Financial institutions reported pervasive fraud from COVID-19 loan program: OID

Hundreds of financial institutions have reported more than 5,000 instances of suspected fraud involving hundreds of millions of dollars stemming from a Small Business Administration COVID-19 loan program, according to a new report released by the SBA’s Office of Inspector General.

“Nearly 440 financial institutions ranging from small, local credit unions to major national institutions have contacted us to express serious concerns,” according to the OIG. “Our law enforcement partners report similar calls from financial institutions.”

In its 13-page report, the OIG highlighted that a federal credit union reported to the criminal division of the Department of Justice that the cooperative received $15 million in SBA deposits. The credit union audited 60 of the transactions and determined that 59 appeared to be fraudulent, according to the OIG report, which did not identify the credit union.

After the Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law last March, it authorized the SBA’s disaster assistance program to use available funds to distribute “economic injury loans,” and begin a new program called Economic Injury Disaster Loans and Advances to respond to COVID-19 economic injuries.

Approximately $374 billion had been allocated for loans and grants through the SBA’s economic injury loan program. As of July 22, the SBA said it has approved 2.8 billion loans totaling $160 billion and 5.7 million advance grants amounting to $20 billion.

According to the report, SBA approved 6,123 loans totaling $208.1 million to ineligible businesses, and an additional 20,692 advance grants totaling $47.8 million to potentially ineligible businesses.

What’s more, the OIG investigation also found the SBA approved and paid at least 275 loans more than one time. Approximately $25 million of the $45.6 million in approved duplicate loans has been disbursed.

“We verified the duplicate approved loans were made to the same businesses at the same address,” the report said.

In addition to the fraud scheme reported by the federal credit union, the report also highlighted that a banking service provider identified $73 million in SBA deposits from about 3,000 suspicious transactions, and that a London-based international money transfer business claimed to have identified $1.9 million in pending SBA deposits being made to accounts to be transferred internationally. The OIG also noted that nine financial institutions reported more than $187 million in suspicious fraudulent transactions.

“We are alarmed by these reports, but they are consistent with our investigations, which indicate pervasive fraudulent activity,” according to the OIG.

Examples of suspected fraudulent activity reported by credit unions and banks included accounts opened with stolen identities, account holders unable to explain the origins of deposits or identify business names on loans, or account holders attempting to transfer the stolen funds from investment accounts or foreign accounts.

Some of the fraud schemes were initiated by organized fraud rings that used social media sites to recruit applicants to split funds with the fraud ring members. Other fraudsters used stolen identities or used online videos on social media that instructed potential applicants how to answer certain questions to falsely obtain loans.

The OIG said it has identified internal control deficiencies within the loan program and that the SBA did not have a process or partnership in place with financial institutions to review instances of suspected fraud.

In response to the OIG report, the SBA said it has deployed sophisticated technology to create a robust set of internal controls for the Economic Injury Disaster Loans and Advances program.

“These internal controls have rejected $9 billion in advances and prevented the processing of another $8.8 billion in duplicate advances,” the SBA said. “The internal controls have rejected $17.7 billion in loans and prevented the process of another $78 billion in duplicated loans.”