the Rusi think tank characterised the welfare system as having become an "ATM for terrorists" in numerous instances, though he noted that distributing agencies had grown more vigilant.
He condemned the administration of pandemic lending as "pretty disastrous", observing: "If there's a loophole, anyone can use that loophole – criminals, terrorists, anyone just making a quick buck."
Mr Keatinge emphasised the need for greater caution regarding who receives taxpayer funding.
Throughout the period examined, Britain maintained one of the world's largest overseas development budgets, committing 0.7 per cent of gross national income to foreign assistance.
The Department for International Development's own figures showed annual aid spending rose from £12.1billion in 2015 to £15.2billion by 2019, before declining during the pandemic.
A separate parliamentary report in December revealed that £10.9billion was lost to fraud and error in the previous government's Covid response, with the counter-fraud commissioner citing weak accountability and poor data quality.
Professor Nicholas Ryder, a terrorism financing expert at Cardiff University and former home affairs select committee adviser, called the findings "staggering".
"The major problem with the UK stance is that the Government fails to recognise that particular connection between fraud and terrorist financing," he said, noting that the US and Australia dedicate far greater resources to using fraud investigations to disrupt terrorist networks.
A Cabinet Office spokesman defended the current administration's record, stating: "This Government is taking unprecedented action to tackle public sector fraud, having saved over £7.5billion of taxpayer money in the past year through aggressive fraud prevention and recovery."
The spokesman added that improved data usage and additional expert investigators meant fraud was being identified and halted more rapidly than before.
Specialist teams have been established to pursue suspected fraudsters and reclaim money from pandemic-era lending schemes.
However, national security sources expressed frustration that comparable scrutiny had not extended to other government funding streams.
Despite some improvements to grant verification procedures, concerns persist that rigorous background checks are not being consistently applied.
Security officials said it remained uncertain which department hold responsibility for assessing national security risks when awarding public grants, leaving potential vulnerabilities in the system.
A spokesman for Bond, the UK network for NGOs, said: "Any reports that UK aid funds have been diverted to terrorists, criminals or hostile actors are deeply concerning, and should be thoroughly investigated. However, it is important to flag that, as it stands, reports do not explain how much of the reported £28billion of misused funds relates specifically to UK aid, as opposed to other forms of government spending such as Covid support schemes, benefits and business grants.
"UK aid is one of the most scrutinised and transparent areas of government spending - assessed at levels ten times more than other government spending. The high level of due diligence applied in the disbursement of UK aid ensures that it continues to reach people around the world who need it most, and helps to build a safer, healthier and more prosperous world for us all. During 2015-20, UK aid helped 15.6 million children get a decent education, and vaccinated one child roughly every second between from 2015 to 2018."