The Department of Justice (DOJ) recently charged two businessmen in Rhode Island with fraudulently seeking PPP loans, the first in the country linked to the loan program. Industry officials warn it won’t be the last. In fact, they estimate fraud rates could be as high as 10% to 12% – consistent with loan fraud from other disasters.
In the case of the two men in Rhode Island, there were several red flags pointing to fraud. Their loan requests, according to court documents, were made to pay employees for a business that was not operating at the time of pandemic and had no salaried employees. In one instance, the business was not even owned by one of the borrowers.
“Thankfully we were able to stop them before taxpayers were defrauded, but today’s arrests should serve as a warning to others that the FBI and our law enforcement partners will aggressively go after bad actors like them who are utilizing the COVID-19 pandemic as an opportunity to commit fraud,” said Joseph Bonavolonta, Special Agent in Charge of the FBI’s Boston Field Office, in a DOJ press release.
Other forms of fraud include identity theft, misrepresentation, such as inflating payroll numbers, and “loan stacking,” which the OCC refers to as an applicant receiving PPP loans from multiple lenders.
Ruth’s Chris Steakhouse, Shake Shack, and the Los Angeles Lakers made headlines last month when they, along with other public companies, received the small business loan. In response, the SBA and Treasury provided additional guidance in their FAQ stating businesses must “assess their economic need for a PPP loan” and certify “in good faith” that their request is “necessary.” Furthermore, the FAQ clarifies that the loans were not intended for companies with access to equity in the market. Borrowers that received loans prior to the issuance of the latest FAQ have until May 18, 2020 (extended from May 7 and May 14) to repay the loan in full to avoid “administrative enforcement.”
While U.S. Secretary of the Treasury, Steven Mnuchin has pledged to review all PPP loans over $2 million, the SBA has stated that all loans less than $2 million will be deemed to have been made in good faith, according to the lastest FAQ published. This is welcomed news for community financial institutions.