Title: Fraud in Small Business COVID-19 Relief Programs Description: Funding to support small businesses and their employees, who were impacted by the pandemic, totaled over $1 trillion. While this assisted more than 10 million businesses, some of it went to those who sought to defraud the government. We'll learn more from GAO's Johanna Ayers. Related GAO Work: GAO-23-105331, Covid Relief: Fraud Schemes and Indicators in SBA Pandemic Programs Released: May 2023 [Music] [Johana Ayers:] When pay-and-chase becomes too difficult or costly to pursue, we the taxpayers, are left to pay for the fraud. [Holly Hobbs:] Hi and welcome to GAO's Watchdog Report. Your source for fact-based, nonpartisan news and information from the U.S. Government Accountability Office. I'm your host, Holly Hobbs. Funding to support small businesses and their employees, who are impacted by the pandemic, totaled over $1 trillion. While this assisted more than 10 million businesses, some of it went to those who sought to defraud the government. In a new report, GAO looked at cases and individuals charged with fraud to see how they committed these crimes and how they could be prevented in the future. We'll learn more from Johana Ayers, the Managing Director of our Forensic Audits and Investigative Services team here at GAO. Thanks for joining us. [Johana Ayers:] Thanks, Holly. I'm really pleased to be with you today. [Holly Hobbs:] So, Johanna, maybe you can start us off with--we looked at some fraud cases. What did we find? [Johana Ayers:] Well, Holly, when we looked at 330 cases that were being prosecuted by the Department of Justice for fraud involving PPP and COVID-19 EIDL, we found that individuals use a wide variety of methods to misrepresent themselves and their eligibility to get funds. In some cases, applicants use stolen identities. In other cases, they applied for funds on behalf of totally fictitious, non-existent businesses. And then in other cases, they applied for funds using shell companies that existed on paper but actually had no employees. In one of the cases that we highlight, a fraudster applied ten different times to these programs. In one of the applications he applied for a legitimate business. In one he applied for a totally fictitious entity. And in an eight applications, he used a shell company that had no actual employees. At the end of the day, he got $750,000 from these programs before he was caught and ultimately pled guilty. [Holly Hobbs:] So that's $750,000 just from one guy. But we looked at 330 cases under the Paycheck Protection Program and the COVID Economic Injury Disaster Loans (or COVID EIDL) program. How much has been lost to fraud in these programs? Do we know? [Johana Ayers:] Well, that's a really great question. And I wish I really had a better answer for you than 'we don't yet know.' For those 330 cases that we looked at--as of December 2021, we can confirm that there was $188 million in losses. But the potential losses from those cases alone is likely much, much higher. And then, of course, the total amount of financial losses across PPP and COVID-19 EIDL will be much higher. The number of cases being investigated grows every day, as do the number of cases making their way through the judicial system. And that will continue on for many more years. And I think we have to be realistic. We may never know the true total amount that was lost to fraud in these programs. That's because some fraud will continue to evade detection. And realistically, not every instance that is detected will result in prosecution. [Holly Hobbs:] So what's being done to get this money back and prosecute those who have committed this fraud? [Johana Ayers:] The Department of Justice and other agencies have taken action to recover stolen funds and hold fraudsters accountable. In those 330 cases we looked at, we identified about $154 million in court ordered restitution and seizures. In those cases, 80 of them had reached the sentencing stage with 94 individuals sentenced to prison. Their average sentence was about 37 months. And while these efforts to get the money back and hold fraudsters accountable are incredibly important, I think they really underscore how critical it is to prevent fraud from occurring in the first place. Pursuing all of the potentially fraudulently obtained funds may ultimately not be feasible or cost effective. And when pay-and-chase becomes too difficult or costly to pursue, we the taxpayers, are left to pay for the fraud. [Holly Hobbs:] In addition to looking at cases charged by the Department of Justice, we also conducted an analysis to see if there were indicators of fraud. What all did that analysis involve and what did we find? [Johana Ayers:] We analyzed SBA's own data related to PPP and COVID-19 EIDL funding, and then we match that data to a data source that we have access to, but that SBA does not. And that provided us with a really unique opportunity to identify potential fraud and SBA's exposure to fraud risk. This data source that we use contains employee and wage information. The absence of wage data suggests that the business was not in operation and had no employees despite what appeared on its application. We looked for a business claiming more employees on its loan applications than what appeared in the wage data, suggesting the possibility that the business may have overstated the number of employees to try and get more PPP funds than it was eligible for. But we really need to be careful here. The presence of a fraud indicator is just that. There is an indication that fraud may have occurred, but there is no proof. Further investigation will need to determine if fraud did occur. But getting to our results, we identified 3.7 million unique PPP and COVID-19 EIDL recipients out of a total of 13.4 million, with one or more of the six fraud indicators we analyzed for. We referred these 3.7 million recipients to the SBA Office of Inspector General for further review and investigation. [Holly Hobbs:] So Johana, we've talked about the Department of Justice's and GAO's investigations, but maybe we can take a step back to look at the programs themselves, which were run by the Small Business Administration. Did SBA take any steps to prevent fraud when they were setting up the programs? And what have they done in the years since to prevent fraud? [Johana Ayers:] When the pandemic began and SBA had to get these programs stood up and implemented quickly and get money to small businesses as quickly as possible, it did so under some very challenging circumstances. But what we also found is that while it was making the best possible efforts to get the money out as quickly as possible, it was not well-positioned to manage the fraud risk and the program. For example, it lacked a dedicated anti-fraud entity. It also had not conducted fraud risk assessments that could have informed its efforts to prevent and more readily detect fraud in these programs. Now as the pandemic unfolded and fraud schemes emerged, SBA adapted and added controls in response, including undertaking its own data analytic efforts to detect fraud in the programs. SBA has also taken important steps to better position itself to manage fraud risk going forward. {MUSIC} [Holly Hobbs:] So Johana just told us that our analysis SBA's COVID programs found indicators of fraud--such as employers claiming too many employees. And while SBA is taking steps to protect against fraud, it has opportunities to better prevent and detect fraud. So, Johana, moving forward, what do we think the Small Business Administration needs to do? [Johana Ayers:] Well, SBA has already undertaken efforts to use data analytics to detect potential fraud. But we identified some opportunities for SBA to enhance those efforts, especially as it continues to move towards more strategically managing its fraud risk. Specifically, we made two recommendations to SBA, both of which SBA agreed to implement. The first has to do with ensuring that it can conduct data analytics across its programs. This was something that was not consistently done over the course of the pandemic and could have helped with the prevention and detection of fraud. We also recommended that SBA evaluate the various external data sources that could help it verify applicant information and detect potential fraud. It doesn't always have access to this data, though. And that may mean seeking changes in laws or developing data sharing agreements with other agencies. [Holly Hobbs:] Last question, what's the bottom line of this report? [Johana Ayers:] Well, Holly, I think we need to keep in mind that the PPP and COVID 19 EIDL programs help millions of small businesses and their employees during the pandemic. However, because the controls that should have helped prevent fraud were not put in place or were relaxed early on, too many bad actors took advantage of these programs to get funds that they were not eligible for. By better understanding how fraud occurred in these programs through analysis of the schemes used, programs can better ensure that they have the right controls in place to help prevent similar schemes and better detect when they are used in the future. [Holly Hobbs:] That was Johana Ayers talking about GAO's new report on fraud and COVID relief programs. Thanks for your time, Johana. [Johana Ayers:] Thanks, Holly. It was great talking with you. [Holly Hobbs:] And thank you for listening to the Watchdog report. To hear more podcasts, subscribe to us on Apple Podcasts, Spotify, or wherever you listen and make sure to leave a rating and review to let others know about the work we're doing. For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at GAO.gov.