From the desk of Rose Oswald Poels, President and CEO, Wisconsin Bankers Association
PPP’s Elevated Fraud Risk
When the PPP program was first created by Congress at the end of March, everyone expected it to be a narrowly focused, short-lived program. Now, four months later, the program continues to exist, completed forgiveness applications can’t be submitted until Aug. 10, and Congress is likely to extend the program’s application phase beyond the current deadline of Aug. 8 into October or later this year. It should be no surprise then that in addition to the fraud we are seeing with EIDL loans, bankers and others across the country are also discovering fraud with PPP loans.
In late June, the Government Accountability Office (GAO), which is the agency in charge of overseeing spending for the CARES Act, announced its determination that there is “significant risk” of fraud for Paycheck Protection Program loans.
In its report, the GAO said “because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved. In addition, the lack of clear guidance has increased the likelihood that borrowers may misuse loan proceeds or be surprised they do not qualify for full loan forgiveness.” In a recent interview with Entrepreneur magazine, Tom Miller, the CEO of risk-management firm ClearForce, estimated there is more than $1 billion in verified criminal fraud within the PPP program.
The Treasury and SBA designed the PPP loan application for speed and ease-of-use, requiring much less documentation and verification than a standard commercial loan. That, combined with the incredible speed with which banks were pressured to process the influx of loan applications and the moving target of requirements from the agencies, resulted in an environment ripe for fraud.
Wisconsin’s community banks responded to this challenge by leveraging their pre-existing strong connections with customers. Some banks only processed PPP loans for existing customers in order to reduce the risk of fraud, and those that did accept applications from non-customers often sought additional information in order to fulfill “Know Your Customer” regulations beyond what is required by PPP.
In addition, WBA supplied member banks with numerous resources, including an extensive FAQ document—updated daily, or even more frequently as SBA issued guidance on the program—and a Forgiveness Calculator as well as a PPP Loan Forgiveness Guide to help small business owners determine their eligibility and whether they will qualify for loan forgiveness. All of these resources, and more, can be found at www.wisbank.com/coronavirus.
Despite the elevated risk, going as far back as early May, the U.S. Department of Justice (DOJ) has only brought charges in 13 cases related to PPP and COVID-19 relief fraud, none of which occurred in Wisconsin. The steps Wisconsin’s banks took to vet and verify customers and non-customers seeking relief funds have helped mitigate their risk of fraud. In most of the cases involving the DOJ, the perpetrators allegedly sought (or obtained) PPP funds by making false statements on the application, including filing for a business that does not exist, claiming payroll expenses for nonexistent employees, and filing with multiple institutions for the same business, or the perpetrators used legitimately obtained PPP funds for illegitimate purposes, including paying off personal debt, financing extravagant purchases of jewelry or watches, and—in one $8.5 million case—gambling.
If any WBA member bank suspects they have receive a fraudulent PPP application, they are encouraged to report it to SBA using the resources below. In addition, the WBA Legal Call Program, a free resource for members, is available to answer questions (contact 608-441-1200 or via email).
Detecting fraud related to SBA loan programs: https://www.sba.gov/document/information-notice-9000-1793-detecting-fraud-small-business-administration-lending-programs
Reporting fraud related to SBA loan programs: https://www.sba.gov/partners/contracting-officials/contract-administration/report-fraud-waste-abuse