A federal loan and grant program for businesses and nonprofits trying to survive the coronavirus pandemic has “pervasive fraudulent activity,” an independent watchdog said this week.
Hannibal “Mike” Ware, inspector general of the U.S. Small Business Administration, said there is “potentially rampant fraud” in the agency’s Economic Injury Disaster Loan program, or EIDL. He said the wrongdoing extends to the companion EIDL Advance grant program.
Ware said his investigators identified about $300 million in loans and grants that were “given to potentially ineligible recipients” or were “potentially duplicate payments” to some recipients.
The problematic EIDL and EIDL Advance grants equal 0.2% of the total $180 billion approved as of July 22, according to SBA data. In New York State, about $16 billion in loans and grants have been distributed. The agency hasn’t provided data for Long Island.
Still, Ware, in a memo to SBA administrator Jovita Carranza on Tuesday, said, “Our preliminary review and investigative findings have identified concerns with internal controls and potentially rampant fraud in the program…Our investigative staff has also begun dozens of investigations into suspected fraud,” he said.
Ware noted SBA doesn’t have “a process or partnership in place with financial institutions to review instances of suspected fraud.”
Nearly 450 banks, credit unions and other financial institutions have contacted the inspector general's office about suspicious activity tied to EIDL, he said.
Red flags have been raised about accounts established using stolen identities, account holders unable to explain the origins of deposits or identify business names on loans, and loan and grant funds deposited into personal accounts with no evidence of business activity.
SBA is authorized to make more than $370 billion in EIDL loans and $20 billion in EIDL Advance grants. The grant funds were exhausted earlier this month.
SBA has unilaterally reduced the maximum EIDL amount to $150,000 per applicant from $2 million, angering borrowers and Congress. The loans have interest rates of 3.75% for small businesses and farms, and 2.75% for nonprofits. The term is up to 30 years.
Carranza, in her response to the inspector general’s concerns, acknowledged the potential for fraud — but said it was being addressed by SBA staff and financial institutions.
She said $113 billion in EIDL and EIDL Advance grants had been rejected because the applicant wasn’t eligible, or the payment was duplicate.
Carranza said the inspector general concluded the “EIDL program’s internal controls are deficient without considering what the internal controls actually are. Rather than rely on purported complaints, [Ware] should be evaluating the internal controls SBA has implemented and looking at the data that demonstrates how those internal controls work to come to the right conclusion,” she said.
Separately, Congress passed a bill last month that President Donald Trump signed into law making changes to another loan program in which the SBA's inspector general found fault. Carranza and Treasury Secretary Steven Mnuchin had written regulations for the Paycheck Protection Program loans that violated the intent of the CARES Act, which established the PPP in March.