Federal agents vow to 'aggressively pursue' scammers after watchdog says $200B in COVID-19 relief aid may have been stolen — here's why the programs became a 'perfect storm for fraud'

Exploiting the SBA’s “weakened controls”

In that initial frenzy as the SBA was focused on getting out funds to struggling businesses, the OIG says scammers enjoyed a “perfect storm for fraud,” which they “egregiously exploited.”

However, these weren’t all simply run-of-the-mill con artists. According to the OIG, “organized criminal syndicates or transnational gangs” were running complex fraud schemes they found “challenging” to dissect.

To clamp down on fraud in these programs, the OIG created SBA-centric task forces to collaborate with the U.S. Department of Justice (DOJ) and other law enforcement agencies.

In the first week of July alone, The U.S. Department of Justice has released information on eight cases of COVID-19 fraud and suspected fraud that involve millions of dollars.

“Through our partnership with the U.S. Attorney’s Office and our federal law enforcement partners, IRS Criminal Investigation Special Agents will continue to aggressively pursue individuals who try to exploit federal relief programs for their personal gain," said IRS Special Agent Donald Eakins in a DOJ case release published yesterday.

Between May 2020 and May 2023, the task forces investigated more than 1,000 cases, resulting in 1,011 indictments, 803 arrests, and 529 convictions. They’ve also recovered $399 million in seized or forfeited assets and $509 million in restitution orders.

Two of those convictions were for a pair of scammers found guilty of using an elaborate telemarketing scheme in which they applied for over 400 fraudulent COVID-19 EIDLs. They managed to successfully obtain over $1.5 million in EIDL advances for ineligible applicants.

Their complicated ruse involved taking their victims’ personal information — for a fee — and promising to file applications for agricultural grants. Instead, they filed fraudulent COVID-19 relief claims with the SBA — which were eventually flagged by the SBA OIG and the U.S. Secret Service.

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Fraudsters left ‘fingerprints’

Through these investigations, the OIG was able to identify 11 fraud indicators that are “almost like a fingerprint left behind at a crime scene.”

They include: dodgy internet protocol (IP) addresses and bank accounts; invalid or duplicate Employer Identification Numbers (EIN), suspicious physical addresses, email addresses and phone numbers; borrowers who received EIDL advances; borrowers in default who have not applied for loan forgiveness; and those issued a hold code by the SBA or a third-party lender.

But the OIG says the two most prevalent indicators of potential fraud were dodgy IP addresses and hold codes.

Of the $136 billion potential fraud within the COVID-19 EIDL program, a shocking $55.7 billion may be attributed to applicants with dodgy IP addresses. The same goes for $16.5 billion of the $64 billion potential fraud within the PPP.

Furthermore, $34.2 billion of EIDL or PPP loans were given to borrowers flagged by the SBA or third-party lenders with hold codes because they identified one or more indicators of fraud.

Improving fraud controls

In conclusion, the OIG found that these fraudsters took advantage of the system’s vulnerabilities and co-ordinated schemes to “gain easy access” to funds meant to help small businesses and entrepreneurs struggling with the impact of the pandemic.

The report verified that the SBA’s “lack of, or weakened, up-front internal controls resulted in the disbursement of over $200 billion in potentially fraudulent COVID-19 EIDLs, EIDL Targeted Advances, Supplemental Targeted Advances, and PPP loans.”

The OIG has issued 77 pandemic-related recommendations, and so far the SBA has taken corrective action to implement 38 of them and is working to implement the rest.

The agency argues that its “fraud controls improved dramatically over time” — in efforts recognized by the OIG, but it still says the SBA’s “need to establish and use effective internal fraud controls is a continuing challenge.”