High-risk transactions identified

To combat PPP fraud, the SBA Office of Inspector General (OIG) has collaborated with the U.S. Department of the Treasury Do Not Pay (DNP) Business Center. 

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Lessons Learned

A New Round of PPP Funding

As communities across the country continue to struggle with the effects of the COVID-19 pandemic, good news has surfaced as the Small Business Administration (SBA) announces the rollout of another round of Paycheck Protection Program (PPP) funding. As part of the new $2 trillion coronavirus stimulus bill, the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act (Economic Aid Act), Congress authorized this round of PPP funding, which is available beginning Monday, January 11, 2021 for certain small businesses.  These funds are intended for new and smaller borrowers and for borrowers in low- and moderate-income communities. 

Unfortunately, this new PPP aid is shadowed by significant fraud with loan proceeds going to ineligible borrowers from aid authorized at the beginning of the pandemic.  In March of 2020, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent act authorized up to $659 billion for PPP. This relief package was signed into law to provide small businesses with the resources they need to maintain their payroll, hire back employees who may have been laid off, and cover applicable overhead during the pandemic. As with other federal relief programs, fraudsters were eagerly waiting to get their hands on this badly needed support.

Combatting Fraud

U.S. Department of the Treasury Do Not Pay List

The SBA Office of Inspector General (OIG) issued an alert January 11, 2021 to warn of improper PPP payments received by ineligible borrowers. Preliminary review and investigation by the OIG have identified concerns with internal controls and red flag indicators of fraud in PPP.  Treasury’s analysis showed approximately $3.6 billion in fraudulent PPP loans in 2020, approximately 1% of total loans funded to date.

In response to the amount of fraud detected last year, the OIG has collaborated with the U.S. Department of the Treasury Do Not Pay (DNP) Business Center, which identified high-risk transactions related to financial assistance to small businesses for the COVID-19 pandemic. To prevent this type of misuse in further funding of the 2020 relief and in the new $284 billion PPP program, the SBA has been directed to flag borrowers reported to the DNP, which could help prevent the magnitude of PPP fraud seen in 2020, including within second draw loans and the forgiveness process.

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Specifically, the OIG recommends more effective oversight controls related to 2020 PPP by:

  • Promptly identifying PPP loans that have not been fully disbursed and follow-up with the lenders to stop $280 million in potential improper loan disbursements
  • Strengthening SBA controls to ensure that loans to ineligible recipients are not forgiven
  • Reviewing prepayment and pre-award procedures and work with Treasury to formulate a technical approach to use Treasury’s DNP portal to determine loan applicant eligibility and prevent improper payments before the release of any federal funds.

Financial institutions are going into this new wave of PPP funding with eyes wide open.  Fraudulent applications and inside collaboration should be top of mind to both lenders and compliance professionals when onboarding new PPP loans. This much-needed partnership with the SBA is welcomed by financial institutions in the fight to strengthen our communities, but it does not take the place of the institution’s responsibilities around due diligence, thorough documentation, and ongoing monitoring. It takes the entire community to fight financial crime and ensure relief funds get into the hands of those who need them.   

About the Author

Terri Luttrell, CAMS-Audit

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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