PPP Loan Fraud
The Paycheck Protection Program (PPP) was launched in April 2020 as part of the Cares Act to provide a lifeline for businesses struggling to pay employees due to the fallout of the COVID-19 pandemic.
The program set up forgivable loans for small businesses and eventually distributed the funds, at least in large part, via web-based financial technology companies. This included fintech companies such as Kabbage and BlueVine Capital, as well as banks and nonbank lenders including Cross River Bank, Celtic Bank, and Ready Capital.
As much as it helped many businesses, the speedy implementation made the program a target for fraud. Investigations have revealed that a substantial amount of money distributed via the program went to ineligible recipients. Some businesses eligible to receive money used it improperly. The US Department of Justice (DOJ) continues to investigate reports and fraud and has already filed charges in several cases.
What are the Examples of Fraud?
The investigations uncovered several types of fraud. For example, some of the companies that applied for loans were non-existent or dormant. One Texas business received approval for a $3 million loan without a website, social media presence, or valid business address. Another Arkansas business received $2 million for a business that wasn’t in good standing with the secretary of state.
Note that not all of the borrowers linked to fraud broke the rules of the PPP program. Many weren’t even accused of wrong-doing. Many of the businesses even complied with SBA directives regarding the loans.
Instead, borrowers took advantage of the opportunity fast-tracking funds provided. The goal was to get the money distributed as quickly as possible, for good reason. But the program had flaws.
To achieve this, the Department of the Treasury and the Small Business Administration (SBA) expanded the program to allow fintech companies to help with distribution.
Fintech Companies Took Over Approval and Distribution
Originally, only the largest banks working with existing companies were handling distribution, but this made it difficult for small businesses to get the funds they needed. This was especially true due to limited timeframes or collecting the funds before they ran out.
But this wasn’t the case with the second round once the fintech companies stepped in. They handled most of the second round. In some cases, as was the case with Kabbage, these companies had never handled SBA loans.
The vast majority (more than 75%) of loans handled through Kabbage were approved without human review of applications. Many loan applications took no more than four hours to receive approval.
Under normal circumstances – not in a world facing a pandemic drastically affecting businesses – firms automating their underwriting and approval process would be on the hook for any losses. But in this case, with SBA-guaranteed PPP loans, taxpayers will likely foot the bill for fraud.
But despite the flaws in the program, some borrowers were charged with fraud. So far, the cases brought by the Justice Department include millions in fraud allegations. The SBA said it isn’t holding lenders or banks accountable, but as more information comes to light, investigations have begun.
To read more about the investigation, check out this article from Bloomberg.
DOJ Investigations Into PPP Loan Fraud Underway
Recently, the DOJ has begun aggressively targeting businesses and individuals suspected of submitted fraudulent applications and using funds illegally.
So far, charges include:
- Creation of shell companies
- Falsifying payroll information
- Using loans for lavish personal expenses
- Attempting to obtain multiple loans
If a DOJ investigation reveals evidence of fraud, businesses and individuals could face charges including:
- Aggravated identity theft
- Bank fraud
- Attempt and conspiracy
- Wire fraud
- Tax evasion
- And more
If you believe the DOJ is targeting your business or plans to investigate you personally for PPP loan fraud, you need to contact an attorney. To learn more about the available defenses or to discuss your situation with an attorney, contact David Lindsey to schedule a free consultation.