Spike in Suspected Business Loan Fraud Reports Coincided with Paycheck Protection Program

Banks filed an abnormally high number of reports of suspected business loan fraud in July, according to previously unreported government data analyzed by the Project On Government Oversight (POGO). The surge in these suspicious activity reports to the Treasury Department’s Financial Crimes Enforcement Network, better known as FinCEN, coincided with the banks’ widespread disbursement of hundreds of billions of dollars’ worth of taxpayer-backed small business loans.

There were 1,044 reports in July 2020—nearly seven times the average number of monthly reports of suspected business loan fraud. It is the highest monthly number of suspected business loan reports in FinCEN’s database, which stretches back to the beginning of 2014. The July 2020 number rivals the total for the whole of 2015 when banks filed 1,263 reports of suspected business loan fraud.

The number of reports in June 2020—489—is more than triple the average monthly number and is the second-highest monthly number of suspected business loan fraud reports in the database.

The $660 billion Paycheck Protection Program (PPP) is administered by the Small Business Administration. The program launched in April and expired on August 8. The program provided loans to small businesses to help them keep employees on payroll as they weather the economic effects of the coronavirus pandemic. Through its economic injury disaster loan program, SBA has also disbursed another nearly $190 billion to businesses as of late August.

Congress has been debating whether to expand coronavirus economic relief, and improving oversight of the program is a focus of legislators. On September 1, Democrats and Republicans on the House Committee on Oversight and Reform issued dueling reports on the Paycheck Protection Program.

Democrats wrote that “Preliminary analysis … reveals that tens of thousands of loans issued by the Administration could be subject to fraud, waste, or abuse. Yet the Administration appears to lack the appropriate oversight mechanisms to identify and root out these problems.” In contrast, Republicans wrote that there was “minimal fraud” and that the Trump administration “avoided fraud to the extent that is typical of disaster relief and other large government programs.”

While a suspicious activity report is not definitive evidence of fraud, the FinCEN data casts doubt on the assertion that there has been minimal fraud in the Paycheck Protection Program, although its extent will likely not be known for a while. It can take time for law enforcement to investigate fraud cases, especially more sophisticated ones, and to criminally prosecute or seek civil or administrative remedies. The Small Business Administration’s inspector general told the New York Times “it’s going to take years” to investigate Paycheck Protection Program fraud allegations. At least 50 Paycheck Protection Program fraud indictments have been brought by the Justice Department to date, according to POGO’s review of Justice Department records.

By law, banks and other financial institutions are generally required to file these suspicious activity reports within 30 days of detecting evidence of a potential crime, especially if they are financial in nature. The Financial Crimes Enforcement Network’s public database does not yet contain statistical information on reports filed in August and September.

Using the database, POGO generated a report on the filings by picking “depository institutions” (that is, banks) under “Industry type”; checking “Display Months; and choosing “Fraud,” specifically “business loans,” under “Suspicious Activity Category / Type.”

The SBA’s office of inspector general (OIG) pointed POGO to a recent report on the economic injury disaster loan program that states, “Since mid-June, OIG’s Investigations Division has had a major increase in reports of suspected fraud from financial institutions and other law enforcement agencies, and we have launched numerous investigations based on these reports.” The SBA provided no comment.

Not all of the suspected fraud reports may be connected with the Paycheck Protection Program or the economic injury disaster loan program, but a top FBI official has said suspicious activity reports filed by financial institutions were assisting federal efforts to combat COVID-19-related fraud.

In early June, before the most pronounced spike in reports, FBI Assistant Director Calvin Shivers told Congress, “We have received countless valuable referrals from financial institutions in the form of Financial Crimes Enforcement Network Suspicious Activity Reports that relate to already open investigations or have led to the initiation of new investigations.”

“The FBI has seen the fraud landscape shifting over the past month as criminals continue to attempt to fraudulently obtain funds made available through the CARES Act stimulus,” Shiver said, referring to the law that created the Paycheck Protection Program. “In response, the FBI is working with the Department of Justice and relevant federal agency inspectors general to actively address substantial numbers of fraudulent PPP loans and Economic Injury Disaster Loan Emergency Advances.”