Rooting out wrongdoing in PPP loans

December 23, 2022 12:01 PM

There's that saying about roads and good intentions, and the Paycheck Protection Program is perhaps one of the best examples of this.

In the early days of the country's grappling with COVID-19, businesses deemed nonessential closed their doors and Americans were encouraged to stay home. Those steps sent the unemployment rate skyrocketing.

Congress acted quickly to try and ensure that as many people kept receiving a paycheck as possible. Thus, the CARES Act was born, and within that piece of legislation was the PPP, which was administered by the Small Business Administration.

Business owners could apply for PPP loans and use those funds to continue to pay their employees, even if they had to shutter their doors. The loans could be forgiven if the business owners followed certain guidelines.

Roughly 11.5 million loans were made for more than $790 billion in just a matter of months. In that respect, the program could be considered a success. It got an incredible amount of money into the pockets of millions of Americans in an unheard amount of time.

However, the rollout of the program was also chaotic, and with so much money being handed out with so little oversight, PPP loans proved attractive to fraudsters. Now the initial success of the program is being overshadowed by headlines highlighting the millions — likely billions — lost to fraud. Although a total is still unknown, some estimates put the total fraud at up to 15% of the loans made.

Here is a look at some of the developments related to PPP fraud so far and the potential long-term effects.

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Finger-pointing at fintechs

The House Select Subcommittee on the Coronavirus Crisis released a blistering report earlier this month that examined whether fintech companies allowed scammers to commit PPP fraud.

"Despite fintechs' claims that their use of technology and innovation would allow them to better administer the PPP than traditional financial institutions, many of these companies appear to have failed to stop obvious and preventable fraud, leading to the needless loss of taxpayer dollars," according to the report. The report noted that "at least tens of billions of dollars" were disbursed to fraudulent or ineligible applicants.

The report examined the practices of a few PPP fintech lenders, including Blueacorn, Womply, Kabbage and Bluevine, and found that the firms struggled to root out and prevent fraud. Celtic Bank and Cross River Bank, which both worked with some of the fintechs, were also mentioned in the House report. The report noted that Celtic and Cross River pushed Bluevine to improve its fraud controls.

The report noted that fintechs are disproportionately represented in the prosecutions the Justice Department has brought so far.

"Celtic made extensive and effective efforts to combat fraud, while at the same time adhering to Congress's and SBA's direction to get money out to companies quickly, in a time of national emergency," the company said in a statement to Bloomberg when the report came out.

"The report … vindicated Cross River. It said that partnering with Cross River, the fintech companies were forced to operate within a regulated structure," Phil Goldfeder, senior vice president of public affairs for Cross River, said to NJBIZ, a New Jersey business journal earlier in December.

"We are proud to have participated in the PPP program during a time that was truly extraordinary. As the subcommittee noted, all fintech companies are not the same, and Bluevine adapted to the ongoing threats better than some of the other fintech companies examined in the inquiry," Bluevine said in a statement to Bloomberg earlier this month.

High-profile prosecution

Rafael Martinez, CEO of MBE Capital Partners, is one person who already faces charges related to the program. Prosecutors claim that Martinez falsified documents by inflating his number of employees and payroll to secure his company a PPP loan of $280,000. Prosecutors also claim that Martinez used those same falsified documents to become a PPP lender in April 2020.

The case has gained attention because of its ties to former basketball star Magic Johnson. One of Johnson's companies worked with MBE Capital in an effort to ensure small minority businesses could access PPP money. (Johnson and his company have not been accused of any wrongdoing.)

MBE earned about $71 million in fees from originating $823 million in PPP loans to roughly 36,000 businesses. Federal prosecutors have charged Martinez with bank and wire fraud and with making false statements to a bank.

Earlier this year, his lawyer, Telemachus Kasulis from Morvillo Abramowitz Grand Iason & Anello said the "charges are false."

More settlements like this on horizon?

In September, Prosperity Bank in Houston agreed to pay almost $19,000 to settle claims that it did not properly process a PPP loan for a customer who was ineligible.

According to federal prosecutors, the Houston company approved a loan of about $213,000 for Woodlands Pain Institute. At the time, Dr. Emad Bishai, the owner of the institute, was facing separate criminal charges related to prescribing pain medications. But in his application, Bishai falsely said he was not subject to any indictments, according to the U.S. Attorney's Office for the Southern District of Texas.

The U.S. attorney's office said that the settlement with Prosperity was believed to be the first of its kind. But some experts believe it won't be the last and that more cases could be potentially brought against lenders.

‘Watchdogs are back’

Prosecutors will have more time to pursue potential cases after President Biden signed legislation in August that extended the statute of limitations for going after PPP loan fraud. The PPP and Bank Fraud Enforcement Harmonization Act gave prosecutors up to a decade to investigate potential crimes related to PPP loan applications. The legislation passed Congress with strong bipartisan support.

Normally, prosecutors would only have five years to bring charges of wire fraud related to a loan application to a nonbank. Similar charges of bank fraud already carried a 10-year statute of limitations.

"Too much of small-business relief funding, which was passed by the Congress, ended up in the hands of those who either didn't need it, or criminal syndicates who outright stole the money," Biden said during the White House signing ceremony of the bill. "The watchdogs are back."

Fallout for SBA

The SBA has also vowed it would investigate potential wrongdoing in the loan program, including the issues outlined in the House report.

"The SBA will continue to work with the House Select Subcommittee [on the Coronavirus Crisis] to examine the evidence laid out in its report and continue taking corrective action to address the fraud and weak controls that were so prevalent at the onset of the PPP," the agency said in a statement when the House report was released in December.

Those concerns over the role that fintechs played in perpetuating PPP loan fraud could have other long-lasting effects. In October, the SBA released a proposed regulation that would allow lenders without a bank or credit union charter to participate in the flagship 7(a) loan guarantee program. That would allow fintech small-business lenders to finally participate.

However, the House report by the coronavirus-crisis subcommittee was highly critical of fintechs and questioned the wisdom of that plan.

"Congress and the SBA should consider carefully whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be permitted to play a leading role in future federal lending programs," the report said.