Throughout the COVID-19 pandemic, the United States Small Business Administration (SBA) provided $1.2 trillion of crucial emergency financial assistance to millions of businesses through the COVID-19 Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP) initiatives. However, several years later, we continue to see the fallout resulting from the fraudulent loans dispersed through these programs.
PPP loans, in particular, were disbursed quickly, with little burden of proof placed upon the requestors to authenticate their prior business revenues or confirm the business existed as a functional business. Such lax requirements resulted in the distribution of over $64 billion in PPP funds to potential fraudsters. By January 2023, 92% of all PPP loans had been granted full or partial forgiveness.
PPP Fraud Investigations
PPP investigations have been conducted since the beginning of the pandemic. Still, with prosecutors’ limited bandwidth and the majority of these loans totaling $20,000 or less, it seemed the fraudulent actors who procured lower-cost loans would not be held accountable. Local units of government, however, have continued to actively review the actions of their employees, and investigations into the fraud are moving forward, along with the prosecution of government employees who illegally obtained loans.
For local governments, the key issue is whether a public employee assigned to a role of trust or leadership took PPP funding during the COVID-19 pandemic without eligible circumstances or in conflict with mandatory disclosures. Such activity is not only illegal on the part of the employee but also embarrassing to the organization and can call into question their hiring and retention practices.
As a result, there has been a focus on disclosing the recipients of PPP loans and their connection to the government unit. For example, an investigation by the Chicago Public Schools Office of Inspector General (CPS OIG) revealed that, of the 780 full-time employees identified as receiving PPP loans, 14 employees were initially identified to have falsified applications to receive up to $21,000 in fraudulent loans. Most of these employees held leadership and central administration roles with annual salaries of over $100,000.
One of those employees was a high-ranking CPS administrator earning more than $200,000 per year who admitted to applying for a $15,000 PPP loan, which was later forgiven following a separate forgiveness application. In addition to misrepresenting their income and expenses on the loan application and other documents, the employee admitted to inflating their self-employment income to qualify for a larger loan while failing to inform the district of the second business as part of mandatory disclosures.
Uncovering Potential PPP Fraud
Employers concerned about such risks in their organizations would be well-served to explore the potential for PPP fraud activity. Yet, most local governments do not have watchdog agencies to monitor fraud within their organizations and those that do have limited resources when faced with the unforeseen volume of potential fraud cases. Organizations can consider the following measures to identify recipients of PPP loans and prevent potential embarrassment caused by employees committing fraud:
- Review and confirm disclosure requirements. Concerned governmental units should confirm disclosure policies and determine whether there are potential issues for employees based on their roles to ensure there is no conflict of interest in the jobs employees perform. At a minimum, employee disclosure requirements should be reviewed for secondary employment and other business ownership and the potential conflicts such action may bring to their organization.
- Search the PPP database. Some municipalities have initiated a search for employees’ names in the PPP borrower database to identify whether they received a PPP loan. While this is a good first step, knowledge of the employee’s business name is helpful since the loan would be listed under the actual borrower, which could be the business. Unfortunately, most government employers do not have this information.
- Conduct a due diligence background investigation. Organizations with significant concerns would benefit from engaging a specialist with an investigative due diligence background. An experienced investigator has the resources and technical expertise necessary to uncover any employee conflicts of interest or potentially fraudulent activity. Using online investigative tools, interviewing and background checks, they can discover employees’ financial backgrounds, relationships and business activities to help identify fraudulent activity before it surfaces publicly.
Make Informed Decisions and Reduce Exposure
Jensen Hughes’ team of due diligence investigators helps organizations understand their exposure to fraud and mitigate the risks of regulatory, reputational or financial harm. We use our expertise in compliance, financial crimes, forensic analysis, data analytics and cyber investigations to ensure clients have all the facts and information needed to make the best decisions. Learn more about Jensen Hughes’ Due Diligence Investigation services.
