$ 4 billion in PPP loans already reported
Recent reports show that $ 4 billion in PPP loans have already been reported. The good news? Under the Paycheck Protection Program (“PPP”), the federal government approved approximately $ 525 billion in loans to more than 5.2 million small businesses between April and early August 2020.
Over 5,400 lenders processed these loans. As I discussed on a Podcast with the ACFCS in April, the PPP is part of the CARES (Coronavirus Aid, Relief, and Economic Security) law and was designed to help small businesses survive the economic downturn caused by Covid-19. The goal of the program was to get money quickly to small businesses – intended primarily to save company employees on payroll, with the rest going towards rent, mortgages, and utilities. If the funds were used according to the PPP rules – then a business could request the complete cancellation of the loan – which would make it a “grant” and not a loan.
Now that the program has stopped accepting applications effective August 8, 2020, more in-depth reviews of the speedy processing of these loans are being reviewed for early indications of fraud.
The bad news? The first signs indicate that many loans were fraudulent.
Of course, the articles that made the headlines shed light on all the luxury cars that would have been bought with PPP funds:
- A florida man who bought a new Lamborghini worth $ 314,000, using taxpayer money that was supposed to be used to keep his employees paid
- A man in texas chose to use its rescue funds on Lamborghini, an SUV, as well as a new Ford F-350.
However, there are red flags that are easier to spot in loans. Preliminary analysis of PPP data by the Congressional select subcommittee on the coronavirus crisis revealed a potential fraud of $ 4 billion.
For example, House Democrats warned in a September report that they had found red flags in nearly $ 3 billion in P3 loans after checking information provided by borrowers on a federal database. business registration. House Democrats say they found no record of these companies in the tax ID database.
Other areas of fraud include:
- Companies benefiting from several loans
- Businesses obtaining loans that have been excluded from doing business with the government under the System for Award Management (SAM) database
For more examples of red flags, listen to my webinar with Gina Jurva and Michael Schidlow: Deceptive Due Diligence: Identifying Risk in Commercial Lending.
In addition, some loans were simply incomplete and did not include the names and addresses of the borrowers.
The need for quick cash is at the root of many of these problems. Many banks said they felt the pressure to provide relief while balancing their anti-money laundering and bank secrecy obligations. In other cases, lenders (which included banks, fintechs, and commercial lenders) may have made loans to new customers, meaning they still had to meet all of their existing customer onboarding standards, including Know Your Customer (KYC) rules components and try to process loans in a timely manner.
As the review process begins – and businesses look to submit loan forgiveness requests – a few key details emerge:
- Every loan recipient has a six-year record retention requirement on loan documents
- All loans over $ 2 million are subject to additional review as part of the current audit plan, and this limit will not be the minimum for other audits and investigations
- Random spot checks will take place
What are the red flags that are immediately obvious – that could have been found by doing standard KYC:
- Confirm that a business was actually in operation on February 15, 2020
- Check that a company or its leaders were not currently bankrupt or on a government exclusion / exclusion list
- Confirm if a business owner (defined as having a 20% or more interest) was currently charged with a felony
- Check whether a landlord – in the past five years – has been convicted of fraud, corruption, embezzlement or misrepresentation – to name just a few verifiable elements of the claim using data from public records
To date, the Inspector General’s office, known as SIGTARP, has carried out investigations that have led to 24 enforcement actions against banks and other organizations and the convictions of 291 people, including 76 bankers, according to the office. SIGTARP audits and investigations will almost certainly lead to significant criminal and civil enforcement activities in the months to come.
In addition, the Department of Justice (DOJ) did not wait for these checks and investigations. Building on lessons from the past, the DOJ set up a PPP Fraud Enforcement Team to investigate potential cases almost as soon as the program started operating. The DOJ has worked with the FBI, the IRS Criminal Investigation, the SBA Inspector General’s Office, and the FDIC’s Inspector General’s Office, as well as other state and local authorities. According to Acting Assistant General Brian Rabbitt, the goal was to hold “fraudsters” and other bad actors accountable and deter other “potential fraudsters” from engaging in similar behavior.
the The GM announced their first indictments months ago and on September 10 they said they had charged 57 people to date. These defendants had “allegedly committed fraud to obtain P3 money” and included individuals and coordinated criminal networks. In total, these cases involve attempts to steal more than $ 175 million from the PPP, with government losses of more than $ 70 million.
Lesson? While the need for legitimate businesses to access the necessary government assistance funds is great, the need to know your customer remains. There are ways to leverage technology to help meet both needs today.
As Congress debates additional stimulus packages for small businesses, including more P3 loans – let’s hope some lessons in fraud detection – pre-application – have been learned.