The rush to distribute hundreds of billions in Paycheck Protection Program (PPP) loans earlier this year opened the door for massive fraud, and more and more of those scams are beginning to surface.
The New York Times reported earlier this month, “Four months after the federal government’s signature coronavirus relief program for small businesses expired, investigators and lawmakers have only scratched the surface of schemes that illicitly tapped its forgivable loans.” According to the outlet, “The program’s hastily drafted and frequently revised rules, its removal of normal lending guardrails and governmental pressure to swiftly approve applications created the ideal conditions for thievery to thrive.”
The new coronavirus relief package recently signed by President Donald Trump includes $285 billion to reopen the program.
PPP loans are intended to provide a direct incentive for small businesses to keep their employees on the payroll during the pandemic-induced recession.
Stacy Cowley, a finance reporter for the Times who has researched the program extensively, described the first round of loans as “a $523 billion government giveaway of largely free money” that “attracted quite a few scammers and grifters.”
In a recent interview with “This Morning with Gordon Deal,” Cowley explained: “Because the loans were approved so quickly, the government was trying to get that money out in as little as a day, there was very little time for the type of due diligence and checking that banks would normally do, so a lot of this fraud is now coming to light on the backend rather than upfront when the money was disbursed.”
Cowley said she spoke to several bank executives, most of whom were unwilling to talk on the record, for her in-depth report on the first round of the program.
“We couldn’t believe how many people were trying to take advantage and game the system,” said Chris Hurn, Founder/CEO of Fountainhead Commercial Capital, a firm that made thousands of loans. “A lot of my employees, including me, were a little frustrated with humanity.”
Lenders detailed several of the rackets, calling many of the attempts brazen and unsophisticated. Strategies included forging documents, inventing companies, doctored payroll lists, and fake tax returns.
“Several bankers said that they noticed a pattern where their bank caught someone and turned them down, the scammer would simply turn around and apply at another bank,” Cowley told Deal. “There were about 4,000 institutions that made these loans, so a persistent scammer could just keep trying until they found someone they could slip past.”
“We couldn’t believe how many people were trying to take advantage and game the system.”
The Paycheck Protection Program had the ideal conditions for thievery to thrive. Here’s how scammers defrauded the government effort to help small businesses. https://t.co/SZDB9mNHKP
— The New York Times (@nytimes) December 9, 2020
As The New York Times recently reported:
So far, the Justice Department has brought criminal charges against more than 80 people accused of stealing at least $127 million from the relief program, but there’s far more to uncover. The House Select Subcommittee on the Coronavirus Crises said it had identified more than $4 billion in potentially improper loans, and some bankers believe the total will be much higher.
A Small Business Administration fraud hotline that took in 742 complaints in 2019 has received more than 100,000 this year. And there are hundreds of active investigations across more than a dozen government agencies, meaning a program that offered borrowers a few months of relief will spark years of court actions. …
To entice lenders to participate, the government allowed them to rely on borrowers’ certifications that they were eligible for a loan and had provided accurate information. So the kind of deep vetting that normally accompanies business loans, including otherwise routine eligibility checks, is being done only now. Receiving a loan “doesn’t mean that S.B.A. has made an affirmative declaration that a borrower is eligible or that it will receive loan forgiveness,” the agency said…
“What lawyers and bankers are really worried about, though, is what they think is the larger scale of this to come on the backend,” Cowley explained. “Companies that are legitimate companies, that really do exist, that took loans that they really didn’t qualify for or didn’t really need, or didn’t use the money appropriately. And that’s a much greyer area. Some of this isn’t really going to get caught. The government is sort of retroactively auditing these loans.”
As Forbes reported, eligibility for the second round of PPP loans “is stricter than before,” adding:
A borrower will have to have fewer than 300 employees, and be able to establish, in general, that they experienced a 25% drop in gross receipts during the first, second, or third quarter in 2020 relative to that same quarter in 2019. The new act caps PPP loans at $2 million. The act also sets aside $12 billion specifically for minority-owned businesses.