Small Business Administration emergency loans meet the inevitable: fraud

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One of the largest and most consequential elements of Congress’ massive response to COVID-19 was a pair of SBA-administered loan programs designed to help small businesses. The CARES Act of 2020 authorized the Payroll Protection Plan to allow employers to keep workers on the payroll and expanded an emergency business loan program called the Economic Disaster Loan Program or EIDL to give small businesses an economic lifeline.

Characteristic of these loan facilities was the unusual speed with which the government rolled out much-needed aid. An inevitable consequence, however, has been fraud on an unprecedented scale. By speeding up the process, the Small Business Administration was all but guaranteed to attract the usual bottom eaters who dutifully showed up to swindle taxpayers.

The incredible reach of loan assistance was highlighted in congressional testimony given March 25 by SBA Inspector General Mike Ware. In his prepared remarks, Ware said that in the early days of the program, the SBA executed 14 years of loans in the first 14 days. The amount distributed through the EIDL, now in the hundreds of billions, exceeds all previous SBA emergency loans since 1953. Given the emergency, the SBA “has lowered the guardrails” according to Ware , but the fraudulent access to the programs exceeded even the high expectations of the overseer.

The inspector general’s office has received 1.3 million referrals for alleged fraud according to a new memo 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 were issued.

A concurrent Government Accountability Office (GAO) review also noted a significant incidence of PPP and EIDL lending to ineligible borrowers and reported that financial institutions filed over 40,000 suspicious activity reports between May and October 2020. And this is just the tip of the proverbial iceberg, as various law enforcement agencies attempt to recruit staff to handle a backlog of potential cases.

The bulk of scams fall into two broad categories: bogus applications for fictitious or duplicate businesses, and misappropriation of legitimate loans for prohibited purposes.

In the first case, scammers apply on behalf of newly created or non-existent businesses, sometimes using stolen identities to establish a shell entity from which to divert 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 expenses. Such embezzlement is subject to a penalty, including immediate repayment of 1.5 times the original loan amount, as well as possible criminal or civil prosecution.

Fortunately, the good guys are starting to catch up. There are currently 32 separate state and federal agencies involved in investigating 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 loan and oversight protocols to better vet applicants and refer miscreants to prosecution. 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 facilities and EIDL.

The abuse of these vital programs has an impact on all of us as taxpayers. The SBA depends on citizens to help it identify potential fraud and has set up a whistleblower hotline. Individuals who suspect abuse of the programs may call the National Center for Disaster Fraud Hotline at 1-866-720-5721 or file a complaint online with the SBA Office of Inspector General at www. sba.gov.

Viruses may come and go, but scammers are always with us.

Christopher A. Hopkins is a Certified Financial Analyst in Chattanooga.

Photo Added/Christopher Hopkins
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