Fraudulent Applicants for Paycheck Protection Program (PPP) and a Surge in Criminal Referrals from Small Business Administration

The U.S. Small Business Administration (SBA) made more criminal referrals to federal prosecutors at the Department of Justice in FY 2020—a total of 91—than any year in the past two decades. See Figure 1 below. Referrals began increasing in April 2020 after efforts began to identify those who submitted fraudulent bank loans under the Paycheck Protection Program (PPP) established by the CARES Act. SBA referrals also remained higher than usual during the first three months of FY 2021 (October - December 2020). In fact, between April 2020 and the end of December 2020, a total of 102 new referrals were made.

Figure 1: Number of Criminal Referrals from Small Business Administration to Federal Prosecutors
FY 2001-2020
(Click for larger image)

Just what proportion of recent referrals reflect alleged fraud under the CARES Act is uncertain since specific details of these referrals will only become public once prosecutions actually are filed. But the timing of this upsurge in referrals as well as details on cases already being filed[1] suggest that alleged fraud in applications for COVID relief was a major driving force. These early results are based on case-by-case government records on SBA referrals obtained and analyzed by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University after successful litigation that required their release.

Paycheck Protection Program (PPP) Attracts Fraudulent Applicants

In March 2020, in response to the economic devastation caused by the COVID-19 pandemic, Congress passed the CARES Act, which, at $2.2 trillion dollars, was the largest stimulus package in US history. A key part of the CARES Act was the Paycheck Protection Program (PPP), a program implemented by the U.S. Small Business Administration, which put $659 billion towards what the agency describes as helping "businesses keep their workforce employed during the Coronavirus (COVID-19) crisis." The federal funds provided for low-interest loans with the possibility of partial or total forgiveness if certain conditions were met, such as maintaining employee wages and not firing employees.

The CARES Act was passed and signed into law at the end of March, but already by the end of April, Assistant Attorney General Brian Benczkowski at the Department of Justice was in charge of a criminal probe into fraudulent applications under the program. Benczkowski described the fraudulent activity as follows: "There are unfortunately businesses that are sending in loan applications for large amounts of money that are overstating their payroll costs, overstating the number of employees they've had, overstating the nature of their business." For instance, in one case filed in Chicago, Illinois, in June 2020, the Small Business Administration along with other agencies announced that a local business had fraudulently applied for a $400,000 loan under the Paycheck Protection Program.

The rise in fraudulent applications for the Paycheck Protection Program (PPP) appear to be reflected in TRAC's data on the numbers of criminal referrals from the Small Business Administration to federal prosecutors. Typically, referrals from the SBA remains low, an average of just 46 per year since 2001, which is even lower at an average of just 30 per year when just the decade before 2020 is taken into account. In 2019, the SBA referred only 11 cases for criminal prosecution. In this context the 91 criminal referrals by the SBA in 2020 stands out sharply with only the number of cases in 2007 and 2008 coming close. See Table 1 below.

Referrals from the SBA to federal prosecutors were concentrated in a few key judicial districts:

• nine (9) each in the Northern and Southern Districts of Texas;

• eight (8) in the Southern District of Georgia and five (5) in the Northern District of Georgia;

• six (6) in the Northern District of Florida and four (4) in the Southern District of Florida; and

• five (5) in the Northern District of Illinois.

Just five states—Texas, Georgia, Florida, Illinois, and California—make up 63 percent of all referrals. See Figure 2. In total, 35 out of 94 federal judicial districts recorded a referral from the SBA. See Table 2 below.

Figure 2: Criminal Referrals by Small Business Administration in FY 2020 by State
(Click for larger image)

Footnotes

^[1] Recent press releases issued by the Department of Justice on prosecutions taking place involving COVID fraud prosecutions are available here.