Report: Up to 41% of SBA Relief Loans May Be Fraudulent
Scammers may have plundered up to $78 billion of taxpayers’ money from a Small Business Administration (SBA) pandemic relief program that had “lowered the guardrails” against fraud as it struggled to process millions of applications for loans, said a new watchdog report.
The Office of the Inspector General (OIG) of the SBA investigated the Economic Injury Disaster Loan program (EIDL), which provides loans of up to $2 million to small businesses, nonprofits, and farms. As of July 31, the administration had approved $169.3 billion in loans and $20 billion in emergency advance grants, of which nearly 41% was potentially fraudulent or raised red flags, the OIG said in its October 28 report.
The report shows how the SBA was overwhelmed by a flood of loan applications as the pandemic hit, and as of the end of July, had lent more for COVID-19 than it had for all other disasters combined since its founding in 1953. To deal with the 14 million applications that had come in by July 31, the SBA weakened controls that were designed to prevent fraud, the report said. For example, it eliminated a rule that had required two officers to approve each loan, and when a contractor sent loans in batches of 25 to 50, SBA employees approved them with little to no vetting, substantially increasing the risk for fraud.
Scammers allegedly took advantage of the lowered safeguards by getting relief loans using phantom companies. They sent showers of bogus applications knowing that some would be approved. They even took out loans meant to help American businesses, then transferred funds to foreign countries, the report said.
Among the examples of suspicious activity uncovered by the OIG:
- Someone applied for 10 farm loans using the same email address with the period moved around within the address, and received $506,700.
- The SBA approved loans to applicants who did not provide their name, or identified themselves as “NA” or “Self Employed.” It approved 1,148 loans to applicants who gave their name as “Uber.”
- Almost a quarter of a million loans were approved without any bank account information, and 136 of these were disbursed, leaving the OIG unable to determine where the money went.
- Some SBA employees and contractors were fired for giving loans to themselves.
- A person or people using a single IP address, which appeared to be a fish market with six locations, applied for 85 loans in the names of jewelry stores, psychiatric services, construction companies, and gas stations, and was lent $9.3 million.
Investigators flagged loans as potentially fraudulent if the applicants changed bank account information after applying, or if multiple applicants used the same Internet Protocol (IP) address, the same mailing address, or the same bank accounts.
SBA management clashed with inspectors over the report’s conclusions. SBA administrator Jovita Carranza wrote, in a letter appended to the report, that it “grossly overstates the risk of fraud, waste and abuse” in the loan program.
She said the report misidentified legitimate loans as potentially fraudulent, and noted there were other explanations for multiple applicants using the same mailing address or sharing IP addresses or bank accounts. For example, multiple independent contractors often submit applications using the corporate headquarters or regional offices of the companies where they work.
“SBA’s management continues to insist that its controls are robust despite overwhelming evidence to the contrary,” the OIG report said. “Our analysis of SBA’s COVID-19 EIDL loan and application data highlights strong indicators of ongoing fraudulent activity.”
The OIG is not the only watchdog to raise the alarm about fraud in the SBA program. The Government Accountability Office said recently that the administration was vulnerable to abuse due to the speed with which it has had to handle applications for the EIDL along with the $521 billion Paycheck Protection Program, which also provided aid to businesses.
Despite disagreement over the OIG’s findings, the SBA has been taking action to correct the problems that it uncovered, the report said.
Office of Inspector General, U.S. Small Business Administration. "Inspection of Small Business Administration's Initial Disaster Assistance Response to the Coronavirus Pandemic." Accessed Oct. 29, 2020
United States Government Accountability Office. "Small Business Administration COVID-19 Loans Lack Controls and Are Susceptible to Fraud." Accessed Oct. 29, 2020