Situational Awareness: SBA Fraud- Don’t Be Caught Off Guard

By Andrea L. Moseley

Over the last few months, I have provided insight into how individuals and small businesses can mitigate risk related to pandemic fund fraud allegations. In this article, I will include an enhanced reference guide with five simple tips on how to protect your business if you have been the recipient of pandemic relief funds.

First, I want you to be aware of some significant recent developments. On July 28, 2020 (cover pictured above) the Small Business Administration’s (SBA) office of inspector general (OIG) reported that it has identified $250 million in taxpayer-subsidized coronavirus loan funds given to “potentially ineligible recipients.” According to this new report, hundreds of financial institutions have reported more than 5,000 instances of suspected fraud.

The SBA-OIG reported that it has been “inundated” with contacts to investigative field offices from financial institutions across the nation. “Nearly 440 financial institutions ranging from small, local credit unions to major national institutions have contacted us to express serious concerns,” according to the OIG. “Our law enforcement partners report similar calls from financial institutions.”

Among the potentially fraudulent transactions detailed in the report are $1.9 million in pending SBA transactions made to accounts outside the United States, roughly 3,000 “suspicious” transactions worth $73 million that were flagged by a banking service provider. A credit union told the Justice Department that 59 out of 60 SBA deposits it received appeared to be fraudulent.

A major focus of this alarming report was the Economic Injury Disaster Loan program. After the Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law last March, it authorized the SBA’s disaster assistance program to use available funds to distribute “economic injury loans,” and begin a new program called Economic Injury Disaster Loans and Advances (EIDL) to soften pandemic-related economic injuries. According to the Washington Post, the EIDL program is different from the $660 billion Paycheck Protection Program (PPP) in that it has fewer restrictions on how the loan funds can be spent, and loans are processed by the government rather than private banks. See Gregg, A., Scathing SBA watchdog report details ‘pervasive’ fraud in coronavirus disaster- loan program, Washington Post, July 28, 2020. This program reportedly offers loans at a 3.75 percent interest rate which is higher than PPP loans. The EIDL program also offers cash-advance grants worth up to $10,000. The certification required for an EIDL is far less rigorous than that of its PPP counterpart.

Spoiler: my analysis of the certifications for both EIDL and PPP applications and the importance of those is mid-production and coming to The Grand Jury Target soon.)

The BIG takeaways:

According to the report, the SBA approved 6,123 loans totaling $208.1 million to ineligible businesses, and an additional 20,692 advance grants totaling $47.8 million to potentially ineligible businesses. The OIG investigation also found the SBA approved and paid at least 275 loans more than one time. Approximately $25 million of the $45.6 million in approved duplicate loans has been disbursed. Examples of suspicious activity reported by financial institutions include:


Accounts established using stolen identities
• Account holders unable to explain origins of deposits or identify business names on loans
• Account holders claiming to use the funds to open a business
• Account holders attempting to transfer funds into investment accounts
• Account holders attempting to transfer funds to foreign accounts
• Loan deposits being made into accounts with no other account activity that were
established remotely just before receiving the loan funds
• Economic injury loan funds made to agricultural businesses being deposited in accounts of
unrelated third parties located in different states than the business
• Account holders attempting to withdraw loan funds in cash or transfer the funds to other
newly established accounts
• Economic injury loans or advance grants being deposited into personal accounts–with no
evidence of business activity–of customers of the financial institution

What can I do now to protect my business?

1. Keep records, records and more records.

As you can divine from the SBA-OIG report, there are thousands of ongoing investigations of potential fraud, both civil and criminal, and that number is growing. With this kind of volume, allegations in connection with fraud may not crop up for years. It is critical that detailed records be prepared (ideally with the advice of counsel). Advice from an expert on what these records should contain and how to update them could save you down the road after memories have faded.

2. Educate your officers and staff.

Make certain that you have delivered the compliance message clearly so that everyone knows what documents need to be preserved and cataloged. An email blast is a good start but a meeting with an agenda could make it even more clear. Your stakeholders must make records relating to any activities associated with the application, receipt and use of pandemic-related funds. Identify the person who is in charge of educating folks and hold them accountable. If you are a very small business owner, that person is you!

3. Maintain organized, complete and accurate documents.

Don’t throw that out!!! The atmosphere surrounding pandemic relief funds is red hot. You must centralize and organize all documents related to your initial application, supporting documents, minutes, emails and memos about your application. This means everything, even those little notes jotted down by hand. Do you have high turnover or is someone important to your application leaving the company? Make certain to give special focus on collecting and retaining information before that person disappears.

4. Know your reasoning and how you arrived there.

There has been a lot of pandemic loan guidance (ever-evolving guidance) published by the government. There are more questions than answers to many FAQs and both the SBA and the Treasury Department have indicated that reliance on published guidance will not be challenged (the same way) if individuals relied on guidance that was later enhanced or amended. I would also suggest that you document your rationale for taking certain actions and make note of what you were relying on. Your rationale could be based upon government guidance or some other (seemingly) knowledgeable source such as accountants, bookkeepers, colleagues, etc.

5. Get ahead of the curve

What is the first thing you are going to do if you are contacted by an investigator, receive a subpoena or you identify a potential whistleblower? You need to have a response blueprint ready and waiting. The more formal the plan, the more reliable it will be. Independent, experienced counsel can help you develop a plan to ensure there are no missteps in handling potential witnesses, whistleblowers or employees. You need to identify the person in charge should these events arise and name those who will be privy to information sharing under these circumstances. The plan needs to include specific steps to ensure that steps one through five are followed. Finally, share the plan with those who have been identified as privy and make sure there is no confusion among decision-makers.

CONCLUSION

If you have received pandemic relief loans, you need to know that the government is dedicated to making sure everyone has acted in good faith along the way. Reasonable minds can disagree about whether a business was acting in good faith when it made certifications in order to receive funds. The potential for allegations is high given the extraordinary level of fraud that has already been reported. Use of outside counsel to make sure your business affairs are in order could protect you from sudden disruption and costly errors if you are caught off guard by an investigation. Even if you do not hire counsel, at a minimum, follow these simple steps to protect yourself.

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