Lenders Can Take Steps to Prevent Fraud in Federal PPP Loans

The Cares Act pumped billions into the economy through the paycheck Protection Program, but the accessibility of these loans left them vulnerable to fraud, and lenders can take certain steps to prevent this behavior by would-be borrowers. 

The $300 billion-plus program, said former Secret Service Agent Bryant Moravek, director of AML & sanctions compliance for Kaufman Rossin, kept business doors open and employees at work – and allowed some individuals to purchase expensive cars and jewelry. And now, a second round is underway. 

“The attempted fraud is staggering,” he said, noting that up to half a billion dollars of loans could fit this description. 

“To help quickly disperse funds,” he explained, “the Small Business Administration allowed lenders to rely on borrowers’ certification. There was no requirement to certify customer forms – they took it at face value.” Loan approval was dependent on documents, he said, with no verification required. While allowing banks to cut out this step helped them get loans out quickly to those in need, it made committing fraud by producing false documentation too easy for tricksters. 

Lenders, Mr. Moravek said, can look out for certain signs that a potential borrower is not the business it claims to be. 

“The biggest red flags,” he said, “are recent creation of a company, exaggerated employee salaries and exaggerated number of employees.” Since fraudsters want to get as much money as they can, he said, they often inflate these numbers to get a greater loan amount – but often the math doesn’t add up. 

Lenders, Mr. Moravek said, should look out for “companies” claiming to pay their employees significantly more than the average rate in their industry. For example, he said, if a pizza restaurant claims to pay its wait staff $100,000 salaries, something smells rotten. 

Fraudsters, he said, have used all sorts of schemes, from creating fictitious businesses to stealing real business identities and even creating synthetic identities by using a combination of real and fake information to apply for credit. The application, he said, is almost always denied, but serves the purpose of creating a credit file. With Cares Act loans based on unverified documentation, he said, many fraudsters have turned to obtaining falsified bank statements, utility and rent bills, etc., which are billed as “novelties” but look just like the real thing. 

Lenders, Mr. Moravek said, are the first line of defense against this activity. Kaufman Rossin, he said, considers 18 factors to be red flags, including lack of information about the business in the public domain, inability to verify the individual identities of “owners,” foreign or recent business registration, and payments to non business-related entities.