The Paycheck Protection Program (PPP) was a vital lifeline for small businesses their employees during the COVID-19 pandemic, but it also became a target for widespread fraud. Billions of taxpayer dollars meant to support struggling businesses were stolen or misused through fraudulent PPP loan applications.
Let’s take at look at how the PPP worked, why it was ripe for abuse and how a suspected $76 billion in federal funds got into the wrong hands.
What Is the Paycheck Protection Program (PPP)?
The Paycheck Protection Program (PPP) was set up by the US federal government to provide emergency financial assistance for businesses struggling during the Covid-19 pandemic. The primary goal was to discourage anyone with a small business from laying off workers and soften the economic impact of the pandemic.
For periods between March 2020 and May 2021, struggling businesses with 500 employees or fewer could apply for a PPP loan to cover essential costs like payroll, rent, and utilities.
The highest PPP loan amount was 2.5 times the average monthly payroll cost of the company, capped at $10 million. There was also a second draw that permitted businesses to apply for up to $2 million if they could show at least a 25% decrease in quarterly revenue. These loans were backed by the government and offered through private banks.
If PPP funds were spent as intended, the borrowers became eligible for loan forgiveness – meaning the debt would be canceled and the loan did not need to be repaid.
The program was part of the Coronavirus Aid, Relief, and Economic Security Act or CARES Act.
How Did PPP Loan Fraud Work?
Fraudsters abused the program by making false statements in an application for a PPP loan and/or in an application for loan forgiveness. Applicants could commit bank fraud by:
- Claiming support for a business that doesn’t exist
- Claiming support using a stolen identity
- Inflating payroll figures
- Applying for loans from multiple lenders
- Using loans for unapproved purposes
- Claiming support for a business that did not need it
Borrowers who provided inaccurate information may be eligible for federal charges.
Why Was the PPP Vulnerable to Fraud?
When Covid-19 hit, the Small Business Administration (SBA) – which administered the PPP loans – wanted to make funds available quickly to those who needed them. For this reason they allowed lenders to prioritize speed over security.
The SBA also faced unprecedented demand. The agency processed “the same amount of loans it had in the last 14 years in just 14 days” and was forced to expand its workforce 10 fold.
To ensure speed and cope with demand, they waived the usual vetting process for borrowers and instead used a process of self-certification.
To be eligible for a loan, applicants simply had to check a box saying that, “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” They were generally not required to provide evidence that this was the case, and any business that borrowed less than $2m would automatically avoid being reviewed by the Small Business Administration.
The scale of the PPP also meant that applications for forgiveness were largely processed without any investigation into how loans were used.
The Role of Fintechs in PPP Fraud
Fintech lenders proved to be a weakness in the PPP system.
Historically, companies have been able to access to SBA-backed loans through approved lenders but, for the purposes of the PPP, the SBA approved new lenders, including smaller fintechs.
One study found that fintechs accounted for more than half of suspicious PPP loans. This may be because big banks limited their lending to existing customers but it’s also possible fintech lenders actively encouraged or ignored suspicious applications or failed to put preventative measures in place.
How Much Money Was Stolen Via PPP Fraud?
Scams and dishonesty related to Covid-19 pandemic relief programs are thought to be one of the most widespread instances of bank fraud in modern US history – if not the most widespread.
A suspected $76B of the $800B paid out in PPP loans could be based on fraudulent applications, and around 15% of PPP loan applications have at least one indicator of potential fraud. However, the true cost of PPP loan fraud is not known.
4 Types of PPP Fraud – with Shocking Examples
PPP loan fraud came in various shapes and sizes, from struggling mom-and-pop businesses who stretched the truth, to opportunistic corporations, and outright con artists. Here are a few examples.
1. Fictitious Businesses
While some real business owners fudged the payroll numbers or exaggerated their payroll, serious fraudsters were bold enough to invent companies from thin air. David T. Hines from Florida pleaded guilty to one count of wire fraud for fraudulently obtaining $3.9m for a fabricated business. He used some of his PPP funds to buy a $318k Lamborghini. Hines was sentenced to over 6 years prison time.
2. Multiple Loans
Texas resident Dinesh Sah made 15 different loan applications through 11 different companies while an 8-person fraud ring in California submitted over 150 loan applications worth over $21m. They used the money on “down payments on luxury homes and to buy gold coins, diamonds, jewelry, luxury watches, fine imported furnishings, designer handbags and clothing, cryptocurrency, and securities”.
3. Identity Theft
Fraudsters who didn’t invent a business, “borrowed” one. It is suspected that nearly 70k stolen Social Security numbers were used to apply for PPP or EIDL (another of the Covid-19 pandemic relief programs), leading to $5B in stolen funds, and at least 25k people have emailed the Small Business Administration to report identity theft related to Covid-19 relief programs.
Christopher Leo Daragjati of Florida is one example. He applied for three PPP loans using two stolen Florida identification cards and received around $150k in public funds. He was sentenced “to five years in federal prison on two counts of wire fraud, two counts of aggravated identity theft, and one count of theft of government property”.
4. Misrepresented Need
PPP funds were only supposed to be available to companies in need – but plenty of loan recipients turned out to be capable of comfortably riding out the pandemic. Some of those recipients lied to access funds while others simple took advantage of lack of oversight. Here are some examples.
- RideNow, a retailer of motorbikes and all-terrain vehicle, saw its income almost triple from 2019 to 2020 as interest in outdoor sports soared during the pandemic and yet received $19m in PPP funds.
- At least $250m was loaned to publicly traded companies with growing revenues and forgiven. Public companies were not explicitly excluded from the PPP but the self-certification system required applicants to attest that the loan was necessary for their ongoing operations.The SBA clarified: “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity. It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”
- At least $5B in public funding went to 611 companies owned or backed by public equity firms that held over $900B in cash reserves.
4 Celebrity PPP Recipients
PPP applications are in the public record which makes it easy for journalists to expose wealthy celebrities who took advantage of the program.
While it’s not clear that all funds were obtained fraudulently in every case, these celebs were seen as taking money away from deserving companies in their time of need.
- Ye (better known as Kanye West). Yeezy, which is 100% owned by Ye, received at least $2m in PPP funds but brought in over $1B in 2019. Ye was also a billionaire at the time.
- Josh Bellamy. According to court documents, former NFL player Bellamy pleaded guilty to wire fraud after he got a $1.2m PPP loan for his company Drip Entertainment, using false information.
- Tom Brady. The NFL quarterback’s sports performance and nutrition company, TB12, received $960k from the PPP. It’s not clear how the company was impacted by the pandemic. Brady signed a $50m deal with the Tampa Bay Buccaneers in March 2020.
- Maurice ‘Mo’ Fayne submitted $3.7m loan application for a fictitious trucking business. According to the Department of Justice, the reality television star planned to use the loan to cover expenses from a Ponzi scheme.
Reese Witherspoon, Khloe Kardashian, Paul Pelosi, and Jared Kushner were all connected with PPP loans.
What Is the Government Doing About PPP Fraud?
As it stands, only 200 defendants have been prosecuted for fraudulently obtaining PPP funds. The SBA is using machine learning to review all loans but just 2% have been manually reviewed by auditors (as of January 2023), and researchers estimate that the enforcement rate for PPP scams is under 0.1%.
Nevertheless, the government has ramped up efforts to tackle the problem, working closely with the SBA’s office, financial institutions, and law enforcement partners, like the Department of Justice.
Here are some of the measures being implemented.
- Using local officials: The US Attorney’s office has asked officials to review lists of local loan recipients for potential fraud.
- Strike force teams: The DOJ has teams looking for big pandemic loan fraud schemes using data analysis.
- Screening violent criminals: Some prosecutors are narrowing the pool by screening violent crime suspects for potential involvement in pandemic relief scams.
- Anti-fraud proposal: Biden’s $1.4B proposal aims to prevent fraud and retrieve stolen funds.
- SBA upgrades: The SBA is investing in better tech and more staff to enhance fraud detection.
- Targeting lenders: The Federal Reserve System imposed a penalty on a bank for its role in processing fraudulent loans.
PPP Fraud: In Short
The Paycheck Protection Program (PPP) and the rest of the CARES Act helped countless Americans make it through the pandemic by keeping them employed.. It did this by providing small, struggling businesses with forgivable loans. However, the process for delivering these funds prioritized speed over security. This (along with the enormous scale of the program) made the PPP extremely vulnerable to widespread fraud.
Over $70B in taxpayer money was likely stolen by applicants who invented fake companies, inflated payroll expenses, or simply did not need the money to keep their business running. The federal government is chasing down these fraudsters but most of them will likely get away with their crime. If the government has learned its lesson, future loan programs will be subject to stricter security.