New Report Unveils Magnitude of Fraud in SBA COVID-19 Relief Programs

Whether we want to or not, the country will continue to feel the effects of the COVID-19 pandemic for years to come in a multitude of ways. Many actions were taken by the government in the early days to help United States’ citizens through the largely unprecedented times, particularly to help support small businesses. As I’m sure many small business owners would say, the assistance offered through the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program was critical to small business owners who, in the early days of 2020, were suddenly facing an unknown future. As closures and restrictions were put into place from every level of government in a bid to try to protect Americans from the novel virus, hospitals and their staff, doctors, and scientists all scrambled to contain the virus and determine the best path forward.

PPP and EIDL applications flooded the SBA in the hopes that the assistance offered through these programs would help to prevent millions of small businesses from sinking under the weight of the pandemic. Unfortunately, the roughly $1.2 trillion in assistance provided by the programs, while good-intentioned and critical to many small business owners’ chances of survival, was not immune to massive levels of fraud. In a report released on January 30, 2023, the Pandemic Response Accountability Committee (PRAC) details a breakdown of the fraud, what is being done about it, and safeguards to help prevent it from happening again.

SBA logged over 11 million PPP loans by the time the program ceased taking applications in May 2021. These 11 million loans totaled a staggering $800 billion. Additionally, SBA provided over $378 billion in EIDL loans and EIDL grants prior to closing its application period on January 1, 2022. According to the report, one of the factors that made these programs so susceptible to fraud in their early days was the urgency required to support small businesses, stating that SBA initially “used few program controls to verify applicants’ eligibility prior to disbursing funds.” Applicants were permitted to  self-certify that they were an eligible business due to the emphasis placed on the speed with which PPP loans were disbursed. Though the lenders of the PPP loans were required to comply with Bank Secrecy Act requirements, there were no measures in place to identify whether the loan recipients were on the Department of the Treasury’s “Do Not Pay” service, and in early 2021, SBA’s Office of Inspector General (OIG) realized the need for additional safeguards.

Unfortunately, by the time SBA began requiring lenders to review PPP and EIDL applications with more scrutiny, it was already too late. As of January 2021, the OIG found that nearly 60,000 SBA-backed PPP loans totaling $3.6B were paid to potentially ineligible recipients (although not ineligible for sure). PRAC updated these figures to nearly 70,000 loans totaling $5.4B between PPP and EIDL loans and grants. Shockingly, these figures only included loans and grants that were acquired through identity fraud. It does not include those acquired by submitting false and misleading statements or those that were misappropriated and spent on Lamborghinis and shopping sprees. Further, there were over 175,000 additional EIDL and PPP applications that were attempted but their efforts were thwarted. At this time, PRAC’s Fraud Task Force, the SBA OIG, law enforcement, and the Department of Justice’s COVID-19 Fraud Enforcement Task Force are working through those loans identified as being paid to potentially ineligible recipients.

So, what does PRAC recommend SBA do to prevent this from happening again? Learn from its mistakes. Yes, really. And enlist the help of the Social Security Administration for identity verification before millions of loans worth billions of dollars are disbursed.

You can find the full report from PRAC here. For federal contractors out there, fraud is a big issue in the procurement space as well. This report can serve as a reminder that the OIGs and DOJs of the world are out there, so make sure your ship is in order.

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