SBA Deputy IG Sheldon Shoemaker Statement (March 9, 2023)
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SHELDON SHOEMAKER
DEPUTY INSPECTOR GENERAL
U.S. SMALL BUSINESS ADMINISTRATION
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT OPERATIONS
AND THE FEDERAL WORKFORCE
COMMITTEE ON OVERSIGHT AND ACCOUNTABILITY
U.S. HOUSE OF REPRESENTATIVES
MARCH 9, 2023
INTRODUCTION
Chairman Sessions, Ranking Member Mfume, and distinguished members of the
Subcommittee, on behalf of Inspector General Ware, thank you for the opportunity
to testify before you today and for your continued support of the Office of Inspector
General (OIG). I am honored to represent the dedicated men and women of OIG and
their work to combat fraud and improper payments in the U.S. Small Business
Administration’s (SBA) pandemic response programs.
Our office provides auditing, investigative, and other services to support and assist
SBA in achieving its mission. The office is ranked as the top OIG in the federal
government as a Best Place to Work by the Partnership for Public Service with an
engagement and satisfaction employee score of 90.6, which exceeds the private
sector score of 79.1 and the overall government score of 64.5. As a result of its
oversight efforts, OIG audits provide recommendations to SBA leadership to
improve the performance of SBA’s programs and services for the benefit of the
American people. Similarly, OIG investigations pursue evidence of wrongdoing in
SBA programs, bringing fraudsters to justice. OIG provides taxpayers with a
significant return on investment, rooting out fraud, waste, and abuse in SBA
programs.
During fiscal year (FY) 2021, OIG provided an exponential return on investment to
the taxpayer with $4.2 billion in dollar accomplishments, which includes
investigative recoveries, fines, and forfeitures, as well as review findings of
disallowed costs. OIG’s oversight efforts in FY 2022 exceeded these returns on
investment to the taxpayer with dollar accomplishments exceeding $4.8 billion. OIG
oversight of the Paycheck Protection Program (PPP) and Economic Injury Disaster
Loan (EIDL) programs has resulted in 776 indictments, 621 arrests, and 426
convictions as of December 2022. 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 our law
enforcement partners and financial institutions. We are educating the public about
fraud in the pandemic relief programs, which has served as a deterrent to
fraudsters. We are working with our law enforcement partners to investigate fraud
and the misuse of billions in pandemic assistance funds, ultimately making the
nation’s taxpayers whole.
1
PANDEMIC RESPONSE & INTERNAL CONTROLS
Congress authorized SBA to administer more than $1 trillion through the PPP,
EIDL, Shuttered Venue Operators Grant program (SVOG), and the Restaurant
Revitalization Fund (RRF), mitigating the economic damage from the COVID-19
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 had 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.
My office knew from the onset of pandemic relief that SBA would face a delicate
balancing act of preventing wide-spread fraud while ensuring timely disbursement
of relief funds to Americans in immediate need of assistance. The biggest concern
for our office was SBA’s quick delivery of capital to qualifying small businesses
without first establishing the internal controls necessary to decrease risk, 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. This was why we
issued three reports prior to the first PPP loan or EIDL being disbursed. Our
reports stressed the importance of up-front program controls to mitigate the risk of
fraud. Because of the lessons we’d learned from other disasters, OIG knew the
weaknesses we found in the past would be greatly magnified with programs as large
as the PPP and EIDL.
2
Improper Payments
OIG’s rationale for sounding the alarm early came from our experience in oversight
of SBA’s Disaster Assistance Program and other lending programs, such as the 7(a).
As pointed out in our White Paper Risk Awareness and Lessons Learned from
Audits and Inspections of Economic Injury Disaster Loans and Other Disaster
Lending, SBA’s disaster loan programs suffer increased vulnerability to fraud and
unnecessary losses when loan transactions are expedited to provide quick relief. We
anticipated that the dramatic increase in loan volume and amounts caused by the
pandemic would place additional stress on existing controls. Therefore, it is
important to provide SBA with risk information from prior audits and inspections
related to increased loan volumes and amounts processed in expedited timeframes.
We concluded that to ensure program integrity and mitigate the risk of financial
loss, SBA must ensure first that loans are provided to eligible applicants and that
borrowers meet all eligibility requirements. The agency also needs experienced and
well-trained personnel to provide appropriate assistance and handle the increased
loan volumes and expedited processing timeframes.
For 7(a) and other SBA loan programs, we published the White Paper Risk
Awareness and Lessons Learned from Prior Audits of Economic Stimulus Loans on
April 3, 2020. In this report, we acknowledged that SBA had significantly improved
its internal control environment in recent years to reduce improper payments and
implement quality assurance in its processes. However, recognizing the size and
scope of the PPP, we proposed several key considerations for mitigating financial
loss when expediting loans to eligible small businesses. SBA should:
• issue clear requirements and ensure timely communication to lending
partners;
• establish and monitor specific outcome-oriented performance measures;
• ensure public communication from SBA officials is appropriate and consistent
with the established requirements;
• establish proper controls in the loan approval phase to ensure eligibility of
participants and to mitigate the risk of loan default;
• establish a quality assurance plan to prevent and detect improper payments;
• oversee the program to ensure it is implemented as intended and that
program goals and objectives are met; and
• modify existing loan systems to track stimulus program data to support
accurate program measurement and reporting.
3
OIG annually publishes its report Top Management and Performance Challenges
Facing the SBA in accordance with the Reports Consolidation Act of 2000. The
management challenges represent areas OIG considers particularly vulnerable to
fraud, waste, abuse, mismanagement, or which otherwise pose significant risk to
the agency, its operations, or its credibility. Each management challenge generally
has originated from one or more reports issued by OIG or the Government
Accountability Office (GAO). We view all challenges as critically important to SBA
operations in the upcoming year, but in drawing attention to pandemic relief as an
acute concern, we placed COVID-19 economic relief programs at the top of the list in
the 2021, 2022, and 2023 reports.
OIG has identified improper payments in both the Disaster Assistance and 7(a) loan
programs as top management challenges since 2009. In 2023, these challenges are
noted as follows:
Challenge 7: SBA’s Disaster Assistance Program Must Balance Competing
Priorities to Deliver Prompt Assistance but Prevent Fraud
Why this is a challenge: SBA’s Disaster Assistance program plays a vital role
in the aftermath of disasters by providing long-term, low-interest loans to
affected homeowners, renters, businesses of all sizes, and nonprofits. SBA
must continually balance the priority of quickly assisting disaster survivors
in the immediate aftermath of a devastating event with the need to mitigate
fraud risk and ensure program integrity. To do so, the agency faces
challenges in staffing, quality assurance, and increased loan servicing
requirements.
As a result of the pandemic’s widespread economic effects on the U.S.
economy, Congress approved legislation that increased funding to SBA’s
disaster loan program, providing over $520 billion in funding to the EIDL
program. Since the start of the pandemic, SBA has approved $390 billion in
COVID-19 EIDL assistance, which is a significant increase over all disaster
loan funding disbursed in the agency’s 70-year history. SBA’s existing
disaster assistance infrastructure could not keep up with the unprecedented
demand caused by the pandemic, so the agency contracted out for new
systems to deliver vital aid to struggling small businesses. SBA’s
infrastructure must be properly equipped to ensure that staffing, processing
systems, and servicing capabilities can efficiently adjust to meet future
needs.
4
Challenge 6: Identification of Improper Payments in SBA’s 7(a) Loan
Program Remains a Challenge
Why this is a challenge: OIG audits and reviews have identified 7(a) loans
that were ineligible, given to borrowers who did not have the ability to repay,
or were not properly closed, resulting in improper payments. Improper
payments occurred in part because SBA did not adequately review related
loans, which is why this remained a management challenge this year.
In FY 2021, the dollar amount of SBA’s 7(a) loan approvals totaled $36.8
billion. Most of these loans were made by lenders with delegated approval
authority. When a loan goes into default, SBA reviews the lender’s actions on
the loan to determine if it is appropriate to pay the lender the guaranty,
which SBA refers to as a “guaranty purchase.” “Guaranty” is a variant of
“guarantee” used in financial terminology.
About 8 years ago, OIG established a High-Risk 7(a) Loan Review Program to
evaluate lender compliance with SBA requirements for high-dollar, early
defaulted 7(a) loans. High-dollar, early defaulted loans are $500,000 or more
and default within the first 18 months of initial disbursement. The 7(a) loan
has been the agency’s largest financing program for general business needs,
so it is vital that SBA identify and reduce the risk of improper payments in
order to meet its objectives for the program.
We successfully foreshadowed SBA’s internal control challenges in previous reports,
and we continue to bring attention to issues that engendered the biggest fraud in a
generation. As pandemic assistance programs swelled to more than $1 trillion, the
risk to the taxpayer increased because SBA’s internal control environment was
calibrated to expediate loans and grants. As a result, our work has identified
duplicate payments and payments to ineligible recipients in the tens of billions. We
will continue to see the effects of pandemic assistance fraud and misuse of taxpayer
funds for many years to come.
5
In addition to ineligible or incorrect payment amounts, a weak internal control
environment also can make programs vulnerable to fraud. While fraudulent
payments are considered improper, not all improper payments are the result of
fraud. We sought to raise awareness of potential fraud by publishing a list of fraud
schemes and scams to alert the public and SBA stakeholders. This information was
made available on OIG’s website and distributed broadly through established
communication channels, including social media. OIG also sought assistance from
organizations involved with SBA lending to distribute the information and raise
awareness. We have also integrated multimedia onto our Hotline webpage to
provide an alternative means of learning about our Hotline and its operations.
SBA Program Delivery
We actively engaged SBA leaders 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. Our primary message remained consistent that strong internal
controls are an antidote to fraud.
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. Complaints from lenders and allegations of
misuse of funds overwhelmed OIG’s Hotline — over 100,000 complaints in the first
year alone. A growing national narrative told of widespread fraudulent activity
involving funds intended to provide economic relief to qualifying small businesses
and entrepreneurs. We launched investigations and audits to root out the fraud and
abuse endangering these critical resources.
PANDEMIC RESPONSE OVERSIGHT
OIG’s highest priority is pandemic response oversight. Our robust oversight plan
uses all available OIG resources to provide timely, objective, and independent
oversight of the programs being implemented and executed by SBA. In addition to
our statutory mandates, such as SBA’s compliance with 2022 improper payments
reporting requirements, we continue to focus on programs and operations that pose
the highest risk to SBA operations, including disaster relief programs and
supplemental programs designed to provide economic relief to businesses in
response to the pandemic.
6
We have issued 29 reports focused on SBA’s pandemic response, and there is more
significant work to come. Moving forward, we are focused 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. OIG is working on more than 10 mandatory reviews,
which are required by law. This year we are planning an additional 24 reviews on
other areas of risk identified in the pandemic response programs, as well as
oversight of SBA’s response to Hurricanes Ian and Fiona, and SBA programs in
capital and contracting certification.
These recently published audits report on improper payments and potential fraud
in SBA’s pandemic response programs:
Follow-up Inspection of SBA’s Internal Controls to Prevent COVID-19 EIDLs to
Ineligible Applicants, Report 22-22
This report presented the results of our follow-up inspection to assess the
effectiveness of SBA’s enhanced internal controls to prevent COVID-19 EIDL
loans to ineligible applicants.
The CARES Act prohibited the agency from requiring tax return transcripts
to prove eligibility. Congress eliminated this restriction 9 months later with
the Consolidated Appropriations Act, 2021. We found SBA did not implement
the tax transcript requirement in a timely manner, potentially disbursing
COVID-19 EIDLs to ineligible entities. For about 4 months after Congress
removed the tax return prohibition, SBA made 133,832 COVID-19 EIDL
disbursements, totaling about $8.5 billion without proving applicant
eligibility using official tax information. Of that amount, more than $92
million was disbursed to businesses with suspect Taxpayer Identification
Numbers.
7
We reviewed 30 of these loans approved before SBA implemented the
requirement for tax return transcripts and found that 16 of them, totaling
about $1.1 million, should not have been approved. Specifically, we found
disbursements to 13 businesses that did not exist on or before January 31,
2020 or had an unknown start date. We also found three businesses that did
exist on or before January 31, 2020, but had other red flags, including change
of registered agent shortly before the application date, evidence of falsified
documents, or evidence the applicant did not own the business.
OIG Recommendations
We recommended SBA recover funds disbursed to ineligible applicants
identified in our sample and review the remaining COVID-19 EIDL
disbursements with suspect tax ID numbers to determine if the business
applicant was legitimate and met CARES Act eligibility requirements. SBA
agreed with our recommendations and plans to review the 20 loans identified
in the report to determine if the applicant business qualifies for assistance
under the COVID-19 EIDL eligibility criteria and attempt to recover funds
provided to ineligible businesses.
SBA’s Award and Payment Practices in the Shuttered Venue Operators Grant
Program, Report 22-15
We inspected SBA’s award and payment practices used to administer the
Shuttered Venue Operators Grant (SVOG) program.
Even after determining multiple disbursements would better protect grant
funds from fraud or misuse, SBA switched to a riskier single advance
payment for all grantees. This payment method may have hastened award
disbursement, but the agency removed internal controls that would have
better protected taxpayer funds. Multiple disbursements enable program
officials to verify that grant recipients used award funds for allowable
activities before disbursing additional funds.
8
We selected 10 awards, totaling $33.2 million, to use as a sample to test
SBA’s disbursement and budget approval practices. None of the 10 awards
reviewed had the proper documentation signed by an authorized government
official. The authorizing agency signature on the notice of award
demonstrates that the proper procedure has been followed and the obligation
has been officially recorded. Without the proper official documentation, all 10
awards we reviewed, totaling $33.2 million, are unauthorized commitments.
Program officials did not ensure it had adequate support for the grant
amounts in 3 of the 10 awards we reviewed. SBA awarded these three
recipients $2.6 million above amounts that were requested. The higher grant
award amounts did not correspond to their budgets, nor was there supporting
documentation to show why SBA awarded the higher amounts. In addition,
SBA did not consistently ensure the recipient’s budget accurately
summarized the financial plan for the award amount. Awards made to 1,849
recipients, totaling $1.49 billion, did not have a budget that reconciled to the
award amount.
OIG Recommendations
We made six recommendations for SBA management to ensure SBA properly
safeguards program funds and improves disbursement and award procedures
while administering the SVOG program.
9
SBA’s Handling of Potentially Fraudulent Paycheck Protection Program Loans,
Report 22-13
We found that SBA did not have an organizational structure with clearly
defined roles, responsibilities, and processes to manage and handle
potentially fraudulent PPP loans across the program. In addition, the agency
did not establish a centralized entity to design, lead, and manage fraud risk.
This problem occurred because the agency did not establish a sufficient fraud
risk framework at the start of and throughout PPP implementation.
Management stated this was partly due to the speed of the delivery of PPP
and the continuous and rapid discovery of different kinds of fraud schemes.
Lenders were also not always clear on how to handle PPP fraud or recover
funds obtained fraudulently from the PPP that remained in the borrower’s
account. SBA did not provide lenders sufficient and specific guidance to
effectively identify, track, address, and resolve potentially fraudulent PPP
loans. During our review, SBA established a Fraud Risk Management Board.
To better mitigate fraud, we recommended SBA establish clearly defined and
detailed roles, responsibilities, and processes and provide lenders formal
guidance for managing and handling potentially fraudulent loans.
SBA management generally agreed with the findings and agreed with both
recommendations. Management plans to document the roles, responsibilities,
and processes for all SBA offices responsible for managing and handling
potentially fraudulent PPP loans. Management also plans to consolidate its
existing guidance to lenders regarding fraud and provide new guidance as
appropriate.
OIG Recommendations
We made two recommendations to SBA to better mitigate fraud.
SBA’s Paycheck Protection Program Loan Review Processes, Report 22-09
We conducted this evaluation to assess SBA’s processes for reviewing PPP
loans for eligibility and forgiveness.
10
SBA’s online loan forgiveness platform used by lenders to submit forgiveness
requests is adequate to support SBA’s loan review process. However, we
found that for some loans, totaling $66.4 billion, SBA did not meet the 90-day
statutory requirement to remit forgiveness payments to lenders. SBA did not
meet the 90-day requirement for 98.2 percent of loans over $2 million. Not
completing reviews of loans and remitting payment promptly creates
uncertainty for borrowers and PPP lenders who are unsure if SBA will
forgive their loans.
We also identified other matters that SBA should address, including how
SBA made changes to allow certain loans to be reviewed for fraud and
eligibility after they have been forgiven. We have concerns about the effects
these changes will have on SBA’s ability to recover funds for forgiven loans
later determined to be ineligible. Outstanding loan forgiveness applications
are a potential indicator of fraud. Borrowers who fraudulently obtained a
PPP loan are unlikely to apply for loan forgiveness. We identified 1.9 million
loans totaling $177.3 billion with no forgiveness application as of May 2021.
OIG Recommendations
We recommended that SBA develop a plan to ensure remaining forgiveness
reviews and remittances are completed within 90 days as required by the
CARES Act. SBA management agreed with the report finding and
recommendation.
COVID-19 EIDL Program Recipients on the Department of Treasury’s Do Not Pay
List, Report 22-06
We produced this management advisory to notify SBA officials of serious
concerns about potential improper payments in SBA’s EIDL program.
Our review of the U.S. Department of Treasury’s analysis of processed
COVID-19 EIDL and emergency EIDL grants from March to November 2020
revealed that SBA’s lack of adequate pre-award controls during this period of
review led to 75,180 COVID-19 EIDLs, totaling over $3.1 billion, and 117,135
emergency EIDL grants, totaling over $550 million, being disbursed to
potentially ineligible recipients.
11
Our preliminary review of Treasury’s Do Not Pay analytical summaries
indicated SBA should reassess controls to ensure only eligible recipients
obtained COVID-19 EIDLs and emergency EIDL grants.
A portion of those applications had been identified as potential fraud risks in
previous OIG reports. A significant percentage of COVID-19 EIDLs and
emergency EIDL grants that Treasury found in federal data sources had also
been identified in earlier OIG reports.
SBA’s lack of adequate front-end controls to determine eligibility contributed
to the distribution of COVID-19 EIDLs and emergency EIDL grants to
potentially ineligible recipients.
SBA should take immediate action to limit improper payments by
strengthening existing controls and implementing additional internal
controls to address improper payments, especially through the use of the Do
Not Pay portal.
OIG Recommendations
We made three recommendations to SBA to prevent improper payments and
strengthen oversight controls related to the COVID-19 EIDL program.
SBA Emergency EIDL Grants to Sole Proprietors and Independent Contractors,
Report 22-01
We examined Emergency EIDL grants to sole proprietors and independent
contractors from March 29, 2020 until the funds were exhausted 14 weeks
later on July 10. We set out to determine whether the agency complied with
its internal policy that set Emergency EIDL grants at $1,000 per employee
up to the CARES Act mandated maximum amount of $10,000.
Using SBA’s data, we found the agency provided $4.5 billion more in
Emergency EIDL grants to sole proprietors and independent contractors than
they were entitled to receive based on established policy. We determined that
542,897 sole proprietors, who received a grant of more than $1,000, applied
for the Emergency EIDL grants without an Employer Identification Number
(EIN) and claimed more than one employee on their applications.
12
The absence of an EIN indicates the sole proprietor applicants should have
claimed no employees and were entitled to a maximum of $543 million
($1,000 per applicant). However, SBA approved and disbursed a total of $4
billion in Emergency EIDL grant funds to these sole proprietors, an over
disbursement of $3.5 billon.
We also found 161,197 independent contractors, who received a grant of more
than $1,000, also applied but did not provide an EIN and claimed more than
one employee on their COVID-19 EIDL application.
Consequently, the independent contractors were entitled to a maximum of
$161 million ($1,000 per applicant). However, SBA disbursed $1.1 billion to
the independent contractors, resulting in over disbursement of about $1
billion.
OIG Recommendation
We made one recommendation that SBA remedy $4.5 billion in funds
disbursed in excess of its policy allowance to sole proprietors and independent
contractors. SBA disagreed with the prior Administration’s policy
determination, which is the criteria used to premise our findings. Despite
management’s disagreement, the agency is taking corrective actions to
implement our recommendation.
SBA’s Handling of Identity Theft in the COVID-19 Economic Injury Disaster Loan
Program, Report 21-15
We issued this evaluation report to notify SBA officials of significant matters
regarding its handling of complaints of identity theft in the COVID-19 EIDL
program.
As of January 31, 2021, SBA had referred 846,611 COVID-19 EIDL
applications to OIG, which is the loan application related to an identity theft
complaint (individuals who indicated that they did not apply for a loan and
believe they were a victim of identity theft) and any related applications
(applications with the same email address, phone number, or physical
address). SBA officials did not know the exact number of individuals who had
filed an identity theft complaint because they did not track each complaint.
13
For the 846,611 applications, SBA disbursed 112,196 COVID-19 EIDLs
totaling $6.2 billion and 98,613 Advance Grants for $468 million. We found
bank account numbers for 29,435 of the 112,196 disbursed loans, totaling
$1.7 billion, were changed from the original number submitted on the
application to another number used for disbursement, which is an additional
indicator of potential fraud.
At the time of our review, we found SBA did not provide status updates to
those reporting COVID-19 EIDL identity theft. Some complainants contacted
SBA multiple times, which further distorted the total number of identity
theft complaints.
OIG Recommendations
We made five recommendations that included the development of processes
to maintain and track all identity theft complaints and to provide status
updates to each complainant alleging identity theft. Our recommendations
also included steps to complete and formalize a process to restore identity
theft victims to their condition prior to the fraud.
Paycheck Protection Program Loan Recipients on the Department of Treasury’s Do
Not Pay List, Report 21-06
We issued this management alert to alert SBA about improper payments to
lenders for potentially ineligible recipients of loans under SBA’s Paycheck
Protection Program in response to the COVID-19 pandemic.
Because of complaints of fraud received by OIG, we collaborated with the
U.S. Department of the Treasury Do Not Pay (DNP) Business Center, which
identified high-risk transactions related to financial assistance to small
businesses for the COVID-19 pandemic. Our review of Treasury’s analysis
showed approximately $3.6 billion in PPP loans to potentially ineligible
recipients.
14
We found that expedited management action could reduce or prevent the
potential for loss in terms of the risk of improper payments to lenders for
amounts ineligible for forgiveness as well as any fees. OIG communicated
summary results to SBA management, who requested Treasury’s results and
had systemically put a “hold” flag on loans identified by the DNP team to
ensure the loan applications were properly reviewed before processing for
forgiveness or any further disbursements.
OIG Recommendations
To establish more effective oversight controls related to the PPP, we
recommended the agency promptly identify PPP loans that have not been
fully disbursed and follow-up with the lenders to stop $280 million in
potential improper loan disbursements and strengthen SBA controls to
ensure that loans to ineligible recipients are not forgiven. We also
recommended the agency review prepayment and pre-award procedures and
work with Treasury to formulate a technical approach to use Treasury’s DNP
portal to determine loan applicant eligibility and prevent improper payments.
COMBATING FRAUD
To bring fraudsters to justice and return taxpayer funds, OIG fosters a “whole of
government” approach. OIG has partnered with other law enforcement
organizations, conducted outreach to the U.S. Department of Justice Offices of the
U.S. Attorneys, and evaluated allegations of wrongdoing received through our
Hotline using a partnership with the Pandemic Response Accountability
Committee. We also partnered with the SBA Office of the Chief Information Officer
to investigate and remove websites suspected of being fraudulent. We have assisted
the U.S. Secret Service in the seizure of more than $1 billion stolen by fraudsters
from the EIDL program.
15
OIG often communicates with financial institutions to educate them on SBA
COVID-related programs and fraud indicators. OIG and the 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.
Over $8 billion in EIDL funds has been returned by financial institutions to SBA.
Additionally, SBA has also received over $20 billion in EIDL funds that have been
returned by borrowers. OIG has played a key role in the return of these funds
through working with our law enforcement partners, financial institutions, and
educating the public about fraud in the pandemic relief programs.
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 and its Offices of U.S. Attorneys.
Among these investigations was the first charges filed against individuals
fraudulently seeking PPP loans, announced on May 5, 2020. This achievement was
the result of dedicated work by OIG criminal investigators and law enforcement
partners. OIG’s subsequent PPP and EIDL oversight and investigative work has
resulted in 776 indictments, 621 arrests, and 426 convictions as of December 2022.
Outcomes of these enforcement actions have resulted in $375 million in seized or
forfeited assets in our joint investigative efforts and $378 million in restitution
orders.
Our office is working an active caseload of nearly 550 investigations. With the
hundreds of thousands of allegations of wrongdoing reported to the OIG Hotline and
through our data analysis efforts, the number of criminal investigations is expected
to grow. Our ability to handle them is only limited by available resources. Of the
more than 225,000 Hotline complaints we’ve received, our data analytics team
identified more than 81,000 actionable leads, which alone represents more than 100
years of investigative case work.
Our enhanced data analytics capabilities have been key to our success. To date,
OIG’s data analytics have identified billions of potential fraud in SBA’s pandemic
response lending programs. Data analytics have bolstered our investigative capacity
with findings that have led to the investigation and arrest of fraudsters across the
nation. Many of the instances of fraud have been egregious, such as:
16
• 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 of the
applicant businesses. 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 and laundered a portion of the proceeds by transferring
the funds from one of his bank accounts to another bank account he
controlled.
• In January 2023, in Georgia, a U.S. Army soldier was sentenced to 42 months
in federal prison for leading a fraud scheme in which she and others illegally
raked in millions from COVID-19 relief programs and federal student loan
forgiveness. She submitted more than 150 fraudulent PPP loan applications
to SBA for herself and others in the conspiracy, resulting in more than $3
million in fraudulent disbursements from banks to members of the
conspiracy. She directly received fraudulently obtained PPP funding or was
paid by conspirators for submitting their fraudulent applications.
• In November 2022, a Texas man and woman behind My Buddy Loans were
sentenced to 121 months and 66 months 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.
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• In September 2022, a Washington, D.C. man was sentenced to 10 years in
prison for carrying out a scheme to steal more than $31 million under the
CARES Act and laundering the proceeds of the crime. From July 2020
through May 2021, he used his company to fraudulently apply for at least 25
PPP loans totaling more than $30 million. He also submitted at least four
false EIDL applications totaling $950,000. He wired the proceeds of his
scheme to at least 13 separate bank and brokerage accounts and purchased a
Tesla Model 3. He also converted at least $288,000 of proceeds from fiat
currency into multiple cryptocurrencies. The man also used the fraudulently
obtained funds for rent, hotels, dog boarding, attorney fees, ride shares,
electronics, and various personal expenses.
• In May 2022, two Florida men were sentenced for leading a nationwide
scheme to defraud the PPP of millions. They recruited additional PPP loan
applicants, preparing and submitting fraudulent loan applications in
exchange for a share of the proceeds. They submitted or facilitated at least 79
fraudulent loan applications worth at least $35 million — and planned to
submit more.
Whistleblowers have been instrumental to our oversight efforts. These brave
individuals have courageously 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
been able to make referrals to SBA to address complainants’ 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.
FRAUD LANDSCAPE OUTLOOK
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, we will be working for some time to help correct the
systemic weaknesses in SBA programs and operations brought to light by the
unprecedented demand during the crisis. This oversight will require vigilance so
that SBA can efficiently and effectively meet the needs of small businesses.
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One area of particular concern is the PPP loans that did not seek forgiveness and
will subsequently default. The program was designed to forgive these loans, so this
possibility raises many questions. When these loans default, SBA must consider
honoring the 100 percent guarantee and seek recourse from the borrowers through
remedies such as the Department of Treasury’s Offset Program. Additionally, SBA’s
disaster assistance lending for the pandemic response, principally through EIDL, is
in the hundreds of billions — an amount exceeding all of SBA’s disaster assistance
lending since 1953 — and will perform in SBA’s portfolio for decades. This will
require continuing oversight by OIG. With 30-month deferment periods in place for
EIDL loans, our concern is that the true scope of the fraud landscape will not be
known until these loans go into repayment, which is occurring at present. With
sufficient resources, coupled with the 10-year statute of limitations for PPP and
EIDL fraud, our office will be poised to combat fraud for years to come. We are
grateful for the swift congressional action in the 117th Congress to extend the
statute of limitation for PPP and EIDL fraud and look forward to working with the
Congress on resource determinations for FY 2024 and beyond.
CONCLUSION
The pandemic presented a whole-of-government challenge. Fraudsters found
vulnerabilities and coordinated schemes to bypass controls and gain access to funds
meant for eligible small businesses and entrepreneurs adversely affected by the
economic crisis. The nation can depend on OIG to provide independent, objective,
and timely oversight of SBA. Our investigations will root out fraud, waste, and
abuse and will leverage and marshal the resources available across the federal law
enforcement community to bring wrongdoers to justice. Our office will continue to
promote a strong internal control environment within SBA to mitigate the fraud
risk up front. We will relentlessly pursue evidence of wrongdoing and provide
oversight of SBA’s pandemic funds.
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