Hannibal "Mike" Ware, Inspector General, U.S. Small Business Administration (July 13, 2023)
Summary
Written testimony of Hannibal “Mike” Ware, Inspector General of the U.S. Small Business Administration, before the Committee on Small Business, U.S. House of Representatives, dated July 13, 2023. It states that SBA disbursed approximately $1.2 trillion of COVID-19 Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program (PPP) funds, and that the Office of Inspector General (OIG) estimates more than $200 billion in potentially fraudulent COVID-19 EIDLs and PPP loans, approximately 17 percent of disbursed funds. The testimony also sets out early warnings, oversight work and recommendations. It states that absent the total budgetary resources requested for OIG, OIG would not have a sufficient operating budget to combat the fraud.
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“Hannibal ‘Mike’ Ware, Inspector General, U.S. Small Business Administration (July 13, 2023).”
Original at smallbusiness.house.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/046-07-13-2023-sba-ig-ware-testimony-16bbdd2945/
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HANNIBAL “MIKE” WARE
INSPECTOR GENERAL
U.S. SMALL BUSINESS ADMINISTRATION
BEFORE THE
COMMITTEE ON SMALL BUSINESS
U.S. HOUSE OF REPRESENTATIVES
JULY 13, 2023
INTRODUCTION
Chairman Williams, Ranking Member Velázquez, and distinguished members of
the Committee, thank you for inviting me to testify before you today and for your
continued support of the Office of Inspector General (OIG). The U.S. Small Business
Administration’s (SBA’s) role in the nation’s pandemic response has presented an
unprecedented oversight challenge. I am proud of the dedication and hard work of
the men and women of OIG to not only oversee SBA programs and services, but also
to detect, deter, and combat fraud.
Over the course of the Coronavirus Disease 2019 (COVID-19) pandemic, SBA
disbursed approximately $1.2 trillion of COVID-19 Economic Injury Disaster Loans
(EIDL) and Paycheck Protection Program (PPP) funds. Using OIG’s investigative
casework, prior OIG reporting, advanced data analytics, and additional review
procedures, we estimate SBA disbursed more than $200 billion in potentially
fraudulent COVID-19 EIDLs and PPP loans. This estimate represents
approximately 17 percent of disbursed funds in these programs — specifically, more
than $136 billion COVID-19 EIDLs and $64 billion in PPP funds. OIG published
these findings on June 27, 2023.
Office of Inspector General
OIG provides auditing, investigative, and other services to support and assist SBA
in achieving its mission. OIG’s oversight efforts provide recommendations to SBA
leadership to improve the performance of SBA’s programs and services for the
benefit of the American people. The office’s investigations pursue evidence of
wrongdoing in SBA programs, bringing fraudsters to justice. For the past 2 years,
our office has been ranked as the top OIG in the federal government as a Best Place
to Work by the Partnership for Public Service with a 2022 engagement and
satisfaction employee score of 86.2, which far exceeds the overall government score
of 63.4.
OIG provides taxpayers with an exponential return on investment, rooting out
fraud, waste, and abuse in SBA programs and making recommendations to improve
SBA’s programs and operations. In the past 2 years alone, OIG’s work has resulted
in more than $9 billion in dollar accomplishments, which includes investigative
recoveries, fines, and forfeitures, as well as review findings of disallowed costs. OIG
oversight of the PPP and the COVID-19 EIDL program has resulted in 1,050
indictments, 827arrests, and 553 convictions as of June 2023. Also, over $8 billion in
EIDL funds have been returned to SBA by financial institutions and another $20
billion by borrowers. OIG has played a key role in the return of these funds through
working with law enforcement partners and financial institutions. We have issued
33 reports on pandemic oversight with 78 recommended corrective actions to
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strengthen internal controls and to promote integrity, efficiency, and effectiveness
within SBA programs.
Notwithstanding these accomplishments, OIG’s oversight capacity is dependent
upon the availability of sufficient budgetary resources to continue addressing the
fraud within SBA pandemic response programs. The President has put forward a
Fiscal Year (FY) 2024 budget request for OIG to ensure continued oversight of
SBA’s pandemic response and its vital flagship programs supporting the nation’s
small businesses. The President also has sought $100 million in supplemental
appropriations, in addition to other measures, for a whole-of-government response
to the massive fraud in the nation’s pandemic response programs. Absent the total
budgetary resources requested for OIG in the 2024 Budget, we will not have a
sufficient operating budget to combat the fraud within SBA programs and provide
effective oversight over its flagship programs. Critically, OIG would not have a
sufficient operating budget to capitalize on the new laws (P.L. 117-165 and P.L. 117-
166) that extended the statute of limitations for fraud in the PPP and EIDL
programs to 10 years.
PANDEMIC RESPONSE OVERSIGHT
Congress authorized SBA to administer approximately $1.2 trillion through the
PPP, COVID-19 EIDL, Shuttered Venue Operators Grant (SVOG), and the
Restaurant Revitalization Fund (RRF), mitigating the economic damage from the
pandemic.
To support businesses adversely affected by the pandemic, Congress tasked SBA
with the lending authority of approximately $470 billion in COVID-19 EIDLs and
$20 billion in COVID-19 emergency grants. In FY 2021, Congress appropriated
additional funds for new disaster assistance programs: $35 billion for Targeted
EIDL Advances and Supplemental Targeted Advances, $16.25 billion for the SVOG
program, and $28.6 billion for the RRF. The Coronavirus Aid, Relief, and Economic
Security (CARES) Act provided $349 billion for the creation of the PPP under
Section 7(a) of the Small Business Act. Congress added an additional $310 billion to
the PPP on April 24, 2020, through the Paycheck Protection Program and Health
Care Enhancement Act. On December 27, 2020, through the Consolidated
Appropriations Act, 2021, the Economic Aid to Hard-Hit Small Businesses,
Nonprofits, and Venues Act extended the program through March 31, 2021. The
Economic Aid Act provided an additional $147.5 billion in program funding. The
American Rescue Plan Act of 2021 provided an additional $7.2 billion, which
increased the total program funding to $813.7 billion. On March 30, 2021, the PPP
Extension Act of 2021 extended the program through June 30, 2021, with May 31,
2021 as the last day for acceptance of applications. As pandemic assistance
programs swelled to more than $1 trillion, the risk to the taxpayer increased
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because SBA’s internal control environment was calibrated to expedite loans and
grants.
Executive and legislative actions at the onset of the pandemic were designed to
quickly address the economic fallout, which allowed SBA to reduce or eliminate key
internal controls and rely on self-certification of eligibility to expedite aid. In turn,
OIG quickly pivoted to provide oversight of SBA’s pandemic response programs.
Early Warnings
We knew at the start of the pandemic that SBA would face a delicate balancing act
of preventing widespread fraud while ensuring timely disbursement of relief funds
to Americans in immediate need of assistance. Our first concern was how SBA was
going to quickly delivery capital to qualifying small businesses without having
established the internal controls necessary to decrease fraud risk. This was why we
issued two reports prior to the first PPP loan being disbursed. Our reports stressed
the importance of up-front program controls to mitigate the risk of fraud, such as
verifying that the business did indeed exist before the onset of the pandemic and
that it had been adversely affected by the economic downturn. Because of the
lessons learned from other disasters, OIG knew the weaknesses we found in the
past would be greatly magnified with programs as large as the COVID-19 EIDL
program and PPP.
Even with these early warnings, SBA’s internal control environment contributed to
bringing about the biggest fraud in a generation. SBA’s need to quickly provide
relief to small businesses led to reduced controls on pandemic-related loans and
grants, substantially increasing the fraud risk. It was immediately clear that
pandemic relief efforts had drawn the attention of unscrupulous and greedy
criminals. In fact, the first criminal charges of PPP fraud were announced on May 5,
2020 — approximately 1 month after the program was initially authorized by
Congress. Complaints from lenders and allegations of misuse of funds overwhelmed
OIG’s Hotline — over 100,000 complaints in the first year alone, which exceed more
than 250,000 to the present day.
OIG used agile work products to deliver review findings and suggested
recommendations for corrective action as the programs were first rolled out. Our
reviews revealed alarming findings. We published a flash report on the PPP in May
2020, which was just over a month after the program started. Thanks to this report,
Congress made changes to the program. We sounded the alarm internally of
rampant fraud in the COVID-19 EIDL program in June 2020.
We actively engaged SBA leadership throughout the duration of the pandemic to
notify them of preliminary findings so they could respond in real time to prevent
loss to the taxpayer. At the same time, we launched investigations and published a
list of fraud schemes and scams to alert the public and SBA stakeholders about the
fraud and abuse endangering these critical resources.
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Oversight Work
OIG focuses its oversight capacity on the most significant risks to SBA and
taxpayers. Many of these risks are addressed in OIG’s Top Management and
Performance Challenges Facing the SBA, which OIG issues annually in accordance
with the Reports Consolidation Act of 2000. The management challenges represent
areas that OIG considers particularly vulnerable to fraud, waste, abuse, or
mismanagement, or which otherwise pose significant risk to the agency, its
operations, or its credibility.
Each management challenge has originated from one or more reports issued by OIG
or the Government Accountability Office (GAO). We do not usually rank the top
challenges in order of importance or magnitude, except for the pandemic economic
assistance challenge. We view all challenge areas as critically important to SBA
operations. However, we placed COVID-19 economic relief programs at the top of
the list for the 2021 report in recognition that it is the agency’s most acute
challenge, and it remains so at present.
OIG annually publishes an oversight plan for reviews it has ongoing or planned for
that calendar year. In 2020, we published a supplemental oversight plan to address
the imminent oversight needs of the pandemic response. Most recently, we released
our comprehensive oversight plan that outlines OIG’s audit and review priorities for
calendar year 2023.
The implementation of this robust oversight plan uses all available OIG resources
to provide timely, objective, and independent oversight of SBA programs and
services. Since the start of the pandemic OIG has testified before Congress 11 times
and held over 80 briefings for Congressional staff to ensure that Congress remains
informed of our oversight of SBA’s pandemic programs. The effects of OIG’s
oversight efforts for SBA’s pandemic response are noteworthy. We have innovative
approaches to issuing agile work products and for leveraging data analytics.
To date, we have issued 33 reports that have focused on SBA’s pandemic response
with more significant work to be released soon. As stated in our oversight plan,
upcoming reports will focus on SBA’s pandemic response programs, including
evaluating eligibility and forgiveness of PPP loans exceeding maximum size
standards; eligibility and forgiveness of PPP loans made to borrowers in the U.S.
Department of the Treasury’s Do Not Pay system; SBA’s internal controls to
prevent SVOGs to ineligible entities; SBA’s decision to end collections on COVID-19
EIDLs under $100,000; and COVID-19 EIDL applicants in Treasury’s Do Not Pay
system. Additionally, OIG is working on more than 10 mandatory reviews, which
are required by law, and an additional 24 reviews on other areas of risk identified in
the pandemic response programs. OIG also is providing oversight of SBA’s response
to Hurricanes Ian and Fiona.
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Over the course of SBA’s pandemic response, OIG offered key recommendations to
strengthen the internal controls to prevent fraud in the COVID-19 EIDL program
and the PPP, such as:
• implementing a process to ensure PPP lenders validate that 1) the loan
amount does not exceed the maximum amount per employee, 2) the business
was established before the mandated date, and 3) the loan amount does not
exceed the maximum number of employees or other applicable standards;
• working with the U.S. Department of the Treasury to develop a technical
solution to enable the use of Treasury’s Do Not Pay system to determine PPP
loan applicant eligibility and prevent improper payments before the release
of any federal funds;
• updating the PPP borrower application to include a field for the North
American Industry Classification code for the business category and the
business description to prevent potentially ineligible loan approvals;
• revising the PPP application to include the demographic information of
borrowers;
• establishing or strengthening controls to ensure loan deposits are made to
legitimate bank accounts for eligible borrowers only, preventing the change of
loan application information post-approval without having that information
reviewed again by a person;
• strengthening or establishing controls to ensure multiple loans are provided
only to eligible COVID-19 EIDL applicants and prevent the erroneous
duplication of loans; and
• strengthening controls for verifying an entity’s start date to ensure
applicants meet eligibility requirements.
SBA has been responsive to OIG recommendations for corrective action. The agency
has continually made progress to reduce fraud risks and prevent further losses in
its pandemic loan programs, and our office’s ongoing work continues to make
further recommendations for corrective action. Although we are confident that
SBA’s implementation of our recommendations stemmed the tide of fraud, many of
the improvements were made after much of the damage had already been done,
namely because of the lax internal control environment at the onset of these
programs.
We will continue to monitor and assess the effectiveness of agency controls through
our ongoing and planned reviews for suspected fraud and suspicious activities.
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Pandemic EIDL and PPP Loan Fraud Landscape
On June 27, 2023, OIG published the COVID-19 Pandemic EIDL and PPP Loan
Fraud Landscape. We conducted this review to provide a comprehensive estimate of
the potential fraud in the SBA pandemic assistance loan programs. Over the course
of the COVID-19 pandemic, SBA disbursed approximately $1.2 trillion of COVID-19
EIDL and PPP funds.
In the rush to swiftly disburse COVID-19 EIDL and PPP funds, the agency
weakened or removed the controls necessary to prevent fraudsters from easily
gaining access to these programs. The fraudsters targeted the weaknesses in these
programs over and over again until they were able to break through and steal from
the American taxpayer.
Using OIG’s investigative casework, prior OIG reporting, advanced data analytics,
and additional review procedures, we estimate SBA disbursed more than $200
billion in potentially fraudulent COVID-19 EIDLs and PPP loans. This estimate
represents approximately 17 percent of disbursed COVID-19 EIDLs and PPP funds
— specifically, more than $136 billion COVID-19 EIDLs and $64 billion in PPP
funds. Since SBA did not have an established strong internal control environment
for approving and disbursing program funds, there was an insufficient barrier
against fraudsters accessing funds that should have been available for eligible
business owners adversely affected by the pandemic.
Based on the various fraud schemes identified in our ongoing and adjudicated
criminal investigations, we expanded rule-based analytics through link analysis —
an investigative technique that identifies fraud clusters through shared data
attributes. Link analysis is distinct from simply identifying loans with duplicative
values, such as sharing the same Internet Protocol (IP) address. In contrast, link
analysis refines basic duplicate analysis by only capturing additional loans that are
associated with a source loan suspected of fraud. This reduced the potential false
positives and allowed us to focus on loan clusters highly suspected of being
fraudulent.
We automated a process in which we linked one-third of all OIG Hotline complaints
to associated loan data by extracting the unique identifiers of tax ID, loan number,
and Dun and Bradstreet business identifier (DUNS) number from complaint
narratives. We incorporated previously unavailable PPP borrower intake data using
administrative subpoenas, which are utilized to further our investigative work. This
data was from a small number of PPP lenders and third-party processors and may
be expanded upon as we obtain additional data.
We conducted an additional review using nonstatistical sampling methods and
professional judgment, as necessary. We took prior experience into consideration,
along with investigative casework and previous OIG reports to increase confidence
in the results of our data analysis.
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As a result, we identified 11 fraud indicators, or fraud groups, which are almost like
a fingerprint left behind at a crime scene. We anticipate these estimates could
fluctuate with additional review, investigative, and data analytics work, in addition
to potentially expanding our link analysis investigative technique to include
additional data fields after receiving more lender and government agency data.
OIG identified multiple schemes, depicted in the fraud indicators, that perpetrators
used to steal from the American taxpayer. The groups listed below all possess the
indicators we considered in our fraud landscape estimates. Together, they illustrate
the types of schemes SBA OIG and other oversight agencies continue to unravel and
then prosecute.
Fraud Indicator 1: Hold Codes
• COVID-19 EIDLs and PPP borrowers whose loans were flagged by SBA or
third-party lenders because they identified one or more potential indicators of
fraud
Fraud Indicator 2: IP Addresses
• COVID-19 EIDLs and PPP borrowers who appear to have submitted loan
applications for 1) a foreign country, 2) the same IP address as the other
applications found to have a higher likelihood of fraud
Fraud Indicator 3: Employer Identification Number
• COVID-19 EIDLs and PPP borrowers whose EIN 1) matched another EIDL
or PPP borrowers whose EIN matched another PPP loan or 2) was improperly
formatted or began with a prefix that was not considered valid by the IRS in
its loan application
• COVID-19 EIDLs and PPP borrowers who appear to have established their
business after the cutoff date to qualify for assistance
Fraud Indicator 4: Bank Accounts
• COVID-19 EIDLs borrowers who 1) received multiple COVID-19 EIDLs using
the same bank account and routing number or 2) changed their deposit
account from the one included on their application to a different bank account
or debit card
• COVID-19 EIDL and PPP borrowers whose bank accounts matched other
applications found to have a higher likelihood of fraud
Fraud Indicator 5: Defaulted/No Loan Forgiveness
• PPP borrowers who have not made any payments, are in default, and have
not applied for forgiveness
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Fraud Indicator 6: Hotline Complaints
• Borrowers whose COVID-19 EIDL or PPP loan was the subject of a complaint
submitted to the OIG Hotline reporting various forms of fraud, waste, or
abuse
Fraud Indicator 7: Sole Proprietors and Independent Contractors without Employer
Identification Number
• COVID-19 EIDL advance sole proprietor or independent contractor borrowers
who claimed to employ more than one person but did not apply using EIN,
which are required of businesses with more than one employee
Fraud Indicator 8: Suspicious Phone Numbers
• COVID-19 EIDL borrowers whose phone numbers match other applications
found to have a higher likelihood of fraud
Fraud Indicator 9: Suspicious Physical Addresses
• COVID-19 EIDL borrowers whose addressed match other applications found
to have a higher likelihood of fraud
Fraud Indicator 10: COVID-19 EIDL Advances
• COVID-19 EIDL applicants who received advances that were identified by
SBA as potentially fraudulent
Fraud Indicator 11: Suspicious Email Addresses
• COVID-19 EIDL and PPP borrowers whose email addresses came from
potentially temporary domains that can disappear in the future or contain
modifications such as dot, dashes, or plus signs that make them appear
unique, but are essentially masked duplicates, as they do not alter where the
email is sent from if appropriate
• COVID-19 EIDL borrowers whose email addressed match other applications
found to have a higher likelihood of fraud
We refer to “potential fraud” throughout the report due to the increased confidence
we have that fraud may exist within certain indicator groups based on our prior
audits, investigative casework, and advanced data analytics. This review
demonstrated that the potential fraud estimates directly correlate to our
investigative casework, adjudicated and ongoing criminal cases, and to schemes
SBA OIG and other oversight agencies are continuing to unravel and prosecute.
COMBATING FRAUD
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Since March 2020, we have initiated over a thousand investigations involving
complaints of fraud, resulting in arrests, indictments, and convictions that are
reported daily by the U.S. Department of Justice (DOJ) and its Offices of U.S.
Attorneys. We have received more than 250,000 SBA OIG Hotline complaints and
allegations of wrongdoing since the start of the pandemic. From that number, our
data analytics team identified more than 95,000 actionable leads — representing
more than 100 years of investigative case work. Through our “whole of agency”
approach we were able to identify s a comprehensive picture of the potential fraud
within the COVID-19 EIDL program and the PPP, expanding our view of the fraud
landscape. With time and resources, OIG and our investigative partners will
investigate these loans identified as potentially fraudulent within the statute of
limitations.
To bring fraudsters to justice and return taxpayer funds, OIG fosters a whole-of-
government approach. OIG has partnered with many other law enforcement
organizations, conducted outreach to the DOJ Offices of the U.S. Attorneys, and
evaluated allegations of wrongdoing received through our Hotline using a
partnership with the Pandemic Response Accountability Committee (PRAC). We
are a key member of several DOJ strike forces, which the President has requested
to increase from 3 to at least 10. We also partnered with the SBA Office of the Chief
Information Officer to investigate and remove websites suspected of being
fraudulent. The U.S. Secret Service has assisted our office in the seizure of more
than $1 billion stolen by fraudsters from the EIDL program.
OIG often communicates with financial institutions to educate them on SBA
COVID-19 related programs and fraud indicators. OIG and the U.S. Secret Service
have jointly issued Financial Crimes Enforcement Network Alerts. We issued a
scam and fraud alert and provided information on how to return the funds or hold
for seizure.
In addition to COVID-19 Strike Force Teams, OIG has fostered and partnered with
numerous task forces across the nation to amplify its law enforcement reach. OIG is
accustomed to such a model through years of investment in training and in outreach
across the law enforcement community to combat fraud in SBA’s flagship programs.
The task force model bolsters efforts to investigate and prosecute the most culpable
domestic and international criminal actors. This strategy works by augmenting and
incorporating existing coordination mechanisms, identifying resources and
techniques to uncover fraudulent actors and their schemes, and sharing and
harnessing information and insights gained from prior enforcement efforts.
Our Oregon Task Force is an outstanding example of how the strategy acted as a
force multiplier in taking the fight to fraudsters’ doorsteps. This task force was our
Western Region Office’s initial task force, bringing charges forward as early as
December 2020. Our partners on this task force include the Federal Bureau of
Investigation, the U.S. Treasury Inspector General for Tax Administration, the
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Internal Revenue Service’s Criminal Investigation, Homeland Security
Investigations, the Secret Service, the U.S. Postal Inspection Service, and the Naval
Criminal Investigative Service. Recently, this task force uncovered one of the
largest schemes we have prosecuted so far, exceeding $170 million, with over $11.5
million in secured funding.
Additionally, OIG has employed an international approach by expanding our
collaboration, rooting out bad actors, including Nigerian fraudsters who have taken
advantage of U.S. government programs. In April 2023, OIG joined a U.S.
delegation to Nigeria where we worked with government and law enforcement
representatives to identify ways our countries can work together to ensure
fraudsters are brought to justice. Nigerian fraudsters also often seek to steal from
their own government. This partnership will continue to produce results here and
abroad.
In the fall of 2022, OIG took a significant step by establishing its Technology
Solutions Division, which aligns with our objective of “leveraging technology and
employee experience to improve OIG methods in carrying out our mission.” Through
intentional investments in data analytics, OIG’s data analytics team has been able
to use machine learning and artificial intelligence to identify outliers in the
portfolios for investigation, as well as employing traditional data analytics to
develop investigative leads for our special agents working in tandem with task force
partners.
Many of the instances of fraud have been egregious, such as:
• In June 2023, a Utah woman was found guilty of $10 million worth of PPP
loan fraud. The federal jury convicted her of two counts of making false
statements designed to influence a bank, one count of money laundering, and
one count of contempt. The woman’s false statements influenced the bank to
fund her requested $10 million PPP loan. After receiving the loan proceeds,
she transferred $150,000 to invest in a movie.
• In May 2023 in Puerto Rico, 44 individuals were indicted for their
participation in a multi-million-dollar fraud scheme to illegally obtain federal
recovery funds under the CARES Act. The Grand Jury charged the
defendants with multiple counts of wire fraud and money laundering. The
charging documents allege that from April 2020 through May 2023, the
defendants and their co-conspirators caused the submission of at least 52
EIDL and PPP loan applications seeking the illegal disbursement of at least
$1.2 million in federal recovery funds from the SBA and Bank 1.
• In March 2023, a former South Florida regional manager for a leading
national bank was sentenced to 120 months in prison for participating in a
conspiracy to defraud the PPP. The man and his co-conspirators attempted to
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submit over 90 fraudulent loan applications to defraud the PPP and EIDL
programs out of approximately $25 million. The conspiracy caused
approximately $15 million in losses. The investigation has recovered over
$800,000 so far.
• In March 2023, a federal jury convicted a Virginia woman on charges of
conspiracy, bank fraud, and money laundering. The woman and her husband
fraudulently obtained two PPP loans. She carried out the scheme in
connection with two of her husband’s businesses by creating fraudulent
payroll documentation for each business and then submitting that
documentation in support of the PPP loan applications. The fraudulent
documentation claimed that her husband’s businesses had dozens of
employees with over $17 million of annual payroll in 2019, when in fact they
had few, if any, employees. In total, she and her husband fraudulently
obtained approximately $2.5 million in loan proceeds. They then spent those
funds on a 7,000-square-foot home.
• In February 2023, a Texas man was convicted for his role in a scheme to
fraudulently obtain and launder millions in PPP funds. The man conspired
with others to submit fraudulent PPP loan applications by falsifying the
number of employees and the average monthly payroll expenses. In total, the
co-conspirators sought over $35 million through more than 80 fraudulent
PPP loans. The Texas man distributed over $500,000 in fraudulent loan
proceeds to his co-conspirators and himself using bogus payroll checks. He
laundered a portion of the proceeds by transferring the funds from one of his
bank accounts to another bank account he controlled.
• In February 2023, a California man was sentenced to 54 months in federal
prison for fraudulently obtaining $5 million in COVID-19 relief loans for his
sham businesses. In May and June of 2020, the man submitted false and
fraudulent PPP loan applications to three banks. The false information
submitted included the number of employees, altered bank account records
with inflated balances, and fictitious quarterly federal tax return forms.
Relying on this false information, the banks funded the PPP loan applications
and transferred approximately $5 million to accounts he controlled. He used
the fraudulently obtained PPP loan proceeds for his own personal benefit,
including for expenses prohibited under the requirements of the PPP
program, such as for the purchase of luxury vehicles and lavish vacations.
• In February 2023, a California woman who fled to Montenegro to avoid
prison sentence was returned to the United States after spending
approximately 1 year as a fugitive. The woman was a member of a Los
Angeles-based fraud ring that engaged in a scheme to fraudulently obtain
more than $20 million in PPP and EIDL COVID-19 relief funds. She and her
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co-conspirators used dozens of fake, stolen, or synthetic identities – including
names belonging to elderly or deceased people and foreign exchange students
– to submit fraudulent applications for about 150 PPP and EIDL loans. They
used the fraudulently obtained funds as down payments on three luxury
homes in California. They also used the funds to buy gold coins, diamonds,
jewelry, luxury watches, designer handbags, cryptocurrency, securities, and a
Harley-Davidson motorcycle.
• In November 2022, a Texas man and woman were sentenced to 121 months
and 66 months, respectively, in federal prison for wire fraud violations
related to COVID-19 relief funds. The two operated a sophisticated
telemarketing scheme under the name My Buddy Loans from a house in
Texas. In exchange for a fee, My Buddy Loans took personal identifying
information from victims and promised to file an application for an
agricultural grant, which they said was available to those who owned as little
as one acre of land. Instead, they filed fraudulent EIDL applications with
SBA that contained the victims’ personal identification information. Based on
these fraudulent applications, SBA issued more than $1.56 million in EIDL
Advances to people who were not eligible.
It should be noted that whistleblowers are instrumental to our oversight efforts.
These brave individuals have come forward to help us focus our oversight on
vulnerabilities within SBA’s internal control environment and other areas of
significant concern. Many of our Hotline complaints concern identity theft. We have
made referrals to SBA to address victims’ concerns pertaining to fraudulent loans.
These reports have also informed our ongoing review of SBA’s response to
allegations of identity theft. OIG is deeply appreciative of the whistleblowers who
have come forward. We will investigate any ensuing complaints of retaliation that
may be related to these protected disclosures.
PANDEMIC RESPONSE ACCOUNTABILITY COMMITTEE
Through the CARES Act, Congress established the PRAC within the Council of the
Inspectors General on Integrity and Efficiency (CIGIE). OIG was designated as a
statutory member of the PRAC, which provides increased oversight capacity to the
pandemic response efforts. I also chair the PRAC’s Audit Subcommittee to provide
strategic audit-related direction to all government review efforts.
The PRAC plays a key role in supporting OIG’s pandemic oversight efforts. During
the pandemic, our Hotline received thousands of complaints outside of its electronic
complaint submission system. The PRAC identified 10 volunteers to perform a
short-term detail to our Hotline. These volunteers performed data entry to
consolidate these complaints into the case tracking system, where they can be
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efficiently assessed and addressed. We are also engaged with the PRAC to bolster
our internal data analytics capabilities, though we have developed over the past
year a robust internal capability to guide and enrich our oversight efforts.
Working with the PRAC, we created an Agile Products Toolkit to help oversight
agencies quickly produce reports addressing the fraud and misuse of taxpayer
money resulting from the expedited disbursal of pandemic economic aid funds.
Federal, state, and local oversight agencies use this toolkit as a guide for conducting
quick-response reviews.
OIG continues to collaboratively work alongside the PRAC to produce
comprehensive work products that further safeguard taxpayer dollars, identify
cases of fraud in SBA pandemic relief related programs and proactively alert
external stakeholders to areas of potential waste, fraud, and abuse. Through this
partnership, the PRAC has issued the following final reports that relied heavily on
OIG personnels’ subject matter expertise regarding SBA programs:
1. SBA PPP Phase III Fraud Controls, January 21, 2022
2. Risk Advisory – Potential Identity or Other Fraud in SBA Pandemic Relief
Programs, September 19, 2022
3. FRAUD ALERT: PRAC Identifies $5.4 Billion in Potentially Fraudulent
Pandemic Loans Obtained Using Over 69,000 Questionable Social Security
Numbers, January 30, 2023
On July 5, 2023, the PRAC published, the PRAC Impact Project report that was
produced in collaboration with the following nine OIGs: Department of Agriculture,
Education, Health and Human Services, Homeland Security, Housing and Urban
Development, Labor, the Interior, Transportation, and the Treasury to review the
sources, intended purpose, and impacts of federal pandemic funds for six geographic
areas. With this team, OIG reviewed the total combined funding for:
1. The Paycheck Protection Program (PPP) loans and associated lender fees;
2. The COVID-19 EIDL and Emergency Advance Grants;
3. The Shuttered Venue Operators Grants;
4. The Restaurant Revitalization Fund; and,
5. Section 1112 Debt Relief Payments provided to each of the following areas:
a. Springfield, Massachusetts;
b. Coeur d’Alene, Idaho;
c. Sheridan County, Nebraska;
d. Marion County, Georgia;
e. White Earth Nation Indian Reservation, Minnesota;
f. Jicarilla Apache Nation Indian Reservation, New Mexico
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Outside of assisting in issuance of comprehensive reports from the PRAC our
partnership furthers goals of promoting integrity, efficiency, and effectiveness of
SBA programs; and continues to amplify our oversight impact through engagement
with an external stakeholder.
SUSTAINED OVERSIGHT APPROACH
SBA has exercised over a trillion dollars in lending authority and entrepreneurial
assistance in the wake of the pandemic. While PPP lending is anticipated to resolve
within the next several years, our efforts to detect and investigate the substantial
fraud will continue. We also will be working diligently to offer recommendations
that improve SBA programs and operations, which were strained by the
unprecedented demand during the pandemic crisis. This oversight will require
vigilance so that SBA can efficiently and effectively meet the needs of small
businesses.
The scale and scope of the pandemic response programs, and the potential fraud
under investigation, far outmatches oversight resources. To prioritize our work and
root out fraud in these vast portfolios, we have moved data analytics into the heart
of our oversight efforts. Our data analytics staff is assisted by contractor support
secured through our partnership with the PRAC. Our FY 2024 budget request seeks
three additional data scientists so that we can maintain and improve our fraud
fight. Data analysis produces a higher quality of audit and investigative
information so that we can improve our audit and investigative work. In addition,
SBA’s loan portfolios are comprised of millions of records, which are far too
expansive for manual review. Data analytics bolsters our investigative capacity
with findings that have led to the arrest of fraudsters nationwide.
In August 2022, the President signed into law two bipartisan bills that were aimed
at holding accountable those who commit pandemic assistance fraud. The two laws
extend the time available to prosecute individuals who committed fraud through the
PPP or COVID-19 EIDL program, extending the statute of limitations for criminal
and civil enforcement against a borrower from 5 to 10 years. These bills
demonstrate that pandemic relief fraud enforcement will continue to be a priority
for many years to come.
The President’s requested increase in OIG’s base operating budget for FY 2024
coincides with the exhaustion of supplemental funds appropriated to OIG during
the pandemic. OIG’s proposed FY 2024 budget maintains our staffing level at 185
positions. The budget proposal also provides for three additional investigative
groups (27 positions) to expand our investigative efforts to match the unprecedented
resources expended on pandemic economic assistance. Vital to the oversight
successes of OIG, the budget also provides for three additional data scientists,
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which are essential to detecting the fraud, prioritizing investigations, and
enhancing the impact of the investigations.
With sufficient resources, coupled with the 10-year statute of limitations on PPP
and EIDL fraud, our office will be poised to combat fraud for years to come. We are
grateful for the swift action from the 117th Congress to extend the statute of
limitations on PPP and EIDL fraud and look forward to working with Congress on
resource determinations for FY 2024 and beyond.
Support of OIG’s budget request sends a strong message of deterrence to fraudsters
taking aim at all U.S. government programs. OIG has proven with adequate
resources, we are poised to promote public trust and instill integrity in SBA
programs. Budget scenarios, such as a return to FY 2022 funding levels, would be
detrimental to instilling integrity in SBA programs. We will not be able to
accomplish the goal of accountability for wrongdoing. Reducing OIG’s funding to FY
2022, as enacted, would decrease OIG’s investigative and fraud enforcement
capabilities to nearly equivalent to staffing levels of the office following
sequestration in 2013, which is less than 100 total positions. At the same time, OIG
will exhaust supplemental funds being directed to combat fraud in SBA’s pandemic
response programs in FY 2024. Such a funding scenario simply does not allow OIG
to provide effective oversight.
CONCLUSION
OIG’s COVID-19 Pandemic EIDL and PPP Loan Fraud Landscape provides a
credible estimate of potential fraud within these programs. This independent and
objective work is intended to keep both the Administrator and Congress informed
about the challenges of employing a pay-and-chase model during an economic crisis.
Fraudsters continuously probed the loan application systems and found
vulnerabilities. They coordinated schemes to bypass limited controls and gain
access to funds meant for eligible small businesses and entrepreneurs adversely
affected by the pandemic.
The nation can depend on OIG to provide independent, objective, and timely
oversight of SBA. We will focus our resources on systems and processes that present
serious management and performance challenges within SBA programs with a goal
of improving the integrity, accountability, and performance of those programs for
the benefit of the American people. Our investigations will root out fraud, waste,
and abuse and will marshal the resources available across the federal law
enforcement community to bring wrongdoers to justice.
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