Small Business Administration emergency loans meet the inevitable: fraud
One of the biggest and most significant parts of Congress’ massive response to COVID-19 has been a pair of loan programs administered by the SBA and designed to help small businesses. The CARES Act of 2020 authorized the Wage Protection Plan to allow employers to keep workers on the payroll and extended an emergency business loan program called the Economic Injury Disaster Loan or EIDL to give small businesses an economic lifeline.
The hallmark of these loan facilities was the unusual speed with which the government deployed much-needed aid. An inevitable consequence, however, has been fraud on an unprecedented scale. By speeding up the process, the Small Business Administration was virtually guaranteed to attract the usual bottom eaters who dutifully came forward to cheat taxpayers.
The incredible extent of loan assistance was underscored in Congressional testimony given on March 25 by Mike Ware, the inspector general of the SBA. In his prepared remarks, Ware said that in the first days of the program, SBA executed 14 years of loans in the first 14 days. The amount distributed by EIDL, now in the hundreds of billions, exceeds all previous SBA emergency loans since 1953. Given the urgency, the SBA “lowered the safeguards” according to Ware , but the fraudulent access to the programs exceeded even the high expectations of the supervisor.
The Inspector General’s office has received 1.3 million referrals for suspected fraud, according to a new note from the Congressional select committee on the coronavirus crisis. The same committee report, based on SBA data, estimated that more than $ 79 billion in bogus loans had been issued.
A concurrent review by the Government Accountability Office (GAO) also noted a significant incidence of PPP and EIDL loans to ineligible borrowers and reported that financial institutions filed over 40,000 suspicious activity reports just between May and October. 2020. And that’s just the tip of the proverbial iceberg, as various law enforcement agencies attempt to recruit staff to handle a backlog of potential cases.
Most scams fall into two broad categories: bogus apps for fictitious or duplicate businesses, and hijacking legitimate loans for prohibited purposes.
In the first case, crooks apply on behalf of newly established or non-existent businesses, sometimes using stolen identities to establish a shell entity from which to embezzle funds. In some cases, ill-gotten loot has been laundered through online brokerage accounts like Robinhood. In the second case, legitimate businesses receive authorized funds and then use them for unapproved purposes such as personal consumption or non-business spending. Such embezzlement results in a penalty, including immediate repayment of 1.5 times the original loan amount, as well as potential criminal or civil prosecution.
Fortunately, the good guys are starting to catch up. There are currently 32 separate state and federal agencies involved in investigations into abuses of Covid relief programs, including the US Department of Justice and several state attorneys general. Ware, the SBA Inspector General, has proposed reforms to the SBA’s lending and monitoring protocols to better vet applicants and bring perpetrators to justice. And the CARES Act created a new oversight board called the Pandemic Response Accountability Committee (PRAC), made up of 22 inspectors general from various U.S. government agencies to oversee all federal pandemic relief programs, including PPP and EIDL facilities. .
The abuse of these vital programs impacts all of us as taxpayers. The SBA depends on the help of citizens to identify potential fraud and has set up a whistleblower line. Individuals who suspect abuse of the programs can call the National Center for Disaster Fraud hotline at 1-866-720-5721 or file a complaint online with the SBA Inspector General’s Office at www.sba .gov.
Viruses can come and go, but crooks are always with us.
Christopher A. Hopkins is a Certified Financial Analyst in Chattanooga.