Six months into the largest and most extensive economic relief program in American history, the Department of the Treasury (Treasury) and the Small Business Administration (SBA) are now grappling with the potential for fraud caused by the speed with which it was implemented, limited risk controls, and conflicting guidance.  The risks, which were apparent from the beginning, were embedded in an application process that relied on borrower certifications and a limited documents review to determine borrowers’ eligibility.  Because the priority was to pump funds into the economy as quickly as possible, the fraud detection effort was largely and effectively shifted to the loan forgiveness process.

On April 28, 2020, Treasury and SBA announced that SBA would review loans of more than $2 million for borrower eligibility after the borrower applied for loan-forgiveness.  On May 22, 2020, SBA posted an interim final rule, noting that it may review any PPP loan it deems appropriate.  For companies seeking loan forgiveness, especially those with loans over $2 million, the procedures for identifying suspected fraud and for referring these cases for investigation will be critical.

On June 25, 2020, citing the risks to the program, the Government Accountability Office (GAO) recommended that SBA develop and implement plans to ensure program integrity, achieve program effectiveness, and address potential fraud, emphasizing that it believed implementation of its recommendation was essential.¹   As of August 8, 2020, when the PPP program ended, lenders had made more than 5.2 million loans totaling more than $525 billion, excluding canceled loans.  Of these, about 29,000 loans, or about 20% of the total funds, went to borrowers of over $2 million.

SBA opened its portal for accepting loan forgiveness applications on August 10, 2020, but the process has lagged as businesses, banks, and lawmakers have advocated for changes in the process.²

On September 1, 2020, the Majority Staff of the Select Subcommittee on the Coronavirus issued a preliminary analysis of PPP loan data suggesting that tens of thousands of loans could be subject to fraud, waste, or abuse.  The memo identified the following data points as suggesting a high risk for fraud, waste, and abuse:

• 10,856 loans, totaling over $1 billion went to companies that received multiple loans.
• More than 600 loans totaling over $96 million went to companies excluded from doing business with the government.
• More than 350 loans worth $195 million went to government contractors with significant performance and integrity issues.
• Federal databases raises red flags for $2.98 billion in loans to more than 11,000 PPP borrowers.
• SBA and Treasury approved hundreds of loan applications missing key identifying information about the borrower.

On October 1, 2020, the GAO told the House Subcommittee on Investigations, Oversight and Regulations that SBA has reportedly stated that loan forgiveness reviews of loans over $2 million will focus on the borrower’s good faith certification of economic necessity and compliance with general program requirements.

• A contractor will review all loans using an automated review tool and will conduct additional manual reviews of some loans based on risks detected by that tool. The contractor also will review the borrower’s economic necessity certification.
• Following the contractor’s portion of the review, SBA will complete the review for all loans over $2 million with a combination of SBA contract and federal staff.
• A separate and independent contractor will provide a quality assurance review on a sample of loans.³

With respect to all of the loans under $2 million, SBA will conduct an automated review to flag potentially questionable loans.  Selected loans will be reviewed manually to determine whether the borrower was eligible for the loan, calculated the loan amount correctly, used loan proceeds for the allowable uses, and/or was entitled to loan forgiveness in the amount claimed.⁴

Independent of the size of the loan, SBA also plans to review loans identified through specific reports of potential noncompliance or fraud, and through stratified statistical sampling based on various loan characteristics.  The agency reports that it has already begun reviews based on reports of potential noncompliance or fraud.⁵  By the end of August, however, the SBA’s fraud hotline had reportedly received more than 42,000 reports of alleged coronavirus-linked fraud.⁶

The Department of Justice announced the first indictment on criminal fraud charges in connection with the PPP loan program on May 5, 2020 – barely a month after the program opened.⁷   On September 10, 2020, in remarks at the PPP Criminal Fraud Enforcement Action Press Conference, the Acting Assistant Attorney General for the Criminal Division, Brian Rabbit, announced that, since early May, the DOJ’s Criminal Fraud Section had charged a total of 57 individuals with PPP-related fraud; a number that did not include cases brought by various U.S. Attorneys’ Offices around the country.⁸   The Fraud Section cases involved attempts to steal over $175 million in PPP loans, with over $70 million in actual losses to the government and loan amounts ranging from as little as $30,000 and as much as $24 million.

Defendants in these cases have included individuals who allegedly created fake companies; legitimate business owners accused of spending the funds on luxury items for themselves rather than paying employees; people who allegedly knew they weren’t eligible but applied anyway; businesses that allegedly sought multiple loans; businesses and individuals who allegedly submitted falsified documents; doctors accused of stealing from patients; suburban homeowners allegedly pretended to be farmers; and elaborate rings of people accused of trying to steal tens of millions of dollars.⁹

Since September 10, there have been at least two more significant fraud cases.  A prominent politically connected defense contractor was charged with bank fraud and money laundering for allegedly stealing more than $12.8 million in PPP funds, including by falsely inflating the number of employees on the loan application and falsely certifying that the applicant and its affiliates would not receive, and had not received, another PPP loan.¹⁰   In a separate case, a Game of Thrones enthusiast was charged with submitting numerous fraudulent PPP loan applications seeking over $6 million, including on behalf of entities named White Walker, Khaleesi and The Night’s Watch, and receiving more than $1.7.¹¹

In his September 10 remarks, Acting Assistant Attorney General Rabbit identified two categories of PPP fraud cases:  the first, involving “individuals – or small groups – who lied about having legitimate businesses, or who claimed they needed PPP money for things like paying their workers, but instead used it to buy splashy luxury items for themselves,” and the second, involving “coordinated criminal rings that have engaged in systematic, organized conduct to loot the PPP.”¹²   While the involvement of the rings was “unsurprising,” Rabbit also labeled it “troubling,” and emphasized that the Department “will be focusing on these types of cases going forward.”¹³

In pursuing these future cases, the Department will focus on the “common threads” it has identified in these fraudulent schemes, e.g., false representations, false supporting documentation, and misuse of the loan funds.¹⁴   With respect to possible false representations, investigators will be scrutinizing borrowers’ statements regarding the nature and existence of their businesses, the number of employees, their average monthly revenue and payroll figures, and the applicants’ criminal backgrounds, as well as the records submitted in support of these statements.  Obvious and widely reported examples of misuse of loan funds have included using funds to purchase jewelry, luxury cars, lavish vacations, etc., but the scrutiny may eventually extend to businesses that used loan funds for business purposes, but not for the specific business purposes authorized under the program.

As the loan forgiveness process takes shape and moves forward, reviewers will be using these data points, as well as the issues raised in the Majority Staff report, to identify and refer loans for investigation and possible criminal prosecution.  With the cases that have been charged, the government has clearly signaled that it will examine instances of multiple loans, borrowers’ qualifications, the veracity of supporting documentation, and the disbursements of the loan funds – and that these reviews will apply both to loans over $2 million and to the smaller loans.   Borrowers seeking loan forgiveness without the likelihood of a negative audit finding and possible investigation by DOJ are advised to review their applications with these concerns in mind.

[1] https://www.gao.gov/assets/710/707837.pdf

[2] As of September 29, 2020, SBA had received more than 96,000 applications for loan forgiveness, representing 2% of the total number of loans, but none had been approved.  https://www.wsj.com/articles/u-s-to-start-forgiving-ppp-loans-after-borrowers-complained-11601414687

[3]https://www.gao.gov/products/GAO-21-117T, p. 9.

[4] Id., p. 10

[5] Id.

[6] https://www.nytimes.com/2020/08/28/business/ppp-small-business-fraud-coronavirus.html

[7] https://www.justice.gov/opa/pr/two-charged-rhode-island-stimulus-fraud

[8] https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-rabbitt-delivers-remarks-ppp-criminal-fraud

[9] https://www.washingtonpost.com/business/2020/09/10/ppp-fraud-charges/

[10] https://thehill.com/homenews/news/519083-defense-contractor-charged-for-allegedly-stealing-more-than-128m-in-ppp-fraud

[11] https://www.justice.gov/opa/pr/north-carolina-man-charged-fraudulently-seeking-over-6-million-covid-relief-funds

[12] https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-rabbitt-delivers-remarks-ppp-criminal-fraud

[13] Id.

[14] Id.