Fraudulent cases of Paycheck Protection Program (PPP) abuse uncovered

The Select subcommittee for the corona crisislead by Rep. James E. Clyburnhas released a staff report detailing the poor performance of many financial technology companies (fintechs) in administering the nation’s largest pandemic relief program, the Paycheck Protection Program (PPP).

The report describes how the investigated companies, despite being tasked with processing PPP applications while filtering out those with signs of fraud, abdicated this responsibility – in many cases recklessly – and resulted in the approval of a large number of fraudulent applications .

In May 2021, the Select Subcommittee launched an inquiry into the role of fintech companies Cabbage, Inc. and Blue wine and partner banks Cross River Bank and Celtic Bank by facilitating PPP fraud following public reports, they were linked to a disproportionate number of fraudulent loans.

The survey was expanded in November 2021 to include fintech start-ups Bluecorn UPS, LLCand Womply, Inc.after an analysis determined significant percentages of OPS loans arranged by the companies had indicators of fraud.

Clyburn’s statement

Chairman Clyburn issued the following statement on the report:

“As the report describes, many fintechs, while promising to help disburse billions of Paycheck Protection Program dollars to struggling small businesses efficiently and quickly, refused to take adequate steps to detect and prevent fraud despite their clear responsibility for to protect taxpayers’ funds.

“Even though these companies failed in the administration of the program, they nevertheless amassed massive profits from program administration fees, much of which was extracted by the companies’ owners and managers. On top of the windfall gained by allowing others to engage in PPP fraud, some of these the persons have compounded their ill-gotten gains by engaging in PPP fraud themselves.

“We must learn from this inexcusable abuse to put in place safeguards that will help ensure that federal programs – including emergency relief programs in future crises – are administered more effectively, efficiently and fairly, while keeping waste, fraud and abuse to an absolute minimum.

“Based on our initial findings, I have asked Small Business Administration (SBA) and Small Business Administration’s Office of Inspector General (SBA OIG_ to conduct further investigations of these companies and pursue all appropriate remedies, and I have advised the DOJ that some of our findings may warrant its attention.”

Fraud detection

Summarizing the findings on fintechs:

• Blueacorn took minimal steps to prevent fraud in its facilitation of billions of dollars in PPP loans, while abusing the program to enrich its owners.
• Womply’s PPP fraud screenings failed to prevent “rampant fraud” – and were accompanied by questionable business practices – despite generating over a billion in profits.
• Capital Plus, Harvest and other fintech partner lenders performed little oversight of Womply and Blueacorn’s activities, allowing fraud to infiltrate the PPP.
• Kabbage’s OPS activities illustrate that OPS lacked incentives for fintechs to implement strong fraud prevention controls or appropriate borrower service.
• Bluevine initially faced significant fraud rates, but their long-time partners stepped in to improve fraud prevention during the program.

Consequences

The program was established during the pandemic for organizations to survive and retain employees. Distributing $800 million to over nine million small and medium-sized businesses, the loans were designed to be fully forgiven. Although this was only the case if the proceeds were used in accordance with the program’s rules. However, the banks and non-bank lenders abused the loose safeguards to make money.

The report offers three proposals in response:

• It urges the SBA to carefully consider whether fintechs should be allowed to participate in federal lending programs.
• It recommends that SBA and the SBA OIG continue to investigate fraud in PPPs. As a result of the findings, it calls for stricter oversight under emergency programs. Furthermore, it suggests that the SBA OIG should investigate all including potentially fraudulent loans received by Blueacorn owners and consultants described in the report. The Department of Justice (DOJ) should continue its work to prosecute fraud in PPPs.
• It suggests that any expansion of SBA programs to unregulated lenders or agents, including fintechs, should have greater oversight by the agency.