Two significant questions loom over the Paycheck Protection Program: How much of the program's funds was lost to fraud? And are banks going to get into trouble for approving these bad loans?
PPP was hastily designed at a time when it felt like the world was falling apart. A pandemic had gripped not only the U.S. but the world as well. Amid the volatility, Americans had bills to pay — restaurants had to make rent, store owners had to pay for inventory that was previously ordered but would sit unsold on shelves, and workers needed to buy groceries and other essentials.
To prevent an economic collapse, Congress passed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, in late March 2020. That $2.2 trillion stimulus package included an initial $349 billion earmarked for the Small Business Administration to provide loans to employers so they could cover expenses, including payroll, until the pandemic subsided enough for the economy to return to some level of normalcy. The hope was that these funds would help prevent mass layoffs. And the loans would be forgivable if the borrowers met certain criteria.
Approved PPP lenders – banks, credit unions and nonbank fintechs — took the applications and got the funds into the hands of small businesses. And the program proved wildly successful in that regard.
However, PPP was implemented with very little oversight. That meant grift was voluminous and began almost immediately as those who were not eligible for a variety of reasons were still able to apply for and receive funds.
A recent report from the House Select Subcommittee on the Coronavirus Crisis found that lenders, and especially fintechs, "faced challenges" in administering the PPP, "missed clear signs of fraud" and attempted to "evade responsibility" after disbursing the program's funds.
"Fintechs and lenders sought to avoid taking responsibility for taxpayer money that was lost to fraud," the oversight report stated.
Both sloppy and sophisticated criminals joined in the money grab. Perpetrators included applicants with pending criminal charges and thus ineligible. In California, an Instagram star used fake names to binge on flashy splurges, while a French art gallery manager in New York teamed up with a convicted felon to steal identities and submit dozens of applications at local banks.
Current estimates put the fraud anywhere between $34.4 billion and $189 billion. Prosecutors are now working to recover as much of this money as possible. Time will tell how much blowback the banks and credit unions that facilitated – even if inadvertently – this fraud will get.
The PPP is likely to go down in history as "one of the most complicated programs that the U.S. government has ever tried to administer," according to Linda Miller, a forensic auditing expert who previously served as the deputy director of the Pandemic Response Accountability Committee. "The PPP will be seen as an incredibly beneficial program that helped businesses at a time of unprecedented need. At the same time, it created one of the biggest fraud events in modern history."
Loose guardrails
PPP faced problems from the start as business owners tried to keep up with shifting SBA guidelines about the types of expenses and qualifications that determined loan size requests. Making matters worse, an initial wave of applications overwhelmed the system.
By the end of June, many of the largest U.S. lenders had already processed hundreds of thousands of applications for billions of dollars in PPP funding. For instance, JPMorgan Chase's second-quarter 2020 earnings reported that the bank had originated $28 billion in PPP loans by that time. Bank of America reported processing 334,000 loans totaling $25 billion in PPP funding.
"I had never heard of anyone processing loans so fast," said a source who reviewed PPP loans for a large national bank who requested anonymity to discuss details of their work. "You had to basically be laundering money to raise someone's eyebrows."
The federal government's desire to release PPP funding quickly without clear and consistent guidance "put a 'we're open for business' sign out for fraud-sters," said Jeb White, president and CEO of the nonprofit group Taxpayers Against Fraud. "Anytime you lessen regulations and do it in a haphazard way that doesn't have adequate safeguards, fraud is naturally going to take off. And the people who end up getting impacted the most are taxpayers and ethical small businesses that are trying to do things the right way."
The federal government, including the SBA, deserves significant blame for fraudulent activity that occurred under PPP, according to Nicholas Anthony, a policy analyst at Cato Institute, a libertarian and free-markets think tank.
From the beginning, the goal for PPP was to "get the money out as fast as possible by any means necessary," Anthony said. Due diligence became a "secondary consideration," he added, especially after lawmakers passed legislation in December 2020 that further reduced underwriting risks and expanded provisions that granted a certain amount of immunity for lenders participating in PPP.
While the program served as a rushed solution to an urgent crisis, an audit of the SBA conducted by the accounting firm KPMG found seven "material weaknesses" and two "significant deficiencies in internal controls" related to the agency's management of the PPP.
To qualify for a PPP loan, applicants were initially required to submit documentation including payroll tax filings, 1099 forms for independent contractor payments and income and expenses from self-owned businesses, according to the text of the CARES Act.
Overall, KPMG found that the SBA flagged over 2 million approved PPP loans that were not in conformance with the rules for at least one of more than 35 reasons, including mismatches in business, taxpayer and employer identifications. The agency "identified approved loans disbursed by its third-party lenders that, in numerous cases, were not accurate and potentially not in conformance" with the PPP's guidelines, according to KPMG's audit.
The PPP will be seen as an incredibly beneficial program that helped businesses at a time of unprecedented need. At the same time, it created one of the biggest fraud events in modern history.
In January, the Pandemic Response Accountability Committee found over 69,000 "questionable" Social Security numbers were used to obtain $5.4 billion in PPP funding. As of February, prosecutors have filed at least 153 identity theft cases, according to data from the law firm Arnold & Porter.
As prosecutors have pursued individual fraud, investigations into lenders that approved misrepresentations have increased. So far, fintechs have faced the most scrutiny for their role in fraudulent loans being disbursed.
The report from the House Select Subcommittee on the Coronavirus Crisis examined the role fintechs played in facilitating "a disproportionately high rate of fraudulent and otherwise ineligible" PPP loans.
The report found that fintechs prioritized processing fees in failing to implement systems that could better detect fraud, faulting three companies in particular, Blueacorn, Kabbage and Womply. All three declined to comment for this story.
The early stages of PPP were a "fog of war" period as the SBA's guidance "changed frequently," according to David Snitkof, senior vice president for growth at the document processing company Ocrolus.
"Lenders were told to mostly rely on stated figures from applicants," said Snitkof, who was previously head of analytics and data strategy at Kabbage, parts of which were sold to American Express prior to filing for bankruptcy.
"Since lenders weren't the ones taking credit risk, because funding was coming from the SBA, they didn't have the same incentive to go through all of the checks they would otherwise go through," he said.
Overall, while Snitkof believes PPP fraud has received a "disproportionate" amount of scrutiny compared to the benefits it provided to legitimate businesses, one lesson learned is to "always be on the side of regulatory clarity."
Enforcing false claims
Last August, President Joe Biden enacted the PPP and Bank Fraud Enforcement Act, sending both PPP lenders and borrowers a strong signal that prosecutions of fraud tied to the initiative were only getting started. The new law gives the government a larger window of time to probe increasingly complex cases.
"The watchdogs are back," Biden said during a signing ceremony for the legislation, which extended the statute of limitations to bring fraud cases to 10 years. "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."
PPP loan fraud prosecutions are likely to hinge upon the "qui tam" legal principle that underpins False Claims Act violations. Qui tam is a Latin phrase that means, "who sues on behalf of the king as well as for himself." In U.S. legal doctrine, this applies to whistleblower protections afforded by the FCA. Enacted to stop price gouging during the Civil War, the FCA has become a powerful weapon in fighting fraud against the government.
The law makes it illegal to "knowingly present or cause to be presented" fraudulent claims for payments or approval as well as the falsification of records. Under the FCA, prosecutors rely on whistleblowers to tip off the government officials about fraudulent misrepresentations and are allowed to collect a portion of money that prosecutors recover through civil and criminal cases.
More than 13,000 FCA cases filed since 1986 have recovered over $72 billion, according to the Department of Justice.
In recent years, the DOJ has expanded the application of the FCA to help account for PPP loan fraud. Last year, the DOJ nearly doubled the amount of FCA cases prosecuted in connection with the PPP compared to 2020 and 2021, according to the Arnold & Porter data. FCA violations typically come with associated charges including wire fraud, illegal monetary transactions, and aiding and abetting theft of government property.
After first prosecuting individual cases of PPP false claims, the DOJ could shift gears and focus on financial institutions that can repay larger amounts of the program's funding, said Kelly Kramer, a partner at Mayer Brown who co-chair's the law firm's global investigations and white collar defense practice.
Due to the volume of potential PPP fraud, prosecutors "can't enforce everything" and are prioritizing cases that "bring the most bang for the buck," Kramer said.
"Prosecutors can't invest a significant amount of money in a case if all they get is a judgment that can't be collected," he said. "An enforcement action against a traditional lender could result in a penalty that's substantially more impactful than against a bankrupt entity."
Kramer added that "financial institutions that didn't have in-depth compliance" could find themselves under the next wave of scrutiny. In general, this could be any bank or credit union that was involved with processing and approving a fraudulent PPP loan. Given the suspected size of the grift, that could include a lot of the industry.
"People that basically saw this as an opportunity to increase funding flow and pursued it recklessly," he said.
A former assistant U.S. attorney who runs a PPP whistleblower firm said that investigators are probing "hub-and-spoke conspiracies."
The former prosecutor, who requested anonymity to discuss ongoing cases, described schemes where a "constellation" of PPP actors engaged in similar conduct that ultimately allowed a central "hub" entity to profit. The "spokes" in these conspiracies may be entities such as accounting firms, which in some cases served as "feeders" of PPP loan applications to lenders that would then collect the SBA's loan origination fees, according to the former prosecutor.
"If you go after and flip the aggregator, and they cooperate against a sleazy lender that has money to pay back, then that becomes the target of an investigation," the former prosecutor said.
Still, prosecutors and regulators have announced only two actions against banks in connection with the PPP so far.
Despite growing concerns about fraud, bankers and credit union lenders say PPP provided a crucial source of capital, backstopping the economy as it faced an unprecedented challenge from the pandemic.
In September, Houston-based Prosperity Bank, a subsidiary of Prosperity Bancshares, was accused of approving a $213,400 loan to a doctor who was ineligible for the program. Authorities alleged that bank employees knew the borrower was facing criminal charges related to prescribing opioids and therefore shouldn't receive any PPP funding. The $37.8 billion-asset bank settled with the DOJ by agreeing to pay around $18,670 for violating the FCA and returned a $10,670 loan processing fee.
Four months later, the Federal Reserve announced a $2.3 million PPP-related fine against Popular Bank. An order from the Fed said that the New York division of Popular, a Puerto Rican bank, self-reported that it had funded $1.1 million in falsely obtained funds in August 2020.
In addition to scrutiny from prosecutors, banks are also facing lawsuits from PPP borrowers. So far, groups of small-business owners have filed at least three lawsuits seeking class-action status — two against Bank of America and one against PNC Financial Services — claiming lenders misrepresented PPP loan qualifications.
The most recent lawsuit was filed against BofA in February. In that lawsuit, business owners in California allege that they were stuck with unforgivable PPP loan debt after loan processors at Bank of America used high-pressure sales tactics to convince the applicants to take out larger amounts.
When the lawsuit was filed, Bank of America responded by placing responsibility on PPP borrowers for the representations they made when submitting their applications. "We processed Paycheck Protection Program loans based on loan amount requests and representations made by businesses," a spokesperson said at the time.
Only $34.4 billion of the $792.6 billion in PPP funding remains unforgiven, according to Pandemic Response Accountability Committee data.
Miller, the former PRAC deputy director, said that the relationship between banks and the federal government in PPP is so "intertwined," the ultimate question will be whether lenders "can legally be held accountable based on how the program was structured."
"It's my opinion that lenders should be held more accountable," Miller said. "Lenders provided a service that the government needed and, to some degree, took advantage of the opportunity to profit off fees and gain new customers."
She added: "Financial institutions are, to a large degree, the infrastructure of government-benefits programs. If the banking system is going to be a partner in government, there needs to be some level of ethical expectations for them."
