SBA Office of Inspector General Issues Management Report Advising of Fraud And Seeking Further SBA Oversight of COVID-19 Loans and Advances

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On June 28, 2020, the Office of Inspector General (OIG) issued a Management Alert raising concerns of potential fraud relating to the Small Business Administration (SBA) Economic Injury Disaster Loan and Advance grant programs. The OIG reported receiving more than 5,000 complaints of suspected incidents of fraud from financial institutions that had received the economic injury loan deposits, 3,800 of which came from the same six financial institutions. The OIG also found internal control deficiencies suggesting that $250 million in economic injury loans and advance grants were given to potentially ineligible recipients and $45.6 million were disbursed in potentially duplicative payments.

With approximately $222.8 billion in lendable funds remaining under the disaster assistance response to COVID-19, the OIG wants the “strong indicators” of potential fraud in the program to be addressed immediately to reduce fraud risk and prevent further losses.

Examples of the reported suspicious activities include:

  • Accounts established using stolen identities
  • Account holders unable to explain origins of deposits or identify business names on loans
  • Account holders claiming to use the funds to open a business
  • Account holders attempting to transfer funds into investment accounts
  • Account holders attempting to transfer funds to foreign accounts
  • Loan deposits being made into accounts with no other account activity that were established remotely just before receiving the loan funds
  • Economic injury loans made to agricultural businesses being deposited in accounts of unrelated third parties located in different states than the business
  • Account holders attempting to withdraw loan funds in cash or transfer the funds to other newly established accounts
  • Economic injury loans or advance grants being deposited into personal accounts–with no evidence of business activity–of customers of the financial institution

The OIG has also identified several social media-based, organized fraud rings where potential applicants are recruited to submit information and split the money obtained with the ringleaders. Other online schemes advertise services to procure loans for new small businesses, only to use the provided information to obtain fraudulent SBA loans.

To address the identified issues, the OIG proffered two suggestions to the SBA:

  1. Assess vulnerabilities for the purpose of strengthening or implementing internal controls to address notices of potential fraud.
  2. Create an effective process and method for lenders to report suspected fraud to the Office of Disaster Assistance and to recover funds.

In response to an advance draft of the Management Alert, the SBA informed the OIG that its existing controls had already led the rejection of over $17.7 billion in loans and prevented the processing of another $78 billion in duplicative loans. However, the OIG proceeded with the publication of alert to raise awareness of preliminary review findings despite the current controls in place.

The SBA also indicated that it is issuing a task order for support to design and implement, within the Office of Disaster Assistance, the strategies and tools necessary to respond to reports from banks involving suspicious activity in connection with deposits of the Economic Injury Disaster Loan program. The SBA hopes that this task order, along with its prior issuance of Information Notice 500-20037, will decrease the incidents of fraud as further funds are distributed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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