One of the most important and consequential elements of the massive congressional response to COVID-19 was a pair of SBA-administered loan programs designed to aid 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 Injury Disaster Loan or EIDL program to throw small firms an economic lifeline.
The hallmark of these loan facilities was the uncharacteristic speed with which government rolled out much needed assistance. One inevitable consequence, however, has been fraud on an unprecedented scale. By expediting the process, the Small Business Administration was virtually assured of attracting the usual bottom feeders who dutifully showed up to bilk the taxpayers.
The incredible scope of the lending assistance was highlighted in Congressional testimony given on March 25 by Mike Ware, the Inspector General of the SBA. In his prepared remarks, Ware stated that during the early days of the program, SBA executed 14 years' worth of lending in the first 14 days. The amount distributed through EIDL, now in the hundreds of billions, exceeds all prior emergency SBA lending since 1953. Given the urgency, SBA "lowered the guardrails" according to Ware, but fraudulent access to the programs exceeded even the overseer's elevated expectations.
The Inspector General's office has received 1.3 million referrals for suspected fraud according to a new memo from the Congressional Select Committee on the Coronavirus Crisis. The same committee report, based upon SBA data, estimated that over $79 billion in bogus loans had been issued.
A concurrent review by the Government Accountability Office (GAO) similarly 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 is just the tip of the proverbial iceberg, as various enforcement agencies attempt to staff up to handle a backlog of potential cases.
The bulk of the scams fall into two broad categories: phony applications for fictitious or duplicate companies, and misappropriation of legitimate loans for prohibited purposes.
In the first instance, scammers apply on behalf of newly created or non-existent companies, sometimes using stolen identities to establish a shell entity from which to divert the funds. In some cases the ill-gotten loot was laundered through online brokerage accounts like Robinhood. In the second case, legitimate businesses receive authorized funds and then use them for unapproved purposes like personal consumption or non-business expenses. Such misappropriation carries a penalty, including immediate repayment of 1.5 times the original loan amount, as well as potential criminal or civil charges.
Fortunately, the good guys are beginning to catch up. There are currently 32 separate state and federal agencies involved in investigating abuses of Covid relief programs, including the U.S. Justice Department and several state Attorneys General. Ware, the SBA's Inspector General, has proposed reforms to SBA's lending and oversight protocols to better vet applicants and refer miscreants for prosecution. And the CARES Act created a new oversight board called the Pandemic Response Accountability Committee (PRAC), comprised of 22 Inspectors General from a variety of U.S. government agencies to conduct oversight of all federal pandemic relief programs, including the PPP and EIDL facilities.
Abuse of these vital programs impacts each of us as taxpayers. The SBA depends upon citizens for help in identifying potential fraud and has set up a whistleblower tip 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 Office of Inspector General at www.sba.gov.
Viruses may come and go, but crooks are with us always.
Christopher A. Hopkins is a certified financial analyst in Chattanooga.