Second round of PPP loans could be open to even more fraud
On Monday, the Small Business Administration began accepting applications for new Paycheck Protection Program loans authorized in the stimulus package passed last month. The same day, the Inspector General of the SBA ad that more than 57,000 potentially ineligible borrowers withdrew $ 3.6 billion from the program last year.
The Inspector General’s office came to this conclusion by comparing a list of P3 loan recipients with the Treasury Department’s Do Not Pay list, a compilation of individuals and entities ineligible to receive federal payments. The result was that 57,473 loans “matched a DNP data source record, indicating loan ineligibility,” the Inspector General found. Intriguing but mysterious fact: Only 10 of 3,403 PPP lending service sites – bank offices, for example – “accounted for 49% of matched loans,” the report says. But it does not disclose the 10 locations.
The SBA says that in the second round, all claims will be checked against the Do Not Pay list. This is obviously a prudent step, but far from sufficient. Abundant anecdotal evidence and common sense suggests that many candidates who were never on the DNP list simply fabricated information about their candidacies – and the new stimulus law makes these basic frauds even easier to commit.
This is the result of well-intentioned new rules for obtaining PPP loans and canceling those loans. The CARES law, passed in March, urged the SBA to prioritize “small businesses and entities in underserved and rural markets,” including businesses owned by ex-combatants, women, and the socially and economically disadvantaged. . But the House selection subcommittee on the coronavirus crisis found last october that loans went disproportionately to large corporations and borrowers who already had relationships with large banks.
In response, most of the money for Round 2 loans is reserved for businesses that have obtained a Round 1 loan, with tighter restrictions on the new loan. Applicants for Round 2 cannot have more than 300 employees (up from 500 in Round 1) and must show that income was impacted by at least 25% in the first, second or third quarter of last year by compared to 2019. Round 1 loans did not impose such a requirement, so even successful businesses could get a conditional payback PPP loan.
But in trying to make the process easier for hard-hit small businesses, the new law invites more fraud. For loans of $ 150,000 or less, the vast majority of PPP loans, the applicant does not need to document the 25% income required. For the SBA to cancel the first-round loans, borrowers had to complete three forms and a spreadsheet, supported by five pages of instructions, and potentially submit dozens of documents. Under the new law, borrowers of $ 150,000 or less can obtain a full pardon by submitting a one-page certificate. The experience of Round 1 shows that many people will find these cheating opportunities irresistible.
Large-scale PPP fraud was inevitable. Venture capitalist Alex Rampell posed this rhetorical question at Fortune when the program started: “How many times in history has $ 350 billion been distributed without face-to-face verification and a few PDFs in two weeks?” The Justice Department set up a PPP team on the day the program was set up, and the FBI has since opened hundreds of investigations. Florida couple allegedly used their fraudulently obtained loan to purchase a seven bedroom mansion; a man would have used his for buy a Lamborghini.
For years to come, we will hear how billions of dollars did not go to the business owners who needed them. This is another reason to hope that we will never see this again.
After political cover of Fortune:
This story was originally featured on Fortune.com