Clyburn Letter to Cross River Bank on FinTech PPP Fraud
- Date
- 2021-05-27
Archived source: Clyburn Letter to Cross River Bank on FinTech PPP Fraud. Captured from coronavirus-democrats-oversight.house.gov.
Cited in: Cross River Bank · Gilles Gade · James E. Clyburn
Full text
May 27, 2021
Mr. Gilles Gade
President and Chief Executive Officer
Cross River Bank
400 Kelby St., 14th Floor,
Fort Lee, NJ 07024
Dear Mr. Gade:
As the Select Subcommittee on the Coronavirus Crisis continues investigating potential
waste, fraud, and abuse in the Paycheck Protection Program (PPP), I am deeply troubled by
recent reports alleging that financial technology (FinTech) lenders and their bank partners failed
to adequately screen PPP loan applications for fraud. This failure may have led to millions of
dollars in FinTech-facilitated PPP loans being made to fraudulent, non-existent, or otherwise
ineligible businesses.1 Recent reports indicate that Cross River Bank, a commercial bank that
partners with FinTechs to distribute PPP loans, has issued a large number of loans connected to
ineligible companies and fraudulent applications.2 I am writing today to request documents and
information necessary for the Select Subcommittee to understand whether Cross River and other
FinTech lenders and their bank partners implemented and utilized necessary fraud controls in
reviewing PPP loan applications.
According to analysis by Bloomberg, while FinTechs processed just 15 percent of PPP
loans overall, they are associated with 75 percent of the approved PPP loans that the Department
of Justice (DOJ) connected with fraud.3 A separate investigation by the nonpartisan Project on
Government Oversight (POGO) found that nearly half of approved loans cited in criminal court
1
See, e.g., Hundreds of PPP Loans Went to Fake Farms in Absurd Places, ProPublica (May 18, 2021)
(online at www.propublica.org/article/ppp-farms).
2
See, e.g., Lamborghinis, Strip Clubs, Bogus Companies, and Lies: The First 56 Paycheck Protection
Program Fraud Cases, Project on Government Oversight (Oct. 8, 2020) (online at
www.pogo.org/investigation/2020/10/lamborghinis-strip-clubs-bogus-companies-and-lies/); Red Flags: The First
Year of COVID-19 Loan Fraud Cases, Project on Government Oversight (May 18, 2021) (online at
www.pogo.org/investigation/2021/04/red-flags-the-first-year-of-covid-19-loan-fraud-cases/); How Small NJ Bank
Cross River Distributed $5.4B in PPP Funds, New York Post (July 10, 2020) (online at
www.nypost.com/2020/07/10/how-small-nj-bank-cross-river-distributed-5-4b-in-ppp-funds/).
3
PPP Scammers Used Fintech Companies to Carry Out Fraud, Bloomberg (Oct. 7, 2020) (online at
www.bloomberg.com/news/articles/2020-10-07/ppp-loans-scammers-used-fintech-companies-to-carry-out-fraud).
Mr. Gilles Gade
Page 2
documents involved seven FinTech companies and their bank partners.4 This failure to detect
fraud occurred while FinTechs made hundreds of millions of dollars in fees by issuing publicly
funded PPP loans.5
This analysis lends credence to reports that criminal actors sought out FinTechs for
fraudulent PPP loans because of the speed with which the FinTech companies processed the
loans—which in some cases could be approved in “as little as an hour”—and the fact that the
FinTech loan application process appeared to include very little scrutiny of its applicants.6 One
FinTech official reportedly said that their company handled PPP loans “at a blistering rate and
with less due diligence than it would normally exercise if its own funds, rather than taxpayer
dollars, were on the line.”7 This indifference to the proper disbursement of public funds is
unacceptable.
Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on
March 27, 2020, to provide relief to millions of Americans struggling due to the pandemic. The
CARES Act empowered Treasury and SBA to develop PPP to provide millions of small
businesses with vital assistance. Treasury and SBA were also charged with identifying suitable
lenders to administer the program.8 On April 8, 2020, SBA began allowing non-bank and non-
insured depository institution lenders, including FinTechs, to provide PPP loans to eligible
recipients.9 In many instances, FinTechs partnered with a handful of regulated banks to process
loans. FinTechs “onboard, verify and approve small businesses,” and then submit the loans to
4
Lamborghinis, Strip Clubs, Bogus Companies, and Lies: The First 56 Paycheck Protection Program
Fraud Cases, Project on Government Oversight (Oct. 8, 2020) (online at
www.pogo.org/investigation/2020/10/lamborghinis-strip-clubs-bogus-companies-and-lies/).
5
See, e.g., How Newbie Firms Got PPP Loans Through Quickie Lender Kabbage, Miami Herald (Sep. 10,
2020) (online at www.miamiherald.com/news/state/florida/article245599035.html); Big Banks Generated Billions in
PPP Fees, Miami Herald (Dec. 3, 2020) (online at www.miamiherald.com/news/coronavirus/article24 7562870.
Html).
6
Why PPP Fraud Hit Fintechs Harder than Banks, American Banker (Nov. 11, 2020) (online at
www.americanbanker.com/news/why-ppp-fraud-hit-Fintechs-harder-than-banks).
7
Lamborghinis, Strip Clubs, Bogus Companies, and Lies: The First 56 Paycheck Protection Program
Fraud Cases, Project on Government Oversight (Oct. 8, 2020) (online at
www.pogo.org/investigation/2020/10/lamborghinis-strip-clubs-bogus-companies-and-lies/).
8
Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, § 1102 (2020).
9
Department of the Treasury, Paycheck Protection Program (online at https://home.treasury.gov/policy-
issues/coronavirus/assistance-for-small-businesses/paycheck-protection-program) (accessed May 20, 2021); Small
Business Administration, SBA Form 3507: CARES Act Section 1102 Lender Agreement – Non-Bank and Non-
Insured Depository Institutions Lenders (posted on Apr. 8, 2020) (online at
https://home.treasury.gov/system/files/136/PPP--Agreement-for-New-Lenders-Non-Bank-Non-Insured-Depository-
Institution-Lenders-w-seal-fillable-4-8-2020.pdf). For definitional consistency, the Select Subcommittee is relying
on the Small Business Administration’s identification of Fintech lenders. Small Business Administration, Fintech
Companies Participating in Paycheck Protection Program (as of May 8, 2020) (online at
www.sba.gov/sites/default/files/2020-05/Fintech_Companies_Participating_in_PPP_05.08.20_0.pdf).
Mr. Gilles Gade
Page 3
SBA through the bank partners.10 Some banks would then keep the PPP loans on their balance
sheets while others would sell the loans back to the FinTech or third parties.11
PPP requires lenders that are federally regulated financial institutions to certify under
penalty of criminal prosecution that they have applied the anti-money laundering requirements
under the Bank Secrecy Act; PPP lenders that are not federally regulated financial institutions are
required to certify that they have followed such requirements applicable to an equivalent
regulated institution.12 Yet many FinTechs reportedly lacked compliance management systems
necessary to satisfy this requirement. One FinTech lender associated with multiple prosecutions
of PPP fraud boasted that “over 75% of all approved applications, and more than 90% of self-
employed applications, were processed without human intervention or manual review.”13
Individuals involved in the manual reviews of potentially fraudulent applications at FinTechs
have described the process as “perfunctory.”14 This lack of rigor was reflected in their failures to
deny applications showing clear markers of fraud. Rather than something to boast of, the rates of
fraud associated with these loans strongly suggest that FinTech companies’ loan screening
processes were woefully inadequate. A Bloomberg report points to multiple instances of fraud
that could have been prevented had FinTechs simply conducted web searches for the company
name of inactive, nonexistent, or otherwise clearly ineligible applicants.15
Cross River is a small New Jersey bank that focuses on providing services for technology
start-ups and has partnerships with multiple FinTechs, including Affirm, Upgrade, Upstart,
Divvy, Gusto, Intuit, and Veem – in addition to partnerships with high volume PPP-facilitating
10
Kabbage, Kabbage PPP Results: A Historic Feat for FinTech (updated as of Aug. 8, 2020) (online at
https://newsroom.kabbage.com/wp-content/uploads/2020/07/Kabbage-Paycheck-Protection-Program-PPP-
Report.pdf); Why FinTechs Are Declaring Victory in PPP Loans, Forbes (Aug. 13, 2020) (online at
www.forbes.com/sites/megangorman/2020/08/13/why-fintechs-are-declaring-victory-in-ppp-
loans/?sh=7031ed202205).
11
FinTechs Are Making Inroads in Small-Business Loans, Barrons (July 15, 2020) (online at
www.barrons.com/articles/Fintechs-are-making-inroads-in-small-business-loans-51594839654).
12
Small Business Administration, SBA Form 3507: CARES Act Section 1102 Lender Agreement – Non-
Bank and Non-Insured Depository Institutions Lenders (Apr. 8, 2020) (online at
https://home.treasury.gov/system/files/136/PPP--Agreement-for-New-Lenders-Non-Bank-Non-Insured-Depository-
Institution-Lenders-w-seal-fillable-4-8-2020.pdf) (emphasis added); see also, Small Business Administration,
Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811 (Apr. 15, 2020)
(interim final rule) (“Entities that are not presently subject to the requirements of the [Bank Secrecy Act], should,
prior to engaging in PPP lending activities, including making PPP loans to either new or existing customers who are
eligible borrowers under the PPP, establish an anti-money laundering (AML) compliance program equivalent to that
of a comparable federally regulated institution.”).
13
Kabbage, Kabbage PPP Results: A Historic Feat for FinTech (updated as of Aug. 8, 2020) (online at
https://newsroom.kabbage.com/wp-content/uploads/2020/07/Kabbage-Paycheck-Protection-Program-PPP-
Report.pdf).
14
Hundreds of PPP Loans Went to Fake Farms in Absurd Places, ProPublica (May 18, 2021) (online at
www.propublica.org/article/ppp-farms).
15
PPP Scammers Used Fintech Companies to Carry Out Fraud, Bloomberg (Oct. 7, 2020) (online at
www.bloomberg.com/news/articles/2020-10-07/ppp-loans-scammers-used-fintech-companies-to-carry-out-fraud).
Mr. Gilles Gade
Page 4
FinTechs such as BlueVine and Kabbage.16 Since the start of the program, over 30 firms have
partnered with Cross River to issue PPP loans. These partnerships are consistent with a “rent-a-
charter” business model — meaning that banks such as Cross River typically agree to ensure
regulatory compliance and other banking rules, while the FinTech partners focus on user
interfaces and platforms.17 According to its website, Cross River offers “credit and underwriting,
origination, payments, compliance, balance sheet capacity and capital market capabilities” to its
partners.18
Despite its modest size of around 300 employees, by December 2020, Cross River ranked
third among all banks by PPP loans made, trailing only national banking giants Bank of America
and JPMorgan Chase, and was twelfth among PPP lenders in dollar volume.19 By May 2021,
Cross River had approved over 280,000 PPP loans worth over $6.5 billion, making it the fifth
largest PPP lender by value in the nation.20 Cross River collected a fee from taxpayers estimated
at around $2,200 per loan, often sharing a portion with partner FinTechs.21 As of July 2020, it is
estimated that Cross River was paid approximately $160 million by U.S. taxpayers in fees related
to PPP loans, nearly doubling its previous year’s net revenue.22 Despite this increase in both
activity and revenue, Cross River’s Chairman admitted to “diving headfirst into PPP without
adding staff.”23 This lack of investment into anti-fraud and compliance capabilities appears to
have had a significant impact on the effectiveness of Cross River’s loan review process.
According to an analysis of PPP fraud cases by POGO, supported by a review of active
DOJ prosecutions, Cross River has approved a large share of the fraudulent loans subject to DOJ
16
How Small NJ Bank Cross River Distributed $5.4B in PPP Funds, New York Post (July 10, 2020)
(online at www.nypost.com/2020/07/10/how-small-nj-bank-cross-river-distributed-5-4b-in-ppp-funds/); Cross River
Bank, Contact Us (online at https://www.crossriver.com/contact-us) (accessed on May 24, 2021); Banking Dive,
Company of the Year: Cross River Bank (online at www.bankingdive.com/news/company-of-year-cross-river-bank-
2020/589524/) (accessed on May 24, 2021); The Tiny Bank that Got Pandemic Aid to 100,000 Small Businesses,
New York Times (Jun. 23, 2020) (online at www.nytimes.com/2020/06/23/business/paycheck-protection-program-
cross-river-bank.html).
17
The Tiny Bank that Got Pandemic Aid to 100,000 Small Businesses, New York Times (June 23, 2020)
(online at www.nytimes.com/2020/06/23/business/paycheck-protection-program-cross-river-bank.html).
18
Cross River Bank, Marketplace Lending (online at https://www.crossriver.com/marketplace-lending)
(accessed on May 24, 2021).
19
Cross River Chief Prepares for a PPP Encore, American Banker (Dec. 8, 2020) (online at
www.americanbanker.com/news/cross-river-chief-prepares-for-ppp-encore).
20
Small Business Administration, Paycheck Protection Program (PPP) Report: Approvals Through May
23, 2001 (May 23, 2021) (online at www.sba.gov/sites/default/files/2021-05/PPP_Report_Public_210523-508.pdf).
21
The Tiny Bank that Got Pandemic Aid to 100,000 Small Businesses, New York Times (June 23, 2020)
(online at www.nytimes.com/2020/06/23/business/paycheck-protection-program-cross-river-bank.html).
22
How Small NJ Bank Cross River Distributed $5.4B in PPP Funds, New York Post (July 10, 2020)
(online at www.nypost.com/2020/07/10/how-small-nj-bank-cross-river-distributed-5-4b-in-ppp-funds/).
23
Cross River Chief Prepares for a PPP Encore, American Banker (Dec. 8, 2020) (online at
www.americanbanker.com/news/cross-river-chief-prepares-for-ppp-encore).
Mr. Gilles Gade
Page 5
prosecutions.24 According to POGO’s analysis, Cross River was involved in over 30 percent of
the approved loans issued by FinTechs or their bank partners that were subject to DOJ
prosecutions.25 In one instance of fraud currently being prosecuted by DOJ, a Minnesota man
used his first and last name as his business name, listed his own social security number as his
business tax identification number, and fraudulently claimed to have 120 employees working out
of a small apartment. Cross River sent $1.2 million in PPP funds to the man’s personal accounts
one day after receiving the application.26
In another incident, a Texas man submitted 15 fraudulent applications to eight different
lenders seeking approximately $24.8 million in PPP loans. Cross River approved seven of the
loans.27 A modicum of due diligence by the bank should have identified the fraud. For example,
one of the applications was for a fictitious company registered on May 18, 2020. On the same
day that the company was registered, Cross River received its application for PPP funds. On the
following day, May 19, 2020, Cross River wired nearly $2 million to the account associated with
the newly registered fictitious company. The individual that submitted the application used PPP
loan funds to purchase multiple homes and buy a fleet of luxury cars, including a Bentley
convertible.28
The Select Subcommittee has consistently advocated for increasing access to loans and
capital to those in underserved markets, including businesses owned by veterans, members of the
military, socially and economically disadvantaged individuals, and women.29 In achieving this
24
Lamborghinis, Strip Clubs, Bogus Companies, and Lies: The First 56 Paycheck Protection Program
Fraud Cases, Project on Government Oversight (Oct. 8, 2020) (online at
www.pogo.org/investigation/2020/10/lamborghinis-strip-clubs-bogus-companies-and-lies/); Indictment, United
States of America v. Dinesh Sah, (N.D. Tex. 2020) (No. 3:20CR0484-S); Criminal Complaint, United States of
America v. Donald Franklin Trosin, (N.D. Iowa 2020) (No. 20-CR-4066); Indictment, United States of America v.
Ahmad Kanan a/k/a/ Ahmad Kanaan (W.D. Wis. 2020) (No. 20-CR-081); see generally, Accountable.US, COVID
Bailout Tracker (online at https://covidbailouttracker.com/) (accessed on May 20, 2021).
25
Lamborghinis, Strip Clubs, Bogus Companies, and Lies: The First 56 Paycheck Protection Program
Fraud Cases, Project on Government Oversight (Oct. 8, 2020) (online at
www.pogo.org/investigation/2020/10/lamborghinis-strip-clubs-bogus-companies-and-lies/); see also, List of 97
Approved Allegedly Fraudulent PPP Loans - As of Sept 30, 2020, Project on Government Oversight (Oct. 8, 2020)
(online at
https://docs.google.com/spreadsheets/d/1KprGhgHt23fJAsyUAw5csHorW_CVgtQCVgFLdGCYZqo/edit?usp=shar
ing).
26
United States of America v. Donald Franklin Trosin, (N.D. Iowa 2020) (No. 20-CR-4066).
27
Red Flags: The First Year of COVID-19 Loan Fraud Cases, Project on Government Oversight (May 18,
2021) (online at www.pogo.org/investigation/2021/04/red-flags-the-first-year-of-covid-19-loan-fraud-cases/).
28
Indictment, United States of America v. Dinesh Sah, (N.D. Tex. 2020) (No. 3:20CR0484-S).
29
See, e.g., Select Subcommittee on the Coronavirus Crisis, Press Release: New PPP Report Shows Trump
Administration and Big Banks Left Behind Struggling Small Businesses (Oct. 16, 2020) (online at
https://coronavirus.house.gov/news/press-releases/new-ppp-report-shows-trump-administration-and-big-banks-left-
behind-struggling); Letter from Chairman James E. Clyburn, Select Subcommittee on the Coronavirus Crisis, to
Secretary Steven Mnuchin, Department of the Treasury and Administrator Jovita Carranza, Small Business
Administration, (June 15, 2020) (online at
www.coronavirus.house.gov/sites/democrats.coronavirus.house.gov/files/2020-06-
15.Select%20Committee%20to%20Mnuchin%20Carranza-%20SBA%20re%20PPP.pdf).
Mr. Gilles Gade
Page 6
goal, both now and in the future, FinTechs and their bank partners may have an important role to
play through participation in small business loan programs. However, future partnerships must
be contingent on FinTechs and their bank partners’ demonstrated ability to properly administer
taxpayer funds and not jeopardize the integrity of the programs in which they participate.
To help the Select Subcommittee better understand the PPP fraud detection processes
applied by FinTech lenders and their bank and non-bank partners, please produce the following
documents and information, accounting for the activities of Cross River and all of its successor
and predecessor entities, by June 11, 2021.
1. All documents and policies establishing or governing the process that Cross River
used to review and approve PPP loan applications.
2. All documents and policies related to:
a. any system of preventive controls that Cross River has used to deter and
minimize fraud related to PPP loans; and
b. any system of detective controls Cross River had in place to identify and
respond to PPP loan fraud after it had occurred.
3. All communications concerning potential fraud or other financial crime related to
PPP loans, including, but not limited to, emails, persistent chat room logs and
transcripts, direct electronic messages, and minutes of senior leadership meetings.
4. All training materials provided to employees and contractors from January 2020
to the present related to fraud control and prevention, PPP loans, financial crime
investigations, and suspicious activity reporting.
5. All documents, including audits, monthly statistics, and external reviews,
containing assessments or estimates of the amount and value of improper
payments that have been made to PPP applicants whose loans were processed
through or facilitated by Cross River.
6. The completed SBA Form 3507.
Please also provide written responses to the following information requests by June 11,
2021:
1. How much is Cross River’s total revenue from facilitating PPP loans to date?
2. How many PPP loan applications and loans have been approved, issued, or
otherwise facilitated by Cross River, broken down by week, from April 2020 to
the present?
Mr. Gilles Gade
Page 7
3. How many PPP loan applications have been denied or rejected by Cross River,
broken down by week, from April 2020 to the present, and what was the reason
for denial or rejection?
4. How many Cross River employees have been dedicated full time and exclusively
to AML, BSA, or fraud compliance, including those employed full time to
prevent, detect, or investigate potential fraud, broken down by week, from
January 2019 to the present?
5. Please provide a list of all fraud checks conducted by Cross River on PPP loan
applications, a description of how each check serves to detect and prevent fraud,
and the average time taken to approve or reject a PPP loan application.
6. Please provide a list of all fraud checks conducted by Cross River on loan
applications unrelated to PPP, a description of how each check serves to detect
and prevent fraud, and the average time taken to approve a loan application
unrelated to PPP.
7. What is Cross River’s assessment or estimate of the number and value of
potentially fraudulent PPP loans that it has issued, approved, or otherwise
facilitated to date?
8. Please provide a description of what indicators and information Cross River’s
automated systems use to detect fraud or money laundering and how many and
what percentage of applications were rejected through this system; please also
describe what indicators trigger these automated systems to escalate an
application for human review and what percentage of those escalations resulted in
rejected applications.
9. Please provide a detailed description of Cross River’s relationship with any non-
bank or bank partners involved in PPP loans, including the name of each entity,
revenue sharing and liability sharing agreements.
10. Please provide a detailed description of how your company recruited PPP loan
applicants, including marketing strategies and advertising plans.
11. Please provide a detailed description of any incentives or rewards provided to
Cross River employees processing PPP loan applications, including monetary
bonuses and non-monetary rewards.
These requests are consistent with the House of Representatives’ authorization of the
Select Subcommittee on the Coronavirus Crisis “to conduct a full and complete investigation” of
“issues related to the coronavirus crisis,” including the “efficiency, effectiveness, equity, and
transparency of the use of taxpayer funds and relief programs to address the coronavirus crisis”
Mr. Gilles Gade
Page 8
and “reports of waste, fraud, abuse, price gouging, profiteering, or other abusive practices related
to the coronavirus crisis.”30
Please respond to this letter by no later than June 4, 2021, to confirm your company’s
cooperation. An attachment to this letter provides additional instructions for responding to the
Select Subcommittee’s request. If you have any questions regarding this request, please contact
Select Subcommittee staff at (202) 225-4400.
Sincerely,
__________________________
James E. Clyburn
Chairman
Enclosure
cc: The Honorable Steve Scalise, Ranking Member
30
H.Res. 8, sec. 4(f), 117th Cong. (2021); H.Res. 935, 116th Cong. (2020).
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2
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statements, reviews, opinions, offers, studies and investigations, questionnaires and
surveys, and work sheets (and all drafts, preliminary versions, alterations, modifications,
revisions, changes, and amendments of any of the foregoing, as well as any attachments
or appendices thereto), and graphic or oral records or representations of any kind
(including without limitation, photographs, charts, graphs, microfiche, microfilm,
videotape, recordings and motion pictures), and electronic, mechanical, and electric
records or representations of any kind (including, without limitation, tapes, cassettes,
disks, and recordings) and other written, printed, typed, or other graphic or recorded
matter of any kind or nature, however produced or reproduced, and whether preserved in
writing, film, tape, disk, videotape, or otherwise. A document bearing any notation not a
part of the original text is to be considered a separate document. A draft or non-identical
copy is a separate document within the meaning of this term.
2. The term “communication” means each manner or means of disclosure or exchange of
information, regardless of means utilized, whether oral, electronic, by document or
otherwise, and whether in a meeting, by telephone, facsimile, mail, releases, electronic
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message including email (desktop or mobile device), text message, instant message,
MMS or SMS message, message application, or otherwise.
3. The terms “and” and “or” shall be construed broadly and either conjunctively or
disjunctively to bring within the scope of this request any information that might
otherwise be construed to be outside its scope. The singular includes plural number, and
vice versa. The masculine includes the feminine and neutral genders.
4. The term “including” shall be construed broadly to mean “including, but not limited to.”
5. The term “Company” means the named legal entity as well as any units, firms,
partnerships, associations, corporations, limited liability companies, trusts, subsidiaries,
affiliates, divisions, departments, branches, joint ventures, proprietorships, syndicates, or
other legal, business or government entities over which the named legal entity exercises
control or in which the named entity has any ownership whatsoever.
6. The term “identify,” when used in a question about individuals, means to provide the
following information: (a) the individual’s complete name and title; (b) the
individual’s business or personal address and phone number; and (c) any and all
known aliases.
7. The term “related to” or “referring or relating to,” with respect to any given subject,
means anything that constitutes, contains, embodies, reflects, identifies, states, refers to,
deals with, or is pertinent to that subject in any manner whatsoever.
8. The term “employee” means any past or present agent, borrowed employee, casual
employee, consultant, contractor, de facto employee, detailee, fellow, independent
contractor, intern, joint adventurer, loaned employee, officer, part-time employee,
permanent employee, provisional employee, special government employee,
subcontractor, or any other type of service provider.
9. The term “individual” means all natural persons and all persons or entities acting on
their behalf.
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