SBA Inspector General Issues Fraud Alert for Disaster Loans

(Bloomberg) — The Small Business Administration’s Inspector General raised serious concerns about potential rampant fraud in a federal disaster-loan program providing coronavirus relief.

The inspector general’s office said in an alert Tuesday that it’s been “inundated” with complaints, including more than 5,000 instances of suspected fraud from financial institutions that received deposits from the SBA’s Economic Injury Disaster Loan program, or EIDL. The review identified more than $250 million in aid given to potentially ineligible recipients as well as $45.6 million in potentially duplicate payments.

SBA Inspector General Hannibal “Mike” Ware suggested “swift management action” by the SBA to immediately identify disbursements that may have been obtained fraudulently, recover disbursed funds, and prevent additional taxpayer losses.

“Our preliminary review reveals strong indicators of widespread potential fraud in the program,” the inspector general said in the memo to SBA Administrator Jovita Carranza. “These issues need to be addressed immediately to reduce fraud risk and prevent further losses.”

Carranza said in a response included in the alert that the EIDL program has “robust internal controls” that have stopped billions of dollars and that it can’t address the substance of the complaints without details that she said Ware’s office declined to provide.

“The reality is that SBA has developed and implemented a comprehensive, rigorous, end-to-end infrastructure to reduce the risk of fraud in the EIDL COVID program,” Carranza wrote in her response.

The aid was designed to give legitimate U.S. entities a quick injection of capital and long-term financing to deal with the pandemic, and the details of suspected fraud are “alarming,” Republican Senator Marco Rubio of Florida, chairman of the Small Business & Entrepreneurship Committee, said in a statement.

The EIDL program, which is separate from the more publicized Car Accident Lawyer in Baton Rouge Paycheck Protection Program, provides loans of as much as $2 million — currently capped at $150,000 — as well as advances of as much as $10,000 that don’t have to be repaid. As of July 22, SBA said it’s approved more than 2.8 million EIDL loans for a total of $160 billion, and more than 5.7 million advances amounting to $20 billion.

Nine institutions alone have reported a combined $187.3 million in suspected fraudulent transactions, the inspector general said. Examples of suspicious activity include accounts established using stolen identities, account holders attempting to transfer funds into investment or foreign accounts and deposits being made into personal accounts with no evidence of business activity.

Ware’s office said it has identified organized fraud rings that use social media to recruit applicants who split advance money with ringleaders, as well as scams to persuade people to provide identifying information to “get free money” and apply for fraudulent loans, according to the alert.

The inspector general found that the SBA approved 6,132 EIDL loans totaling $208.1 million to potentially ineligible businesses as well as 20,692 advances worth $47.8 million. The SBA has also approved, or approved and paid, at least 275 loans more than once — with some businesses approved for three or four loans, the alert said.

“SBA processed the multiple applications submitted because the agency does not have effective controls in place to determine if the applicants had previously applied for and received financial help,” the report said.

(Updates with Rubio comment in seventh paragraph.)

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