Lowering the Guardrails (Staff Memo, March 25, 2021)

Summary

A memorandum dated March 25, 2021 from Majority Staff to Members of the Select Subcommittee on the Coronavirus Crisis, titled Lowering the Guardrails: How the Trump Administration Failed to Prevent Billions in Pandemic Small Business Fraud. It describes new evidence obtained by the Select Subcommittee about fraud in the SBA's Paycheck Protection Program and Economic Injury Disaster Loan program. Its Key Findings list $626 million seized or forfeited, less than 1% of the nearly $84 billion in potential fraud identified, 1.34 million EIDL fraud referrals from SBA to its Inspector General, and 148,525 SBA OIG hotline complaints. The memo also describes oversight steps by the Biden Administration and Congress, including $142 million in oversight funds in the American Rescue Plan.

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MEMORANDUM

March 25, 2021

To:
Members, Select Subcommittee on the Coronavirus Crisis

Fr:
Majority Staff

Re:
Lowering the Guardrails:  How the Trump Administration Failed to Prevent
Billions in Pandemic Small Business Fraud

This memorandum describes new evidence obtained by the Select Subcommittee
regarding the scope of fraud in the Small Business Administration’s (SBA’s) Paycheck
Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program.  These programs
have played a crucial role in helping small businesses keep their lights on and keep workers on
the payroll during the pandemic, preventing the nation’s economic crisis from becoming even
worse.  However, the Trump Administration refused to implement basic controls in PPP and
EIDL despite warnings from the Select Subcommittee and others, leading to billions of dollars in
potential fraud.  The American Rescue Plan provided more resources to federal watchdogs to
combat this problem, and the Biden-Harris Administration is enhancing program integrity to
prevent fraud, waste, and abuse in these critical programs going forward.

Key Findings

• $626 million:  Funds seized or forfeited as a result of civil and criminal investigations
involving the EIDL and PPP programs by the Department of Justice (DOJ), less than 1%
of the nearly $84 billion in potential fraud identified in these programs.

• 1.34 million:  Referrals for suspected fraud in EIDL loans and advances from SBA to the
agency’s Inspector General.

• 148,525:  Hotline complaints received by the SBA Office of Inspector General (OIG)
relating to PPP or EIDL, a 19,500% increase over prior years.

• 212:  Open SBA OIG investigations regarding EIDL or PPP as of March 18, 2021.

• 32:  Law enforcement and other federal and state agencies investigating small business
fraud in pandemic relief programs.

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I.
Trump Administration Actions Led to Substantial Fraud in Small Business Relief
Programs

In response to the coronavirus pandemic, Congress has taken swift action to aid
America’s small businesses.  With the passage of the American Rescue Plan, more than $1
trillion has been appropriated for PPP and EIDL.i  So far, SBA has issued more than 8.2 million
PPP loans totaling over $718 billionii and more than 3.7 million EIDL loans totaling over $200
billion.iii  SBA has also issued more than 5.7 million EIDL Advance grants, worth $20 billion.iv
These programs have played an essential role in preventing further economic destruction during
the pandemic.  However, the programs’ effectiveness was hampered due to poor implementation
by the previous Administration that led to the diversion of funds due to fraud, waste, and abuse.

The Select Subcommittee, as well as the Government Accountability Office (GAO) and
SBA OIG, have worked to determine the scope of potential fraud in EIDL and PPP under the
previous Administration.  Last October, SBA OIG found that under the Trump Administration,
SBA “lowered the guardrails” by “removing or weakening of controls” in the EIDL program,
which “significantly increased the risk of program fraud.”v  Regarding PPP, the Inspector
General concluded that the Trump Administration’s efforts “to hurry capital to businesses were
at the expense of controls that could have reduced the likelihood of ineligible or fraudulent
businesses obtaining a PPP loan.”vi

EIDL Fraud

The Trump Administration’s actions resulted in significant potential fraud, waste, and
abuse in the EIDL program.  According to the most recent analysis by SBA OIG, there have
been $79 billion in potentially fraudulent EIDL loans and advances, including:

• $67.5 billion in loans and advances to applicants with duplicate IP addresses, email
addresses, physical addresses, and bank accounts;
• $7.9 billion in loans and advances to applicants using bank accounts that differed from
the accounts listed on their original loan application;
• $3.2 billion in loans and advances linked to alleged identity theft; and
• $557 million in loans and advances to potentially ineligible recipients with Employer
Identification Numbers registered after the program cutoff date.vii

The scale of potential fraud is also evident in the 1.34 million referrals for suspected
fraud in EIDL loans and advances that SBA sent to the agency’s Inspector General.  These
include nearly 750,000 referrals for suspected identify theft and more than 585,000 referrals for
other potentially fraudulent activity.viii

PPP Fraud

Significant potential fraud has also been identified in PPP following the Trump
Administration’s refusal to implement basic fraud controls.  On September 1, 2020, the Select
Subcommittee released an analysis identifying more than $4 billion in potentially fraudulent PPP
loans.ix  The SBA OIG conducted its own analysis, identifying $4.6 billion in potentially

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fraudulent PPP loans,x including $3.6 billion that went to borrowers on the Treasury
Department’s Do Not Pay list,xi $692 million in duplicate PPP loans,xii and $402 million to
borrowers with Taxpayer Identification Numbers (TINs) created after the program cutoff date.xiii

In a separate analysis, SBA OIG also identified nearly 55,000 PPP loans totaling $7
billion made to potentially ineligible businesses, including companies that exceeded maximum
loan amounts based on the number of employees, exceeded maximum business size standards, or
received TINs after the program cutoff date.xiv

In December 2020, SBA’s independent financial auditor identified a broader set of more
than two million PPP loans worth $189 billion —more than one third of all PPP loans issued in
that period—that “are potentially not in conformance with the CARES Act and related
legislation.”  The auditor found the Trump Administration “did not adequately design and
implement controls to ensure PPP loan guarantees were accurate” for the purpose of reporting
SBA’s liabilities for loan guarantees and that the SBA “approved loans disbursed by its third-
party lenders that, in numerous cases, were not accurate.”xv

Fraud Complaints and Reports

Federal watchdogs received an unprecedented number of tips and complaints about
potential fraud in these programs.  SBA OIG has received a total of 148,525 hotline complaints
relating to PPP and EIDL, a 19,500% increase over the approximately 700 to 800 hotline
complaints the Inspector General receives in a typical year.  Of the complaints received, 428
have led to OIG investigations, while 73,758 were still unprocessed as of March 18, 2021.xvi

Financial institutions also identified significant potential fraud in PPP and EIDL during
the previous Administration.  These entities filed 41,000 Suspicious Activity Reports with the
Department of the Treasury’s Financial Crimes Enforcement Network relating to PPP and EIDL
from May to October 2020.xvii

II.
The Biden Administration and Democrats in Congress Are Taking Action to Stop
Fraud

Supporting Oversight by Federal Watchdogs

Congressional Democrats and the Biden-Harris Administration have ramped up oversight
efforts to address small business lending fraud risks.  President Biden has called for “fastidious
oversight” of pandemic relief funds and directed his Administration to “make sure the relief
arrives quickly, equitably and efficiently with no waste or fraud.”xviii

The American Rescue Plan provides an additional $142 million in oversight funds to
combat fraud, including $77 million to GAO, $40 million to the Pandemic Response
Accountability Committee (PRAC), and $25 million to the SBA OIG.xix  SBA OIG may use
these funds, in part, to increase hiring of law enforcement agents.  The PRAC plans to use the
funds, in part, for the Pandemic Analytics Center of Excellence, which the PRAC recently
established to conduct data analysis on pandemic-related funds and assist fraud investigations.xx

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The Center’s four goals are:  (1) conduct data analysis and visualization of all pandemic response
funds; (2) provide fraud-fighting tools and central shared services to the Inspectors General
community; (3) enable the broad sharing of data, analytics and leading practices across the
oversight and law enforcement community; and (4) assist investigations and audits of pandemic
relief programs with expanded data for open source investigative intelligence.xxi

Enhancing Program Integrity and Interagency Coordination

Given the high number of potentially fraudulent loans disbursed by the previous
Administration under the PPP and EIDL programs, the federal government faces a steep
challenge in mounting an effective response and pursuing fraudsters.  The Biden-Harris
Administration has made improvements to program integrity and interagency coordination to
help address this challenge.

In February 2021, the White House announced key program changes to reduce fraud in
PPP while ensuring a streamlined loan review process.  Under these procedures, “loan guaranty
approval is now contingent on passing SBA fraud checks, Treasury’s Do Not Pay database, and
public records.”  In addition, the largest PPP loans and a sampling of smaller loans are now
subject to more detailed manual reviews.xxii

Government coordination has also improved.  At least 32 federal, state, and local law
enforcement and other agencies are currently investigating PPP and EIDL fraud.xxiii  The PRAC
is working with DOJ and other law enforcement agencies to combat fraud, including by
establishing a Fraud Task Force on February 11, 2021, to help develop an organized approach to
handle cases with potentially overlapping jurisdiction.xxiv

As of March 23, 2021, DOJ has charged 173 criminal cases involving 242 defendants for
violations related to the PPP or EIDL programs. In those cases, DOJ has charged $446.8 million
in losses related to PPP and obtained 48 convictions.  For the EIDL program, DOJ has charged
$27.1 million in losses and obtained 9 convictions.  Of the nearly $84 billion in potential fraud in
the PPP and EIDL programs, $626 million has been seized or forfeited as a result of DOJ’s
criminal and civil investigations.xxv   DOJ may need additional personnel to continue effectively
investigating and prosecuting cases involving EIDL and PPP fraud.  This could include
additional attorneys, as well as more data analysts and forensic contractors, to pursue all
coronavirus-related fraud.

To further promote accountability and coordination, President Biden appointed former
National Economic Council Director Gene Sperling to oversee pandemic relief implementation
under the American Rescue Plan, with a focus on ensuring the funds go where they are needed
and are not diverted to fraud, waste, or abuse.xxvi

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i Pandemic Response Accountability Committee, Funding Overview (online at
www.pandemicoversight.gov/track-the-money/funding-overview) (accessed on Mar. 22, 2021); American Rescue
Plan Act, Pub. L. 117-7 (2021).
ii Small Business Administration, PPP Data (as of Mar. 21, 2021) (online at www.sba.gov/funding-
programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data).
iii Small Business Administration, Disaster Assistance Update:  Nationwide EIDL Loans (Feb. 16, 2021)
(www.sba.gov/sites/default/files/2021-02/2.16.2021_COVID%20EIDL%20200B-508.pdf).
iv Small Business Administration, Disaster Assistance Update:  EIDL Advance (July 15, 2020)
(www.sba.gov/sites/default/files/2021-02/EIDL%20COVID-19%20Advance%207.15.20-508.pdf).
v Small Business Administration, Office of Inspector General, Inspection of Small Business
Administration’s Initial Disaster Assistance Response to the Coronavirus Pandemic (Report No. 21-02) (Oct. 28,
2020) (online at www.sba.gov/sites/default/files/2020-10/SBA%20OIG%20Report%2021-02.pdf).
vi Small Business Administration, Office of Inspector General, Inspection of SBA’s Implementation of the
Paycheck Protection Program (Report No. 21-07) (Jan. 14, 2021) (online at www.sba.gov/document/report-21-07-
inspection-sbas-implementation-paycheck-protection-program).
vii Email from Staff, Small Business Administration, Office of Inspector General, to Staff, Select
Subcommittee on the Coronavirus Crisis (Mar. 18, 2021).
viii Email from Staff, Government Accountability Office, to Staff, Select Subcommittee on the Coronavirus
Crisis (Mar. 17, 2021).
ix Select Subcommittee on the Coronavirus Crisis, Press Release:  Select Subcommittee Releases
Preliminary Analysis of Paycheck Protection Program Data (Sept. 1, 2020) (online at
https://coronavirus.house.gov/news/press-releases/chairman-clyburn-addresses-administration-s-unprecedented-
refusal-release-ppp).
x Email from Staff, Small Business Administration, Office of Inspector General, to Staff, Select
Subcommittee on the Coronavirus Crisis (Mar. 18, 2021).
xi Small Business Administration, Office of Inspector General, Management Alert:  Paycheck Protection
Program Loan Recipients on the Department of Treasury’s Do Not Pay List (Report No. 21-05) (Jan. 11, 2021)
(online at www.sba.gov/sites/default/files/2021-01/SBA%20OIG%20Report%2021-06.pdf) (data as of Aug. 8,
2020).
xii Small Business Administration, Office of Inspector General, Flash Report:  Duplicate Loans Made
Under the Paycheck Protection Program (Report No. 21-09) (Mar. 15, 2021) (online at
www.sba.gov/sites/default/files/2021-03/SBA%20OIG%20%20Report%2021-09.pdf) (data as of Aug. 9, 2020).
xiii Small Business Administration, Office of Inspector General, Inspection of SBA’s Implementation of the
Paycheck Protection Program (Report No. 21-07) (Jan. 14, 2021) (online at www.sba.gov/document/report-21-07-
inspection-sbas-implementation-paycheck-protection-program).
xiv Small Business Administration, Office of Inspector General, Inspection of SBA’s Implementation of the
Paycheck Protection Program (Report No. 21-07) (Jan. 14, 2021) (online at www.sba.gov/document/report-21-07-
inspection-sbas-implementation-paycheck-protection-program); According to SBA OIG, $402 million of this $7
billion in loans to potentially ineligible borrowers overlaps with the $4.6 billion in potentially fraudulent loans that
SBA OIG identified.
xv Small Business Administration, Agency Financial Report, Fiscal Year 2020 (Dec. 2020) (online at
www.sba.gov/sites/default/files/2020-12/2020%20SBA%20AFR_121820A.pdf); see also Small Business
Administration, Paycheck Protection Program (PPP) Report (identifying a total of 5.2 million loan approvals

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through Aug. 8, 2020) (online at www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-
508.pdf).
xvi Email from Staff, Small Business Administration, Office of Inspector General, to Staff, Select
Subcommittee on the Coronavirus Crisis (Mar. 18, 2021).
xvii Government Accountability Office, COVID-19:  Critical Vaccine Distribution, Supply Chain, Program
Integrity, and Other Challenges Require Focused Federal Attention (GAO-21-265) (Jan. 2021) (online at
www.gao.gov/assets/gao-21-265.pdf).
xviii President Biden:  COVID Relief Needs ‘Fastidious Oversight’, Government Executive (Mar. 15, 2021)
(online at www.govexec.com/oversight/2021/03/president-biden-covid-relief-needs-fastidious-oversight/172681/).
xix American Rescue Plan Act, Pub. L. 117-7 (2021).
xx Briefing by Michael E. Horowitz, Chair, Pandemic Response Accountability Committee, to Staff, Select
Subcommittee on the Coronavirus Crisis (Jan. 26, 2021); Email from Staff, Pandemic Response Accountability
Committee, to Staff, Select Subcommittee on the Coronavirus Crisis (Mar. 19, 2021).
xxi Email from Staff, Pandemic Response Accountability Committee, to Staff, Select Subcommittee on the
Coronavirus Crisis (Mar. 19, 2021).
xxii The White House, Fact Sheet:  Biden-Harris Administration Increases Lending to Small Businesses in
Need, Announces Changes to PPP to Further Promote Equitable Access to Relief (Feb. 22, 2021) (online at
www.whitehouse.gov/briefing-room/statements-releases/2021/02/22/fact-sheet-biden-harris-administration-
increases-lending-to-small-businesses-in-need-announces-changes-to-ppp-to-further-promote-equitable-access-to-
relief/).
xxiii Email from Staff, Small Business Administration, Office of Inspector General, to Staff, Select
Subcommittee on the Coronavirus Crisis (Mar. 18, 2021); Email from Staff, Government Accountability Office, to
Staff, Select Subcommittee on the Coronavirus Crisis (Mar. 17, 2021); Email from Staff, Pandemic Response
Accountability Committee, to Staff, Select Subcommittee on the Coronavirus Crisis (Mar. 19, 2021).
xxiv Briefing by Robert Westbrooks, Executive Director, Pandemic Response Accountability Committee, to
Staff, Select Subcommittee on the Coronavirus Crisis (Jan. 26, 2021).
xxv Email from Staff, Department of Justice, to Staff, Select Subcommittee on the Coronavirus Crisis (Mar
23, 2021).
xxvi President Biden:  COVID Relief Needs ‘Fastidious Oversight’, Government Executive (Mar. 15, 2021)
(online at www.govexec.com/oversight/2021/03/president-biden-covid-relief-needs-fastidious-oversight/172681/).

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