The Paycheck Protection Program (PPP) was rolled out during the early months of the pandemic (Introduced on 5/26/2020 and became public law on 6/5/2020) to provide emergency relief for small businesses, healthcare workers, and the hospitality industry. Due to the sudden scarcity of customers and a reduced need for hourly or salaried workers in many industries, PPP helped bear some of the burdens caused by Covid-19 (forced closures, extreme restrictions, and economic downturn).
The intended purpose
To help small businesses be able to stay open in the midst of the pandemic by having funds for rent, employee pay and benefits, and to help prevent employees from being furloughed and otherwise in need of unemployment benefits.
What Is the CARES act?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) implemented a variety of programs to address issues related to the onset of the COVID-19 pandemic. Its purpose was to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic. Eligibility for some of the loans and small business assistance was still up to the discretion of the Treasury or Small Business Administration. They came with some strict conditions, and Congress appointed an inspector general and an oversight board to supervise and oversee their administration. The law initially allocated $150 billion to states and localities battling the pandemic.
PPP (Paycheck Protection Program) is a part of CARES act
The law appropriated an initial $349 billion (eventually growing to nearly $800 billion) to support small businesses’ efforts to maintain their payroll and some overhead expenses through the period of emergency. The stated goal was to keep workers paid and employed during the period of the emergency. It applied to any business, nonprofit organization, veterans’ organization, or tribal business that had under 500 employees—or, under the Small Business Administration (SBA) standard, had under 500 employees per physical location for all foodservice and accommodation businesses. The loans were allowed to cover payroll, benefits, and salaries, as well as interest payments, rent, and utilities. Fees were waived, and collateral and personal guarantees were not required. The principal of the loan could be forgiven up to the total cost of payroll, mortgage interest payments, rent, utility payments, and any additional wages paid to tipped employees made during the eight-week period after origination. However, under PPP, this amount would be reduced by the proportion of any reduction in the average number of employees during that period.
Within these restrictions, any small business that had employees could apply for and potentially receive an interest-free loan. In addition, and of even greater importance, if they followed the use guidelines and did not reduce their average number of employees, the loan would be completely forgiven, in essence, a gift, not a loan.
10% of the $800 billion allotted for relief was obtained or used fraudulently. How was this done? By falsifying documents, inflating business sizes and worth, falsifying employee count, and even inventing fake (synthetic) businesses in order to get relief funding.
For example, In Miami, several “farming” businesses that obtained PPP loans were discovered to be a single residential property with no farm business attached in any way. Basement businesses such as home barber shops, lawn care companies, etc. were falsely created or fabricated for the purpose of getting a PPP loan.
Here are just a few facts about the massive scale of PPP fraud
More than 15% of PPP loans had at least one indication of potential fraud. Around 1.8 million of the PPP’s 11.8 million loans showed signs of fraud, according to an academic working paper cited by The New York Times.
Researchers estimate that $76 billion in PPP loan money was taken illicitly. That is almost 10% of the program’s nearly $800 billion budget.
Fintech lenders had the highest rate of suspicious PPP loans. They provided approximately 29% of all PPP loans but accounted for more than half of the suspicious loans to borrowers.
The unfortunate reality
For all the benefits, there was a dark side to the PPP program – the high percentage of fraudsters who took advantage of the government relief program, falsifying documents for loan audits, inflating business sizes and value, loan stacking (applying for and accepting loans from multiple lenders) and inventing fake businesses for the purpose of obtaining relief funding. Funds that were obtained legally or otherwise were often used for improper or unapproved purposes (cars, houses, jewelry, etc.).
Haywood Talcove, CEO (Chief Executive Officer) of LexisNexis Risk Solutions told NBC News that the PPP loan program “spent approximately $800 billion and provided 21 million loans to individuals, [however]…there is absolutely no security…There’s no validation of any information,” Talcove said. “And voila, you have [fraudulent] company ABC with 40 employees and a payroll of $10 million. And you go and apply for a PPP loan. It was a piece of cake.”
How did the abuse happen? Some of the many factors involved:
- Expediency was a primary goal. The program was approved just weeks after introduction.
- SBA removed fraud control guidelines just prior to release.
- The government failed to respond quickly to fraud. They are now playing catch-up.
- Ease of approval: Easy to apply, easy to qualify, near instant payout at the expense of thorough vetting. AI (Artificial Intelligence) driven approvals may have never been seen by a human.
- Lenders (many small community banks and credit unions) were instantly flooded with requests and may not have had the proper training to handle a program of this scope.
- Lenders may have not been as diligent with vetting since it was not their money they were “lending.”
How are the SBA and others (including banks) trying to find and prosecute PPP loan abusers?
False Claims Act (FCA) originally enacted in 1863, The FCA provided that any person who knowingly submitted false claims to the government was liable for double the government’s damages plus a penalty of $2,000 for each false claim. This has been updated for inflation several times. The FCA is being used to pursue PPP loan abusers.
The Federal Bank Fraud Statute prohibits the knowing act or attempt to defraud a bank or to acquire any money owned or controlled by a financial institution. Any intentional act to deceive, cheat, or deprive a bank for personal financial gain is sufficient to prove an artifice or scheme. The government need not prove the bank’s monetary loss if specific intent is shown.
Pandemic Response Accountability Committee – A committee made up of 21 Inspectors General, and law enforcement partners. Committee also employs data scientists to use Artificial Intelligence (AI) to look at 150 million records to identity fraud. PRAC Oversees over $5 trillion in pandemic-related programs and spending.
PRAC looks for repeat use, stolen or synthetic identification including:
- Phone numbers
- SS# / EIN#
- Email addresses
- Stolen IDs
- Synthetic ID
Surprisingly, as of late March 2022, only 178 cases have been prosecuted.
$800 billion / 20 million loans, averages $400,000 per loan (though a majority were in $20,000 range).
178 x $400,000 = $71 million in prosecuted loans. This is barely a dent into the $80 billion estimated in fraudulent cases!
Possibly the majority of the prosecuted cases were the larger ones (the examples below were extremely large PPP fraud cases) but based on average this is an extremely small percentage of cases and volume.
Some high-profile cases
- A California couple received $18 million in PPP loans, bought three houses, diamonds and expensive watches. The couple are now serving 17 and 6 years in prison.
- A Florida man received $7.2 million in PPP loans and bought a mansion and sports cars.
- A Georgia man applied for $4.5 million in PPP loans using false information. He was approved for $162,000 and purchased a Range Rover with the money.
As the Treasury Department and PRAC uncover more and more instances of fraud, both fraudulent acquisition and fraudulent use of funds, the real cost of PPP mismanagement will be even clearer. How this cost will affect our economy long-term is yet to be revealed.
MORE CARES ACT FRAUD CASES
Cares Act Fraud Tracker collects and shares PPP fraud cases as they are made.
HOW DOES DATASEERS and FINANSEER help protect financial institutions from fraud like this?
While the SBA and their task forces are the primary agencies in pursuit of PPP fraudsters, the banks and fintech who provided the loans have a responsibility to recoup the fraudulent funds. Financial institutions made these loans and were responsible for the funds. They were paid back by the Federal Government only when the loans were properly obtained. Fraudulently obtained loans were the responsibility of the financial institution to collect on. PPP loans that were issued by a bank to a customer who did not meet the criteria (a legitimate business with employees, who used the funds for the agreed upon uses – payroll, taxes, rent) were then NOT reimbursed by the Federal Government and would need to be collected by the financial institution. Many of these fraudulent loans could have been avoided with the proper due diligence and tools to prevent or catch fraud early on.
A financial institution using software like DataSeers’ IdentitySeer would have had better tools to help in the early prevention of PPP fraud. The KYB/KYC (Know Your Business / Know Your Customer) tools helps confirm that a business exists, that the owner is legitimate (is who they say they are, has non-compromised ID, is not a synthetic ID) and if there is still uncertainty, can implement additional levels of identification requirements to either approve or reject loan applications.
A financial institution employing DataSeers’ IdentitySeer modules would have better tools to monitor each account holder’s information and set an Alert Monitoring system to identify unusual/large deposits and provide requests for further investigation. A customer that opens a new business account and then shortly after receives a large deposit that is out of the ordinary should elicit some scrutiny in the name of fraud prevention. Suspicious deposits would trigger potential further investigation and then alert the bank to consider freezing the account while the deposit is investigated. Identifying and dealing with this kind of unusual deposit before it leaves the banking environment (getting spent on houses, cars, jewelry) is important to the banks
Many of these fraudulent uses of PPP were identified by SBA and their task forces when funds were used for non-approved purchases, a sudden large purchase, or from the discovery of a false business location. Both of these types of discoveries can be identified through the FinanSeer modules. Mapping of business addresses would have identified the “farm” as a residential subdivision and flagged the account for review. A Sudden cash purchase of expensive sports cars would have flagged accounts for further review and possibly account freeze.