S.B.A. Overpaid $4.5 Billion on ‘Illogical’ Small Business
Grant Claims
By Stacy Cowley, 10/7/21, NY Times

An emergency relief program hastily rolled out in the early
days of the pandemic had such poor fraud protections that
it improperly doled out nearly $4.5 billion to self-employed
people who said they had additional workers — even those who
made wildly implausible claims, like having one million
employees.

The $20 billion program, called the Economic Injury Disaster
Loan Advance, offered small businesses immediate grants of
up to $10,000 in the months after the pandemic shuttered
much of the economy. But hundreds of thousands of the grants
it made were inflated because there was no system to catch
applications with “flawed or illogical info,” Hannibal Ware,
the Small Business Admin’s inspector general, wrote in a
report released on Thursday.

The report, which described how the agency could have
spotted obviously bogus applications by taking even
rudimentary steps to prevent fraud, was the latest black eye
for the S.B.A., a tiny dept that was thrust to the front
lines of the govt’s pandemic response. The agency also ran
the Paycheck Protection Program, which gave out $800 billion
in bank-issued loans but often left lenders & borrowers
scrambling to comply with confusing & shifting rules. Fraud
was a problem there, too: Tens of billions of dollars may
have been taken improperly.

The loan advance grants were created by Congress in March
2020 as part of its first coronavirus aid package. Intended
to quickly get money to devastated companies, the program
offered grants to businesses that applied for a disaster
loan — and allowed applicants to keep the money even if
their loan request was rejected.

In the 14 weeks the program operated before it ran out of
money, nearly 5.8 million applicants received grants based
on their company’s head count: $1,000 each for up to
10 workers.

Sole proprietors and independent contractors who employed
only themselves should have collected a maximum grant of
$1,000 — but many collected bigger checks.

Over 700,000 solo business owners received larger grants
by claiming additional workers. While sole proprietors can
have employees, such an arrangement is unusual. And those
that do have employees are required to have an Employer
I.D. Number from the Internal Revenue Service.

But the S.B.A. skipped an obvious safeguard: It did not
require sole proprietors claiming to have employees to
enter their Employer I.D. Number, instead allowing them
to use their Social Security numbers.

Although some of the outsized payments are likely to be
the result of applicant error, the majority of the
suspicious applications cited in the inspector general’s
report maxed out their claims: Over 380,000 applicants
said they had enough workers to get the full $10,000.

Some of the claims were outright absurd. Hundreds of
applicants received the maximum grants after saying that
they employed over 500 workers, a number that would
generally make them ineligible for the small business
program. 15 said they had one million employees — a figure
that would put them in league with Amazon and Walmart.

The Small Business Admin “never requested additional info
from these sole proprietors to verify the number of
employees cited on their grant applications before
approving & disbursing the grants,” Ware said in his report.

By his calculation, those applicants were eligible for
only $704 million of the $5.2 billion they received.

Earlier watchdog reports had pointed to deep problems in
the Economic Injury Disaster Loan pgm’s fraud safeguards.
Ware’s office warned in July 2020 of “potentially rampant
fraud” because of the pgm’s nearly nonexistent guardrails,
& a Bloomberg article last year described how almost
comically easy it was to scam the system. It cited how-to
videos that circulated on YouTube with titles like “$10k
SBA Loans & GRANTS Got The STREETS Going CRAZY!”

In a statement, the agency noted that the loan policy
began during the Trump admin and said the Biden admin’s
disaster loan team had identified and worked on risk
management improvements.

Senator Benjamin L. Cardin, the Maryland Democrat who
spearheaded the grant legislation, said the agency had
thoroughly bungled the program.

“When Congress drafted the CARES Act, our intent was for
S.B.A. to provide all businesses with E.I.D.L. Advance
grants worth $10,000,” he said. “Not only did the Trump
admin limit grants to $1,000 per employee, it failed to
enforce its own policy.”

In a written response included in the report, James E.
Rivera, the head of the unit that ran the program, said
the agency was required by the CARES Act to accept
applicants’ self-certifications that they qualified.
He also said that the lack of an Employee I.D. Number on
the application form was not proof that the applicant
did not possess one.

Mr. Ware criticized those responses.

“The CARES Act mandate for S.B.A. to accept applicant
self-certification does not relieve the agency of its
fiduciary responsibility to the taxpayers to detect and
prevent fraud,” he wrote.

Ware recommended that the govt try to reclaim the $4.5
billion it overpaid. He suggested that the agency seek
proof from applicants who claimed to have employees,
request reimbursement from those who don’t provide it, &
refer suspected fraudulent cases to the inspector general’s
criminal investigation division, which works with outside
agencies like the FBI.

Rivera said in his response that the agency would hire
an outside contractor to review the grants, and would
“develop an appropriate plan to remedy cases identified
where the applicant provided false info.”

He said one option for recovering funds is the Treasury
Dept’s Offset Program, which seizes tax refunds and other
federal payments to settle debts.

The Justice Dept has already prosecuted hundreds of cases
involving fraudulent claims across the govt’s $1 trillion
small business pandemic relief programs, reclaiming over
$600 million.

But that is only a sliver of the amount lost to bogus
claims. A March memo by the House Select Subcommittee on
the Coronavirus Crisis identified an estimated $84 billion
in suspected fraud in the P.P.P. and E.I.D.L. programs
after the Trump admin “refused to implement basic controls.”

Ware told a House committee in April that his office had
opened more than 400 cases involving the agency’s assorted
relief programs.

“Fraud investigations will be a decades-long effort,” he said.

https://www.nytimes.com/2021/10/07/business/fraud-small-business-administration.html

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