$4 Billion in PPP Loans Already Flagged for Review

The Current State of PPP Loans

Recent reports indicate that $4 billion in Paycheck Protection Program (PPP) loans have already been flagged for review. The positive news is that the federal government approved approximately $525 billion in loans to over 5.2 million small businesses between April and early August 2020 through the PPP. These loans were processed by over 5400 lenders. The PPP was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to assist small businesses that were struggling due to the economic impact of the pandemic. The primary goal of the program was to provide quick financial support to small businesses in order to retain their employees and cover essential expenses like rent, mortgages, and utilities. If businesses used the funds according to the PPP rules, they could apply to have the loan fully forgiven, effectively turning it into a grant.

Now that the PPP is no longer accepting applications as of August 8, 2020, closer scrutiny is being given to the fast processing of these loans, specifically to spot any potential indications of fraud.

Early Signs of Fraud

Unfortunately, preliminary analysis of the PPP data conducted by the Congressional Select Subcommittee on the Coronavirus Crisis suggests that there may be up to $4 billion in fraudulent loans. For instance, House Democrats identified red flags in nearly $3 billion worth of PPP loans after cross-referencing the borrower information with a federal business registration database. According to House Democrats, these companies had no record in the tax ID database, raising suspicions of fraudulent activity.

See also  Are You Familiar with Reptile Theory in the Legal World?

Other instances of fraud include companies receiving multiple loans and companies that were ineligible to do business with the government under the System for Award Management (SAM) database still obtaining loans.

Notable Examples of Misused Funds

While the media has focused on attention-grabbing headlines about luxury cars being purchased with PPP funds, such as a Florida man buying a Lamborghini worth $314,000 and a man in Texas using bailout funds for a Lamborghini, an SUV, and a new Ford F-350, there are more readily identifiable red flags in the loans.

The Importance of Proper Due Diligence

In order to identify potential fraud, conducting thorough due diligence is crucial. Standard Know Your Customer (KYC) procedures can help pinpoint red flags, such as confirming the business’s operational status as of February 15, 2020, verifying that the business or its principals are not currently bankrupt or on a debarred/government exclusion list, checking if any owner with a 20% or more interest in the company is facing felony charges, and confirming if any owner has a history of felony fraud, bribery, embezzlement, or false statements convictions within the past five years. These verifiable elements can be cross-checked using public records data.

Scrutiny, Audits, and Investigations

As the review process begins and companies start submitting forgiveness applications for their loans, several key details emerge. Any loan recipient must retain loan paperwork for a minimum of six years. Loans exceeding $2 million will face additional scrutiny under the current audit plan, and random spot check audits will also take place.

The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has pursued 24 enforcement actions against banks and other organizations, resulting in the conviction of 291 individuals, including 76 bankers. SIGTARP’s audits and investigations are expected to lead to significant criminal and civil enforcement actions in the coming months.

See also  The Indispensable Advantages of an Effective Risk Assessment Tool

Additionally, the Department of Justice (DOJ) established a PPP fraud team in collaboration with the FBI, IRS Criminal Investigation, SBA’s Office of Inspector General, and the FDIC’s Office of the Inspector General. Their goal is to hold fraudsters accountable and prevent future fraudulent activities. The DOJ has already charged 57 individuals with attempting to defraud the PPP, involving a total of over $175 million in attempted theft and causing losses to the government of over $70 million.

The Lessons Learned

While it is essential for legitimate businesses to access necessary government relief funds, it is equally important to prioritize due diligence and know your customers. Implementing technology-driven solutions can help meet both needs effectively.

As Congress debates additional stimulus packages, especially concerning more PPP lending, let us hope that the lessons learned from the initial rollout will lead to stronger fraud detection measures being implemented beforehand.

For more information, visit Garrity Traina.