‘Unprecedented’ fraud has penetrated COVID-19 small business loan rollout, watchdog warns

On the cusp of the COVID-19 pandemic, when offices and restaurants began to close, the federal government worked to keep small businesses afloat – ultimately spending more than $ 1 trillion to help protect the American dream of millions of workers and business owners.

But even before the first checks, the alarm bells went off.

The person who rang those bells the loudest was Hannibal “Mike” Ware, the Inspector General of the Small Business Administration. The veteran internal watchdog says he attended a series of meetings with Trump administration officials and SBA analysts that were interspersed with “difficult discussions” on how to quickly distribute funds without leaving them vulnerable fraudulent claims.

His warnings have gone unheeded, Ware said, and the fallout has “transformed him from a black-haired man to a gray-haired man.”

“My level of frustration was extremely high,” Ware told ABC News in a recent interview. And now, a year and a half later, he has declared that “the scale of the fraud we are witnessing is unprecedented – unprecedented”.

As small businesses emerge from the pandemic, the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL), two key relief programs passed under the CARES Act of Congress, are drawing to a close. But for all the jobs they saved, their legacy can be tarnished by unprecedented amounts of fraud – a reality that experts say could hamper efforts to adopt future emergency relief programs.

“In terms of dollar value, the amount of fraud in these COVID relief programs will be greater than any government program that came before it,” Ware said.

All government programs suffer from some fraud, experts say. And emergency programs are even more sensitive, due to the inherent tension between the pressure to approve loans quickly and the need to screen applications and maintain other fraud prevention measures that can prolong the process.

In an October 2020 report, Ware’s office found that “to speed up the process, the SBA” lowered safeguards “or relaxed internal controls, which significantly increased the risk of program fraud.”

A senior SBA official in the Biden administration concurred with Ware’s analysis, noting that “it shouldn’t be an expectation that we have to sacrifice speed for certainty – you can do both.”

“The story of 2020 for PPP and EIDL is the fact that the leadership of the previous administration did not have enough controls in place to determine individual identity or corporate identity,” the official said. . “There are absolutely different choices that could have been made to limit vulnerabilities to fraud.”

“With limited staff, few technological tools to perform prepayment verification, and an overwhelming need, the SBA and other agencies have abandoned many traditional checks and simply approved applicants with little or no verification of self-reported information. “, according to Linda Miller, the former assistant manager. director of the Pandemic Response Accountability Committee, a government task force established under the CARES Act.

“Best practices require upstream due diligence to avoid making the fraudulent or improper payment in the first place,” Miller wrote in June, after leaving the PRAC. “But in the rush to quickly distribute pandemic relief, we failed to do so and so are continuing now [funds that were fraudulently granted] … but the funds recovered will be a fraction of what was stolen. “

Ware said this is precisely what his office seeks to avoid. Even before PPP and EIDL were finalized, the SBA Inspector General’s office submitted three reports to the SBA “detailing the importance of the initial checks,” according to Ware. During the grueling exchanges of spring 2020, he said he warned the SBA to “pump the brakes” on the process.

“Scammers are going to do what scammers are going to do,” Ware said. “But the initial controls mitigate exposure to fraud, and that would have saved taxpayers a lot of downline heartache. Unfortunately, heartache was not avoided because of the way these programs were implemented from the start. departure.”

Jovita Carranza, the former SBA administrator who resigned when President Trump stepped down, could not be reached by ABC News for comment. Last October, in a letter in response to Ware’s report, Carranza wrote that the Inspector General “failed to recognize the improved and effective system checks and validations that the SBA uses” to eliminate fraudulent claims and “overestimate grossly the risk of fraud, waste and abuse. “

Carranza’s successor as SBA administrator – Biden candidate Isabella Casillas Guzman – said “reducing the risk of fraud, waste and abuse” in the distribution of relief loans and grants is a top priority . She said a series of measures implemented in December – including initial verifications and claimant tax information – had already produced “a sharp drop” in fraud, and that she was working closely with Ware to further improve safeguards and vigorously track and recover previous fraudulent dispersions.

Ware agreed that the controls put in place late last year helped fight fraud, but said the efforts were too weak, too late.

“At that point, well, you already know how much money is gone,” he said. “A lot of money was out.”

Among the relief programs, the deployment of the EIDL of the previous administration was given special consideration. James W. Cooper, a former federal prosecutor who now works for the law firm Arnold & Porter, called the program a “fraud magnet,” citing a provision that allowed beneficiaries to receive up to $ 10,000 in ‘advance “without any conditions”.

“That money is gone,” Cooper said.

But that didn’t stop Ware from trying to get him back. Its investigative efforts have resulted in 307 indictments, 205 arrests and 69 convictions related to PPP and EIDL fraud, which has raised more than $ 600 million to date.

This figure, however, only reflects a fraction of what experts believe was defrauded. Of the more than $ 1,000 billion distributed, Ware and others estimate that more than 5% of transactions were fraudulent – a staggering rate that would suggest tens of billions of dollars lost.

The first accusations of PPP fraud came just weeks after the program was launched, Ware said, and will continue for years to come. Fraudsters have used a range of strategies to illegally obtain the relief funds, including identity theft and setting up bogus companies to submit loan applications.

Those charged include a former “Love & Hip Hop: Atlanta” reality star accused of defrauding PPP to the tune of $ 2 million, and a former New York Jets football player who allegedly obtained a loan. PPP of $ 1.2 million and spent a large chunk of the money on jewelry and Gucci and Dior items. Other fraudsters are accused of spending their loot on Tesla shares and a 40-foot catamaran sailboat.

A NASA executive recently pleaded guilty to submitting fraudulent loan applications to PPP and EIDL seeking more than $ 350,000 and then spending the money on various personal expenses, including a swimming pool and a breeder. dogs. Prosecutors said the executive “views COVID-19 relief programs as a personal piggy bank.”

For those found guilty, prosecutors call for severe penalties; Last week, a Texas man who submitted false documents and received over $ 17 million in PPP loans was sentenced to 11 years in prison and ordered to repay $ 17 million in restitution. He had used the illicit funds to buy several houses and a fleet of luxury cars, including a convertible Bentley, a Corvette Stingray and a Porsche Macan.

But experts fear these bold and expensive cases are just the tip of the iceberg – and they warn that over time investigators will uncover even more complex scams.

“This first round of lawsuits targets the fruits at hand – clear cases of fraud involving large sums of money that are relatively easy to trace,” said Cooper, the former federal prosecutor. “What will be interesting to see is whether investigators will end up turning their attention to more nuanced and sophisticated fraud cases.”

A notable challenge for investigators will be to identify the organizers of large-scale schemes that have been a pervasive source of fraud. This includes schemes in which a small number of people enlist others to submit a high volume of low-cost loan applications and then take a share of the proceeds – a kind of fraudulent crowdsourcing, experts said.

“In many cases, individuals have obtained these loans at the request of one or more people who sought multiple advances using straw applicants,” Cooper said. “It will be very difficult for investigators to identify the real perpetrators.

These complex cases require more time and energy to investigate, straining already depleted resources. Brandon Brockmyer, research director at Project on Government Oversight, a nonprofit watchdog group, said investigators will likely have to prioritize the most egregious cases.

“Official watchdogs are trying to slice up and slice up the data to figure out where to spend their time and resources because they are overwhelmed,” Brockmyer said. “These are a huge number of deals. They have no choice but to be strategic about where they are looking.”

In light of the challenges, Ware predicts that the investigative work will continue for years to come. And experts fear more and more that there is more at stake than unrecovered money.

“It comes down to the public’s confidence in government to administer programs of this magnitude,” said Brockmyer. “The rate of fraud in these COVID relief programs will have an impact the next time a major emergency rescue program is needed.”

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