Banks report record spike in fraud as U.S. business aid flows

U.S. banks and credit unions reported skyrocketing levels of suspected business-loan fraud last month, a period that coincided with growing awareness of scams involving government small-business aid programs.

Financial institutions filed 1,922 suspicious activity reports involving business-loan fraud in August, data from the Treasury Department’s Financial Crimes Enforcement Network show. That’s about 14 times the monthly average for the six years beginning in 2014, the earliest date for which data is available. It’s the fourth consecutive monthly record.

The statistical data don’t show what’s causing the spike in reports. Neither Fincen nor the Small Business Administration’s inspector general said they could comment on a potential link.

But the reports coincide with a wave of applications for the SBA’s Economic Injury Disaster Loan program, which has distributed more than $200 billion and which the agency’s inspector general, Hannibal Ware, warned in July is plagued by “pervasive fraudulent activity.” They also coincide with the last days of another SBA program, the $525 billion Paycheck Protection Program, which concluded on Aug. 8.

The Project on Government Oversight, a Washington-based nonprofit, published an article earlier this month noting the spike in business-loan fraud reports through July and their potential connection to SBA programs. The August figures weren’t available at that time.

In his July 28 report, Ware cited thousands of reports of potential fraud from financial institutions, including banks and credit unions. In many cases, the institutions were noticing that individuals with no apparent connection to a small business were receiving disaster-loan aid proceeds in their personal bank accounts.

‘Rampant’ misuse

The Fincen suspicious-activity statistics show that most of the suspected fraud was thought to involve bank customers, that it was linked to deposit accounts and that it involved government payments.

Last month, Bloomberg News reported that it identified 52 congressional districts where the SBA sent more $10,000 disaster-loan grants than the number of eligible small businesses. In all, there were about 128,000 excess grants worth almost $1.3 billion.

About half of the total was in the Chicago area.

Earlier this month, Bloomberg reported that JPMorgan Chase, the nation’s largest bank, had uncovered “rampant” misuse of the disaster-loan program by its customers, including a few of its own employees. It sent a companywide memo encouraging employees to report any unethical activity they’d witnessed.

In a statement, Fincen said it couldn’t comment on the reason for the surge in reports but that it has “done extensive work in reaction to" COVID-19” and that it has “raised awareness within the financial industry of red flags and targeted scam techniques.”