Bird-Dogging ‘Waste, Fraud, Abuse’ of Trillion-Dollar COVID Business Loans

Image by Maxime.

Whenever an epic national disaster happens, Congressional squabbling over relief funds is certain to follow as it undoubtedly will with the Los Angeles wildfires. Our relief history is full of them. Think Chicago fire (1871), Galveston’s hurricane (1900), San Francisco’s earthquake (1906), the Great Depression (1933-39), the Alaskan earthquake (1964), Hurricane Katrina (2005), 9/11 (2011), and, more recently, the continuing COVID pandemic (2020-).

Next comes the hue-and-cry demands that tight controls should have been in place to prevent “waste, fraud, and abuse” of federal aid. As if that were possible on the fire lines of astronomically expensive and unique catastrophes with thousands of casualties and property damage beyond insurance companies reserves.

Until president Trump rescinded his all-funding freeze a few days ago, how could Congress, or the administration’s OMB (Office of Management and Budget) even estimate costs during an event to give an instant and accurate damage assessment to Treasury of how much taxpayer revenue to dispense for aid to survivors? That never matters to those seeking political capital (especially to home-folks) by posing as public watchdogs in condemning any significant expenditures. “Why should other states be bailing out California for choosing the wrong people to run their state?” asked Alabama’s Republican Sen. Tommy Tuberville the other day.

The current classic target of sturm und drang about “waste, fraud, and abuse” for the last four years has been the federal government’s Small Business Administration (SBA) pandemic loans and grants. That thousands of fraudsters posed as business owners and, by this last November, made off with a possible $2.25 billion of taxpayers’ hard-earned dollars.

Now, up to March 2022, the federal government spent nearly $6 trillion on COVID healthcare and the nation’s economic engine. Of this, some $1.2 trillion went to SBA to save America’s small businesses by making or guaranteeing loans and grants to keep them functioning. It assisted more than 10 million small businesses through its relief programs up to mid-2023,” according to a report from the GAO (U.S. Government Accountability Office). For over 100 years it has tracked outgoing federal funds.

As a Milwaukie OR acupuncturist said recently: “That [SBA] loan saved my practice.” She’s still making payments with its 1% interest rate to keep from defaulting’s severe penalties : business seizure and all assets, wage garnishment at future jobs, and a ruined credit rating.

To set the record straight on COVID, President Trump in February 2020 originally called the early signs of the pandemic a “hoax ” and recommended antidotes such as disinfectant injections . The pandemic was in full crisis mode by then. Lockdowns devastated large and small businesses, threatening the nation’s economy. Loud and vast outcries came from struggling small businesses owners for federal emergency funding to stay open. He and his administration were finally forced to “do something!”

So on March 6, Trump finally signed the first of six COVID recovery bills, the Coronavirus Preparedness, and Response Supplemental Appropriations Act . Twelve days later, he signed a second relief bill providing $192 billion . Most went to small businesses and state and local governments “to help provide them with more resources to fight the pandemic and provide relief to strained budgets.” Recipients were also mandated to use allocations for paid sick, family and medical leave.

After10 more days, Trump’s major overarching CARES law (Coronavirus Aid, Relief and Security Act) was enacted with $1.8 trillion going to businesses. Some $484 billion was earmarked chiefly for two SBA operations: PPP (Paycheck Protection Program) and Provider Relief Fund (PRF). PRF was designed to help healthcare providers cover “offset lost revenues” and increased resourses to battle COVID.

PPP’s share of $64 billion was for forgivable loan extentions on payrolls “to prevent layoffs.” An applicant had to have less than 500 employees. Loans were capped at $10 million to cover payroll, rent or mortgage interest. Interestingly, among PPP recipients were his son Don, son-in-law Jared Kushner, and favored associates . ProPublica’s investigative reporters found they stood to “receive as much as $21 million in government loans” .

A third loan program—EIDL (Economic Injury Disaster Loan)—focused originally on natural disasters like forest fires and hurricanes and was already in place prior to the pandemic. It also offered paid sick leave, payroll coverage, operating materials, rent or mortgage interest, unmet bills, and deductible expenses.

As the virus claimed victims by the thousands every day, yet another law was passed in late April adding $484 billion to support PPP and, by then, the hugely popular EIDL.

SBA’s programs were major in helping to provide national stability from 2020-24 when COVID killed 1.2 million Americans among the 103.4 million stricken. The Census Bureau’s Business Formation Statistics reported SBA’s loans in that period played a large role in creating 25.5 million new businesses. And not only did they save millions of jobs, but the funds created over 13 million new ones , according to SBA administrator Isabella Casillasnewa Guzman.

That was the good news. The bad was fast approaching.

Back in 2018, SBA had 2,800 staffers , many who had processed and approved 23,497 loan applications that year. But by 2020 and COVID’s lightening-fast spread, they were faced with 4 million frantic business owners demanding direct loans under Trump’s loose-knit CARES law.

The process permitted applicants to self-certify documents, eased loan regulations just to speed funding—two weeks or less—to keep the economy going. The rush also meant SBA’s many banks and other lenders furnishing the cash and collecting payments, were required to limit document review “to determine the qualifying loan amount and eligibility for loan forgiveness.”

In such chaos, vetting millions of SBA loan applications apparently was nearly impossible at the overwhelmed agency. Even identity mugshots of a Barbie doll for self-certification documentation somehow was overlooked and, then, overpublicized as a sign of “waste, fraud, and abuse,” amazingly not of the Trump administration, but Biden’s.

As the SBA’s inspector general later said about Trump’s loan rules: “…many of the improvements [in reviewing applicants’ documents] were made after much of the damage had been done due to the lax internal control environment created at the onset of these programs.” One was with PPP loans. While SBA’s interest rate for other programs was 3.63% , a PPP was 1% with a five-year maturity. And defaulters could apply for the forgiveness extension option. No collateral or personal guarantees were required, nor could the federal government or the loan’s lender charge any fees.

What crook could resist such a temptation to borrow millions (or a few thousands) and disappear? Indeed, fraud constituted 86% of those early loans, amounting to $200 billion of SBA’s first tranche of aid. All this despite thieves ignoring the application’s warning about lying, located just above the signature line. It said that if a false form was “submitted to a federally insured institution under 18 U.S.C. 1014 [the penalty was] imprisonment of not more than 30 years and/or a fine of not more than $1,000,000.”

Obviously, fraudsters were willing to take the risk of prison and restitution fines if caught contributing to “waste, fraud, and abuse.” Anyone could use a podcast to gleefully boast of swindling taxpayers and the government to pay for leasing luxury apartments, buying a yacht or Lamborghini, investing in stocks, gambling, buying a string of houses, or getting plastic surgery.

Fortunately, some thrifty and farsighted drafters of Trump’s CARES law thought to include an accountability wing from several departments’ inspector generals called the Council of the Inspectors General on Integrity and Efficiency: PRAC (Pandemic Response Accountability Committee). Its mission was to promote:

“ …transparency by reporting accessible and comprehensive spending data; collaborate across the oversight community to identify cross-cutting issues and risks; and detect fraud, waste, abuse and mismanagement of relief spending to hold wrongdoers accountable.”

Troubles started with SBA’s almost immediate recognition that grand larceny was being committed daily. Its offficials knew a Congressional reckoning would soon be ahead about those incredible losses. Once Trump left office, it wasn’t long before the GAO began prodding them to stop the “cash flow” and start retrieving defaulted loans and stolen funds.

In GAO’s year-long analysis (March 2020-February 2021) of EIDL records alone, its examiners reported in January 2021 that at least 3,000 loans worth $156 million were ineligible for that fund. That between May and October 2020 “over 900 U.S. financial institutions filed more than 20,000 suspicious-activity reports related to the EIDL program with the Financial Crimes Enforcement Network”: identity theft, false attestation, fictitious/inflated employee counts, and misuse of proceeds.

By March 2021, GAO strongly recommended SBA use a process called “data analytics” on all EIDL loans to detect ineligibles and fraudsters. SBA quickly responded that it was using “third party services ” to develop its own analytic system to search all CARES’ loan programs. It also was tightening the application process and beginning hot pursuit of the thieves—and loan defaulters—to recover the lost billions.

New anti-fraud’s tools were created by the SBA in collaboration with PRAC’s new Fraud Task Force, the Justice Department, and Offices of Inspector Generals (OIGs) of several departments suffering the same waste-fraud-abuse complaints for years. They included the Departments of Labor, Agriculture, Transportation, Homeland Security, Health and Human Services.

Begun in April 2021, the major result was a data-driven detection section called PACE (Pandemic Analytics Center). Its success eventually convinced 37 department OIGs to pool and share certain identical data from their isolated silos because some thieves “worked” several federal offices disbursing funds. By last September, PRAC could attest to the House Oversight and Accountability committee that:

“…OIGs stand a better chance of identifying fraud and improper payments by combining data sets and using tools like link analysis, text mining, and anomaly detection [. We have built a data analytics center that, to date, has more than 59 data sets from public, non-public, and commercial data sources, each of which has specific rules governing their use. Some of these data sets are shared within the OIG community….[W]e have been able to attract top data science talent from across the country….

“PRAC issued a Fraud Alert in January 2023 after our data scientists used the PACE to identify over 69,000 questionable Social Security Numbers (SSNs) that had been used to obtain $5.4 billion in PPP and COVID-19 EIDL loans and grants. PACE data scientists identified this potential fraud and identity theft by analyzing over 33 million COVID-19 EIDL and PPP loan applications to identify a targeted selection of questionable SSNs included in those applications. …

“[They] are also developing automated robotic processes for some of the tasks associated with monitoring pandemic relief spending. The processes help identify red flags and anomalies which are sent to our investigators for a closer look. We also develop risk models to help Inspectors General identify high-risk recipients of pandemic funds.”

The Justice Department (DOJ), parent of PACE, accordingly launched five enforcement task forces around the country to deal with COVID relief crime (California, Colorado, Florida, Maryland, New Jersey). Their agents indicted more than 3,500 of whom 2,000 were convicted collectively of stealing over $2 billion. Over $1.4 billion has been retrieved up to last May.

The SBA predicament made it PACE’s Client No. 1.

Its PPP and EIDL fraud losses were at least $10 billion . DOJ agents arrested 985, indicted 1,255, and convicted 683. PACE data services helped SBA’s deny 21.3 million applications for loans or grants worth $511 billion. Some of the individual loan sizes would stagger the ordinary borrower.

For instance, SBA’s largest loan fraud conviction cost two financial technology companies a $59 million settlement. Another fraudster is doing 25 years in federal prison for falsely claiming $10 million in lost business. Yet another is doing 7.3 years for a $15 million theft. The 683 who joined them in federal lockups for a few months or a quarter- century also will pay enough fines to almost replace what they stole from SBA and taxpayers.

Add to these recovered sums, those from loan defaulters’ business and personal assets that the U.S. Treasury and its collection agencies seized and sold. As of mid-January, SBA admitted defaults involved 439,000 loans valued at $7.2 billion, but that the agency was aggressively pursuing defaulters. Its spokesperson pointed out that:

“To date, SBA has made more than 75.2 million phone calls to support repayment and collection. SBA has sent a letter to every active COVID EIDL borrower the month before the end of their deferment to remind them of their payment obligation. SBA has sent more than 9 million collection letters in addition to 1.4 million due-process letters and other borrower communication.”

Meantime, Iowa’s Republican Sen. Joni Ernst (R-Iowa) has been making political hay for over a year from the SBA’s losses. A hue-and-cry post-event critic. As the ranking member of the Senate’s Small Business Committee, she said little publically about its struggles until January of this last election year.

In January, she took credit for forcing “Biden’s mismanaged SBA ” to collect all delinquent and fraudulent loans which it had already been doing for months. Ernst claimed leadership in pushing an anti-deadbeat bill (Strengthening Taxpayers Recoveries Act ). By June, she was demanding answers about SBA’s use of artificial intelligence (AI) in catching fraudsters. A month later, she was blaming it for failure to police its initial loan applications from “felons, gang members, and drug traffickers .” When SBA asked for supplemental funds in October, Ernst and three colleagues scolded them for failure to notify Congress about advance needs and “mismanagement” despite that avalanche of loan applicants in 2020. Now caucus chair of the new Department of Efficiency, she just authored a bill forcing 30 percent of SBA’s staff to move out of Washington to save office space (and make the SBA less efficient, of course).

Uninsured homeowners surviving Los Angeles’ wildfires—nearly 14,000 houses burned so far—soon will be applying by the thousands for one-time relief checks of $87,970 from FEMA (Federal Emergency Management Administration). Or, surprisingly, SBA’s willingness to make $500,000 loans in neighborhoods averaging $150,000 homes . FEMA is probably grateful that SBA led the pioneering use of PACE by many OIGs to detect perpetrators of waste-fraud-abuse of relief funds—and long experienced to handle harassment by the Joni Ernsts in Congress.