The COVID-19 pandemic challenged communities and businesses nationwide, and financial institutions were no exception. As part of the $2 trillion coronavirus stimulus bill, Congress authorized Paycheck Protection Program (PPP) funding. Under the PPP program, the Small Business Association (SBA) rolled out two relief rounds for certain small businesses. These funds were intended for new and smaller borrowers and borrowers in low- and moderate-income communities.
PPP fraud: How financial institutions can mitigate ongoing risk
March 29, 2023
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Detecting PPP fraud after the program's end date
BSA and fraud professionals saw a spike in fraud during the first two rounds of PPP funding. Here's how to detect fraudulent loans still in the portfolio.
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Takeaway 1
Prosecutors call PPP fraud the largest fraud in a generation. The impact we have seen so far is likely just the tip of the iceberg.
Takeaway 2
More than 15% of PPP loans were potentially fraudulent. Researchers estimate that $76 billion in PPP loan money was taken illegally.
Takeaway 3
Following the use of funds can lead to fraud detection, and regulators will expect enhanced due diligence on PPP fraud.
PPP fraud spikes
How PPP funding led to fraudulent loans
While individual stimulus checks and PPP funding helped many businesses during the crisis, a Government Accountability Office report concluded that the SBA’s organizational structure and priorities during the pandemic contributed to conditions that led to increased fraud. For example, the PPP applicants simply needed to self-certify information—the SBA did not have policies or methods to verify borrower information before funds were disbursed or forgiven. The Secret Service has estimated that $100 billion was illegally obtained from the relief programs.
COVID-19 relief fraud has been uncovered for some time, but the devastating numbers and impact are still being realized. According to The New York Times, more than 15% of PPP loans were potentially fraudulent, and financial institutions continue to discover fraudulent loans in their PPP portfolios today.
The U.S. Department of Justice continues to pursue charges against large companies that received multi-million-dollar PPP loans. It has also charged individuals accused of obtaining six-figure PPP loans to finance lavish personal expenses such as luxury vehicles, mansions, private jets, high-end jewelry, expensive vacations, and even plastic surgery.
The Biden administration has taken a hard stance to hold criminals accountable for COVID relief fraud. President Biden stated, "We must prosecute serious offenders and go after those who have the largest amount of stolen funds to recapture.”
According to both the SBA and the Secret Service, these initial criminal complaints are just the “tip of the iceberg”.
Next steps
How financial institutions can help track down PPP fraud
It’s not too late for financial institutions to review their remaining PPP portfolio for any indication of fraud. The following red flags are indicators of fraudulent PPP applications:
- Misuse of proceeds
- Unqualified borrowers
- New Employer Identification Numbers (EIN)
- Shell corporations/dormant EINs
- Recent business incorporations
- Inflation of payroll
- Large loan amounts
- False statements on applications
- Fraudulent supporting documents (e.g., payroll, tax forms)
- Employee/employer collusion
- Newly created and multiple bank accounts with abnormal transaction activity
- Consumer accounts rather than business accounts
- Rapid movement of money in and out of accounts
- Withdrawals made via cash or apps (i.e., Cash App, Zelle, Venmo)
- Abnormal transaction activity for the client
- Transfers to overseas accounts known for poor anti-money laundering controls
- Crime rings - multiple applications are submitted using phishing information
The fast rollout of the PPP program meant that financial institutions were under pressure to issue loans quickly and may have missed some of these signs. With all types of fraud on the rise, now is the time to include lenders in fraud training, including what to look out for when checking for PPP fraud.
Stay on top of PPP Fraud with our complete PPP Fraud Detection Checklist.
DownloadRetracing steps
Conducting due diligence after the fact
To detect any lingering fraud within a PPP portfolio, a financial institution should review the PPP loan documentation to ensure that the application and attestation are fully completed with no evident red flags. Be sure to:
- Ensure that current anti-money laundering (AML) procedures were followed
- Conduct negative news searches on an entity and all principals and beneficial owners
- Review public records for the existence and filing date of the entity (was it a viable business before the pandemic?)
- Complete a credit check if not done at onboarding. Is there evidence of “loan stacking”?
- Check that all related tax identification numbers (TINs) are valid and were obtained before SBA imposed deadlines
- Check that all borrowers are related to the business
In addition to these customer due diligence (CDD) procedures, financial institutions should conduct a complete relationship enhanced due diligence (EDD) review on PPP loans. This will require them to:
- Follow the use of loan proceeds from funding to the current date
- Review payroll expenditures and taxes. If funding account elsewhere, consider this a red flag and submit a 314(b) request if warranted
- Balance the borrower’s anticipated payroll costs with the number of employees
- Review for thorough financial institution records of loan decision-making and spending of proceeds
- Update policies & procedures to show enhanced due diligence for PPP loans
Financial institutions are required to follow Bank Secrecy Act (BSA) requirements and perform proper due diligence. Financial institutions should follow all Suspicious Activity Report (SAR) requirements for fraud reporting and start the 30-day SAR clock when fraud is detected. If a borrower does not comply with the PPP criteria and the loan is not forgiven, a SAR may be warranted for loans that are termed out.
In addition to filing a SAR, the federal government has asked that the following agencies be contacted immediately upon detecting PPP fraud:
- SBA at www.SBA.gov
- Local Secret Service field office at www.secretservice.gove/contact/field-offices/
- Other local federal offices (FBI, IRS, etc.)
AML/CFT units should work closely with lenders and senior management to ensure all relevant staff receive training, including PPP portfolio review and monitoring. It is equally important to perform CDD and transaction monitoring of these businesses. Regulators will expect enhanced due diligence since financial institutions know that PPP fraud has been widespread, so be proactive and weed out any PPP fraud in your institution’s portfolio before someone else does.
Stay up to date on AML/CFT and fraud trends with more professional development.
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