Fraudulent loans and the United States paycheck protection program

Abstract

Purpose Despite lessons learned from prior disaster relief funding programs, billions of dollars in fraudulent loans were issued by the Paycheck Protection Program (PPP) during the COVID-19 pandemic in the USA. The misuse of funds prevented business owners and their employees who are in true financial need from accessing program funds. The purpose of this paper is to identify techniques perpetrators used to obtain funds from the program illegally since its inception in March 2020 and concludes with suggestions on internal controls to reduce fraud occurrences in future relief packages. Design/methodology/approach The authors analyze 106 loan fraud cases reported by the US Department of Justice and compiled by the Project on Government Oversight to examine methods individuals used to illegally obtain funds from the program. The authors complement the data with lender characteristics from Call Reports and Business Insights. They further compare the fraud sample to the entire population of PPP loans, which is available on the US Small Business Administration website. The authors report descriptive statistics, correlations and multivariate regressions. Findings The authors find that most fraud cases falsify tax data to access program loans and inflate payroll numbers to obtain larger loan amounts. Applicants who sought large amounts applied using multiple companies and across multiple lenders, consistent with the use of multiple loans to avoid the scrutiny of a single large loan with a single lender. The authors find that cases with larger amounts relied on less regulated lenders, such as lending companies, rather than more regulated lenders. Originality/value The PPP is part of the largest ever US stimulus in which the private sector allocated funds. This study provides novel evidence of how fraudsters adapted to the program's rules to defraud the government.

Faith in Trump and the willingness to punish white-collar crime: Chinese Americans as an out-group

“…The CARES Act included a number of programs intended to provide relief to struggling small businesses and employees, such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL). Although many government programs are prone to fraud, the pressure to promptly provide funding while simultaneously conducting a thorough review of applications makes emergency loan programs particularly vulnerable (Bailey et al, 2022).…”

“…To secure bigger loans, tax information and payroll numbers are frequently falsified (United States Department of Justice, 2021). Other criminally motivated individuals applied for smaller loans from multiple lenders to avoid generating suspicion (Bailey et al, 2022). In May of 2021, the COVID-19 fraud task force was established to work with other government agencies to prosecute the most egregious cases of fraud (Ngo, 2022).…”

Lender financial reporting incentives and loan prioritization during the Paycheck Protection Program

“…Kapinos (2021a) documents that counties with larger PPP exposure actually experienced a decline in economic activity, as the program allowed businesses to remain closed longer. Further research examines fraud during the program, exploring a variety of methods used by borrowers to defraud the program (Bailey et al. , 2021; Beggs and Harvison 2021).…”