Debra Geister, a Senior Director in Treliant’s Corporate & Regulatory Compliance service area, is a veteran of the financial crimes risk and compliance industry. Her current areas of focus include Paycheck Protection Program fraud and advanced technologies such as robotic process automation for risk modeling and mortgage testing. Previously Debra…
Just as the Payroll Protection Program (PPP) entered its second round of funding this year, the U.S. Department of Justice announced in January that it had reached the first settlement of a False Claims Act (FCA) violation. The case involved an internet retailer and bankruptcy debtor in California that admitted making false statements to obtain PPP funds. The company and its CEO agreed to pay $100,000 in damages and penalties.
This landmark settlement opened the door to additional actions under the FCA and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The Small Business Administration (SBA) has faced scrutiny of its handling of the PPP program since Phase 1, which extended $349 billion in loans in 2020. By this March, the Justice Department had brought PPP fraud cases against 120 defendants and signaled that there would be more to come.
As PPP funds have moved into the economy to support small businesses, fraudsters have jumped into the funding streams. Fraudulent applications, in many cases, involve entities and organizations that have been formed very recently. Sometimes, applicants have sought multiple loans to multiple entities with the same ownership at the same address.
Meanwhile, in an effort to expedite access to funds, some lenders’ “know your customer” and enhanced due diligence processes may have fallen short. Because of the quick rollout, fraud controls were limited and as a result, PPP loans are presenting challenges for financial institutions including reputational risk as well as potential losses.
PPP Program Updates Compound Challenges
Is your organization clear about the risks of PPP loans? Do you have the resources to support this program? Recent program changes under the Biden Administration have compounded the challenges facing financial institutions. Those updates include:
- Instituting a 14-day wait period for small business access
- Giving sole proprietors, independent contractors, and self-employed individuals more financial support
- Ending a restriction that prevented small business owners with prior non-fraud felony convictions from obtaining PPP loans
- Eliminating a restriction that excluded small business owners with delinquent student loans
- Allowing non-citizen small business owners who are lawful U.S. residents to use an Individual Taxpayer Identification Number to apply for funding
These changes will expand access to PPP loans for underserved groups of business owners but can provide additional challenges for financial institutions’ customer due diligence processes. Clearing flags or reviewing the loans’ risks to your institution can take weeks, which is contrary to the mission of the PPP program. How can you balance getting funds out quickly with managing risk?
Scenarios that Raise Questions
Here are just a few of the scenarios we have seen in the PPP lending portfolio:
Newly Formed Organizations: Even though PPP was created to support keeping employees on payroll, there are examples of newly formed organizations receiving funding. In some cases, new organizations were added to existing businesses to increase funding. Such organizations clearly do not meet the intent of the program, if they were created just to get a loan, and should be scrutinized further.
Misrepresentation of Payroll and Staff: Entities are giving payroll totals from previous years that are inconsistent with public records. Some applicants show in public data sources that they have one or two employees, but applications have stated totals many times higher. One applicant showed a single employee in public records but for the PPP loan application alleged more than 200 staff members across several entities at the same address.
Connections to High Risk: Our research has revealed applications and funding to organizations with direct ties to hostile nation-states and other high-risk entities. These connections are not obvious on the surface, but our linking analysis has revealed second-, third-, and fourth-level connections to high-risk organizations. These include:
- Entities with sanctioned ownership
- State-owned organizations tied to Russia and China
- Shell and shelf companies
- Incarcerated individuals
- Convicted human traffickers
- Known money launderers
- Businesses that are unlicensed or not in good standing
Marijuana-Related Businesses: Even though the PPP program states that marijuana-related businesses are excluded, we have identified numerous examples in application files.
Because of these potential fraud and high-risk issues, it is possible that your institution may be left holding loans that will not be forgiven. Nor are loans that are fraudulent likely to perform. So if they are not forgiven and paid back by the government, will your institution have to write off the losses?
The Bottom Line
The PPP program’s quick creation and rollout have left it vulnerable to fraud and misrepresentation. Ongoing scrutiny for fraud and denial of forgiveness will continue to impact PPP lenders, who need to understand the risks involved. Application fraud could be a liability for your financial institution, so make sure to analyze the risks of your portfolio regardless of how large or small the size of the loan.
Treliant’s PPP Services
Treliant has the tools, technology and resources to help you mitigate PPP risk.
Let us perform a risk review of your program and portfolio. We can assist in identifying potential risk to your organization. Or we can provide additional resources to do primary or secondary loan reviews. At the same time, we can help minimize client impacts and create a positive experience for small business customers.
Our technologies, experienced staff, and audit expertise can support your understanding of applicant risks while assuring that you meet program requirements.
Our support teams can assist with backend reviews and help to clear flags on loan applicants using our PPP loan fraud review tools. Whether you need to hand off parts of the review process or just submit report requests, our experienced staff and focused tools can assist in managing your PPP loan operations.
Services we can provide include:
- Fraud reviews and reports
- Staff augmentation
- Process outsourcing
- Secondary portfolio/program review
- Diversity impact assessment
- Market penetration assessment