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Paycheck Protection Program Fraud

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The Paycheck Protection Program (“PPP”), established by the CARES Act, is a Small Business Association (“SBA”) loan intended to help businesses with 500 or fewer employees keep their workforce employed during the COVID-19 crisis. Congress initially allocated $349 billion to the program in the first stimulus package, and added an additional $310 billion in April. Unfortunately, since its launch in April, there have been numerous issues with the program, including technological problems, loopholes for larger businesses, and lack of access, specifically for women and minority owned businesses.

Another issue that has surfaced with the PPP is the potential for fraud, which unfortunately is not uncommon during a time of crisis. A program offering potentially forgivable loans will be a natural target for scammers, and already the Justice Department has charged two men, David A. Staveley of Andover, Massachusetts, and David Butziger of Warwick, Rhode Island, with conspiracy to make a false statement to influence the SBA to obtain a loan and conspiracy to commit bank fraud. Additionally, Mr. Staveley has been charged with aggravated identity theft.

These two individuals sought more than $540,000 in forgivable loans to pay employees of four small businesses, three of which were restaurants. However, according to the Justice Department, two of the restaurants had closed prior to the COVID-19 pandemic, and another restaurant was not actually owned by either of the two men. Mr. Butziger filed another application for a PPP loan for an unincorporated entity called Dock Wireless in order to support payroll for seven full-time employees that had to be laid off due to the pandemic. However, the Rhode Island State Department of Revenue had no records of employee wages paid by this entity in 2020.

These are the first charges associated with the PPP, and federal investigators have indicated that they will not be the last. Assistant Attorney General Brian A. Benczkowski said that the Justice Department, “has a lot of leads and there are multiple ongoing investigations of individuals and small businesses,” as the Department seeks to root out fraud in the PPP.

Current estimates are that fraud rates within the program could be as high as ten to twelve percent, which unfortunately is in line with fraud rates in previous federal disaster programs. In 2006, the United States Government Accountability Office (“GAO”) found that in response to Hurricane Katrina and Hurricane Rita, approximately sixteen percent of the payments issued by the Federal Emergency Management Agency for disaster relief were improper or potentially fraudulent. In the report, the GAO indicated that this figure could be understated, and that the need to issue payments quickly to those in need exacerbated the problem. This same situation could easily occur now, as a record number of Americans are out of work and small business owners are trying to avoid going out of business.

The Treasury Department has indicated it will also be auditing PPP loans of $2 million or more and spot checking smaller loans, with Treasury Secretary Steven Mnuchin stating that a payroll report showing that funds were actually spent on payroll will be required for loan forgiveness. However, a rush to issue funds and having to deal with ever-changing guidance on the program will make it difficult to detect fraud in the loan process, as lenders have less time for Know Your Customer and further due diligence tests.

Analytics are being used to identify red flags in loan applications and whether businesses that have received funds from SBA lenders are using the funds for the intended purposes. Mr. Benczkowski indicated that the Justice Department expected to see false statements about how loan proceeds were used in order to obtain loan forgiveness.

Additionally, stressed out small business owners acting in good faith can also be easy targets for scammers. Be aware of the following scenarios to protect yourself from fraud:

  • Similarly to the IRS phone scams, the SBA will not contact you to initiate a loan. If you are a business owner and you are contacted by an individual claiming to represent the SBA and offering you a loan, assume this is fraud.
  • If you are contacted by an individual promising to get you access to a PPP loan but requiring payment up front, this is likely fraud.
  • Any e-mail communication coming from SBA will come from accounts ending in sba.gov. Be aware of phishing e-mails, especially any e-mail that requests any personally identifiable information. A new phishing campaign asks recipients to click a link to review and sign a file related to an alleged PPP loan application, and once the link is clicked, a prompt appears asking the user to sign in to their Microsoft account. Any information entered here will be obtained by the scammers responsible for the e-mail. Be aware of misspelled words, poor grammar, or strange looking e-mail addresses.

Fraudsters can use these methods to obtain information from unsuspecting small businesses and use that information to fraudulently apply for funding.

If you are a small business owner that has either received a PPP loan or are trying to receive a PPP loan, all of this can be a little frightening. It is important to make sure that your own representations in loan applications are accurate and to have the appropriate documentation to support utilization of the PPP funds in accordance with the loan forgiveness stipulations. No business is too small to avoid a potential government audit, but preserving supporting documentation and making accurate loan submissions will help business owners be prepared for potential scrutiny.

Additionally, be vigilant in any communications you receive about PPP loans in order to ensure legitimacy. Taking an extra two minutes to look over any e-mails received related to COVID-19 in general can make a huge difference in protecting your business from fraud.

Megan Kelly, SobelCo 
Megan.Kelly@SobelCoLLC.com

 

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