Note: This podcast was updated to correct an error in the introduction. The Small Business Administration has process about $800 billion (not $8 billion) in loans to small businesses that were adversely affected by COVID-19. From the U.S. Government Accountability Office, www.gao.gov Transcript for: Potential Fraud in SBA's Paycheck Protection Program and Efforts to Prevent It Description: In response to the pandemic, the Small Business Administration quickly implemented the Paycheck Protection Program to assist small businesses adversely affected by COVID-19. However, there are concerns that because SBA implemented the program quickly to respond to the crisis, it was left without safeguards against payments to unqualified businesses or fraud. We find out more from GAO's Bill Shear. Related GAO Work: GAO-21-577, Paycheck Protection Program: SBA Added Program Safeguards, but Additional Actions Are Needed Released: July 2021 [Intro Music] [Bill Shear:] Identifying and prosecuting those committing fraud after the fact is very expensive and can take years to complete. [Holly Hobbs:] Hi, and welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office—celebrating 100 years, of fact-based nonpartisan government oversight. I'm Holly Hobbs. In response to the pandemic, the Small Business Administration quickly processed about 11 million loans totaling about $800 billion, to small businesses that were adversely affected by COVID-19. While loans proved to be an important protection for small businesses, there are concerns that the quick implementation of this program left it without safeguards against misuse and fraud. Today, we'll find out more from Bill Shear, an expert on federal small business programs and a director in our Financial Markets and Community Investment team. Thanks for joining us, Bill. [Bill Shear:] It's a pleasure being here, Holly. [Holly Hobbs:] So, Bill, let's start with--what does the Paycheck Protection Program do? [Bill Shear:] Holly. It's a little bit complicated. The program provided loans to about 9 million small businesses. The loans were intended to help small businesses that were adversely affected by COVID-19. For loan recipients that meet requirements for spending loan proceeds on payroll, the loans can be forgiven. And this effectively turns the loan into a grant. [Holly Hobbs:] And we've previously reported about suspicious activity under this program. What do we know so far? [Bill Shear:] We know that there's a lot of potential fraud out there. So until someone is prosecuted, we don't really call it fraud. But the indications are stunning. There've been over 20,000 suspicious activity reports associated with the program that have been filed by financial institutions. The Department of Justice has announced fraud charges in over 130 fraud related cases associated with the program. [Holly Hobbs:] So that seems like a lot of suspicious activity for a program that's just a little over a year old. What is SBA doing to respond? [Bill Shear:] We've been reporting on this program for over a year now. SBA started providing us information during the latter half of 2020 indicating that contractors would review loans already made using automated and manual processes to determine eligibility for those loans. We also reported actions by law enforcement agencies, including the Department of Justice and SBAs Office of Inspector General, to identify and prosecute entities that committed fraud. [Holly Hobbs:] And so you just discussed ongoing reviews of loans that were made in 2020. Did SBA make any changes for loans issued in 2021? [Bill Shear:] Yes, SBA did make a change. In February of 2021, there was new authorization that allowed more loans and it allowed those businesses that already got one loan to get another loan. And in February, SBA started making upfront automated compliance checks for new first and second round loan applications. So this was the first case of actually requiring some verification before the loan was made. [Holly Hobbs:] So let me ask this. With all the attention on fraud in the program, should SBA's attention be focused on preventing rather than just responding to fraud after the fact? [Bill Shear:] You're making a very good point. Our focus has been on management practices that SBA should use to prevent fraud from occurring in the first place. Identifying and prosecuting those committing fraud after the fact, while this is important, it is very expensive and can take years to complete. So this is why we emphasize preventative measures to begin with. [Holly Hobbs:] And businesses can ask for these loans to be forgiven. What are the requirements for that, and what's the process for making sure businesses meet those requirements? [Bill Shear:] Borrowers are generally eligible for full-loan forgiveness if 60 percent of the loan proceeds were used on eligible payroll cost. To receive full forgiveness, the borrower first makes an application to the lender. If the lender approves the application, it then sends it to SBA. And if SBA approves the lender's decision, it remits the appropriate forgiveness amount to the lender. [Holly Hobbs:] And what are we hearing about this process? [Bill Shear:] Although SBA developed tools such as a Web portal and lender hotline, as part of our work, we conducted this very extensive survey of lenders. Some lenders cited delays or unresponsiveness to queries on the status of loan forgiveness determinations. [Music] [Holly Hobbs:] So Bill told us the Paycheck Protection Program has played an important role in protecting small businesses affected by the pandemic. But that while the Small Business Administration has taken steps to improve its oversight of the program, there are still some weaknesses that need addressed. So, Bill, did we make any recommendations to SBA? [Bill Shear:] We've been reporting on this program for over a year now. In our previous recommendations included having SBA conduct a fraud risk assessment of the program. In this report, our recommendations include taking actions to complete a process for allowing lenders to claim the SBA guarantee when they have evidence the business ceased operations or declared bankruptcy. There are times when borrowers who receive these loans will go out of business. And this is a guaranteed loan. So there has to be a process for that. Our report also includes a recommendation to implement a process to ensure SBA responds to lender queries on a status of loan forgiveness determinations on a timely basis. [Holly Hobbs:] And last question, what's the bottom line of this report? [Bill Shear:] The Paycheck Protection Program was a response to very adverse impact from COVID-19 on millions of small businesses. It has been an extremely expensive program. To limit cost and ensure that the program serves the small businesses that are the intended beneficiaries, SBA has to take actions to improve the integrity of the program, manage fraud risk, and improve responsiveness to lenders and borrowers participating in a program. [Holly Hobbs:] That was Bill Shear talking about GAO's recent review of SBAs Paycheck Protection Program. Thanks, Bill. [Bill Shear:] Thank you for having me. Holly, it's been a pleasure. [Holly Hobbs:] And thank you for listening to the Watchdog Report. 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