When disaster strikes, unfortunately criminals view it as open season for committing of financial fraud. The coronavirus pandemic certainly qualifies as a disaster, and fraudsters have been quick to seize upon the opportunity presented by the Paycheck Protection Program, a piece of legislation meant to help small businesses that have been waylaid by the impact of COVID-19. In today’s podcast, Sonia Desai, managing director of Weaver in Austin, Texas, discusses what makes the PPP susceptible to fraud, popular ways by which fraudsters are looking to perpetrate their schemes, and the possible impact on legitimate borrowers.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

Sadly, over time, we have learned that time periods around which disasters occur are frequently susceptible to fraud in the financial realm. The onset of coronavirus certainly qualifies as a disaster. And unfortunately, when financial aid via the Paycheck Protection Program was established to help small businesses get through this continually challenging time, fraudsters were not far behind. Today, we are talking with Sonia Desai, managing director at Weaver in Austin, Texas, to discuss aspects of the Paycheck Protection Program that make it susceptible to fraud, popular ways fraudsters are seeking to carry out their schemes, and more.

Can you tell us a little bit about the mindset of a fraudster? What would drive them to want to illegally obtain funds from a program meant to aid small businesses in the middle of a pandemic? Is there a profile they usually fit?

[Desai] There's a theory in fraud, they call it the fraud triangle. This theory suggests that there's three key elements that need to be present when someone decides to commit fraud. Those three elements are opportunity, pressure, and rationalization. Putting that into the context of the PPP program, starting with opportunity, the PPP presented a great opportunity to fraudsters where there's been an unprecedented amount of government funding being deployed at a rapid pace. Unlike other government economic stimulus programs, this was really the first time that loans were completely forgivable, which many people perceived as free money.

Looking at the second element, pressure, again, keep in mind the PPP was implemented in response to a global pandemic. Businesses were disrupted, unemployment rates were skyrocketing. It's really not surprising that people felt financial pressure to commit fraud. These were really desperate times. Then, finally, the rationalization. It really speaks to the fraudster's mindset and his or her justification to commit the fraud. Here I can really only speculate what the rationalization could be for the fraudsters that have been prosecuted so far.

It may be that they told themselves, "Hey, it's a loan, and I fully intend to pay it back." Or they suffered some kind of a hardship, either a loss of employment or the loss of their business that made them think that these stimulus funds were intended to help people like them. With the high volume of the loans that were made, it's likely that ... we all heard our friends, neighbors, and colleagues talking about people taking advantage of this program. These fraudsters, they're also observing others around them applying for PPP loans and taking advantage of the program. They thought that they were doing nothing wrong.

Are there any aspects of the Paycheck Protection Program in particular that make it susceptible to fraud?

[Desai] I would say yes. The government really prioritized the speed of the funding process in order to ensure that businesses that were hurting as a result of the pandemic could get released faster. The objective of the PPP was to get the funds in the hands of small businesses so they could keep Americans employed. In order to expedite the funding process, Congress allowed lenders to bypass the more traditional due diligence and underwriting practices that they would typically perform and instead rely more heavily on sort of good-faith self-certification despite borrowers.

Then, the U.S. Government Accountability Office – that sort of is the oversight over this program – commented that reliance on applicant self-certifications can leave the program vulnerable to exploitation, and because of the limiting loan underwriting that lenders and the SBA really have less information to look at and review in order to detect errors and fraud when they happen.

What are the popular ways we're seeing by which fraudsters are trying to perpetrate these schemes in this case?

[Desai] My last count was that the Department of Justice has filed charges against 65 borrowers now. They're alleging collectively that they tried to fraudulently obtain close to 230 million in PPP loan funding. Amongst these cases, there are definitely common themes in how the fraudsters perpetrated the fraud. It looks to be the most popular scheme was that they would create fake companies or they would use defunct companies. Perhaps they had a company that just went out of business years ago. They are often committing identity theft and using information belonging to others, including business information, to apply on behalf of those companies.

So, it's faking the company that it existed, faking the fact that they had employees, falsifying supporting documents that feed into their application, including tax returns and payroll records, bank statements. Even legitimate businesses that are still operating that were operating throughout the pandemic were inflating the number of employees and their payroll costs in order to obtain higher levels of loans. So those are the most common occurrences that I've seen. In one case, the defendant was actually found to submit a list of employees that investigators later found were obtained from a publicly available random name generator on the internet. It's really just falsification of documents, falsification of the existence of companies and employees.

Would you say that there were any risks identified about the Paycheck Protection Program prior to its introduction? If so, why were they not properly addressed? Would you say that the PPP was possibly rushed out too quick?

[Desai] Yes. Certain risk areas were identified in relation to just generally the SBA 7(a) loan programs. The Office of the Inspector General reported on these risk areas and they provided lessons learned from previous economic loan stimulus programs, and they made recommendations to address the risks that were identified. It appears that in the report by the U.S. Government Accountability Office, that these risks were not adequately addressed. But as we've discussed, Congress, they were prioritizing timeliness of the funding in an effort to get the money working to help keep Americans employed.

It would have done no good to anybody to take months to process applications and submit funding. Those businesses were on the verge of laying employees off. I think what the SBA intends to do is implement safeguards on the backend after loan approval and maybe even after loan forgiveness through an audit of loans over $2,000,000 and even possibly loans under $2,000,000. Also keep in mind that there's a long statute of limitations on the PPP loan. The government has up to six years to review and recover any loans that they determined were obtained fraudulently and file criminal charges.

Are these sorts of fraud attempts unique to the Paycheck Protection Program or is it an issue that comes up with most economic stimulus programs?

[Desai] These frauds are definitely not unique to the PPP. The Office of the Inspector General has reported on previous government stimulus programs and identified instances of inappropriate or unsupported loan approvals. In fact, an annual report by the Association of Certified Fraud Examiners reports that organizations typically lose approximately 5% of revenues each year due to fraud. This problem is not unique to the PPP or even to government stimulus programs. However, the unprecedented volume of the loans issued in the PPP makes it likely that the number of fraud cases that will be filed will exceed anything experienced with other economic stimulus programs.

Do these sorts of frauds have any kind of adverse effect on legitimate borrowers? Either way, what do borrowers have to do to ensure that the loan forgiveness process runs smoothly?

[Desai] These frauds really should not impact legitimate borrowers. Borrowers simply have to demonstrate that they were eligible to receive the loans, that they applied for the correct load amount based on their monthly payroll costs, and that they spent the PPP loan proceeds on authorized expenses. When you think about it, it's pretty straightforward. You follow the rules and you'll be fine.

If there's any question in their minds, I would encourage borrowers to call their CPA, their attorney, or other advisor and seek advice, because certainly there is a lot of room for interpretation. There's been evolving rules and guidance around this program. So it's very important to understand and stay current on those rules and guidance as they continue to evolve. Then document everything. I would say err on the side of too much documentation. Keep an audit trail of your expenses and just seek advice where you feel that you're not a 100% certain about something.