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GAO warns of billions of dollars in coronavirus relief fraud

FILE - In this April 2, 2020 file photo, "For Sale By Owner" and "Closed Due to Virus" signs are displayed in the window of a store in Grosse Pointe Woods, Mich. (AP Photo/Paul Sancya, File)
FILE - In this April 2, 2020 file photo, "For Sale By Owner" and "Closed Due to Virus" signs are displayed in the window of a store in Grosse Pointe Woods, Mich. (AP Photo/Paul Sancya, File)
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In a watchdog report released Monday, the Government Accountability Office warned of "substantial" fraud risk that could jeopardize billions of dollars in coronavirus relief funding.

The GAO told lawmakers and key agencies that fraud "could be widespread" and that any large sums of coronavirus aid passed in the future should be treated as "susceptible to significant improper payments."

Since March, the federal government has spent close to $3 trillion in emergency funding including more than $1 trillion for economic relief programs. The report came as Congress remains gridlocked over the passage of another coronavirus stimulus bill and unable to agree on a price tag. Most relief measures are scheduled to expire at the end of the calendar year.

The GAO was unable to estimate how much money has been lost from the programs intended to support businesses, workers and families. Based on Trump administration guidance, it could take until 2022 to account for all the money that went out through various business loans, unemployment assistance and other emergency measures.

"Even if improper payments are limited to 1 percent of the COVID-19 relief funds appropriated to date, this would equate to $2.6 billion," the GAO wrote.

According to professional fraud examiners, that number is likely to be a lot higher. "Nobody knows the numbers yet but they're going to be big," said John Warren, the vice president and general counsel for the Association of Certified Fraud Examiners. "They're going to be in the billions or tens of billions, almost certainly."

In part, the problem was inevitable. There was a nationwide shutdown in mid-March. Businesses closed their doors and more than 22 million Americans filed for unemployment in a matter of weeks. At the end of March, Congress authorized the CARES Act, a massive $2.2 trillion emergency funding bill. The money was sent out quickly. Millions of loans were processed in a short amount of time with less diligence than normal conditions. In some cases, applicants only had to "self-certify" their eligibility to receive money.

Knowing the massive influx of federal cash would attract some amount of fraud, Congress created an oversight board made up of inspectors general to keep track of the CARES Act money. Despite having its oversight responsibilities curtailed by the Trump administration, the Pandemic Response Accountability Committee (PRAC) has already identified billions of dollars that were allocated improperly through federal relief programs.

Roughly $1.1 billion was paid out to potentially ineligible businesses through the Economic Injury Disaster Loan Program, a program to help established businesses and nonprofits make up for temporary losses.

Another billion-plus was disbursed to people who likely did not qualify for Pandemic Unemployment Assistance benefits. Based on historical analysis, the PRAC estimated up to 10% of the money paid through Pandemic Unemployment Assistance was at high risk of fraud and that the "improper payment rate could increase into the billions."

As of July, the Pandemic Unemployment Assistance program had spent roughly $110 billion, more than half of which went toward a $600 weekly paycheck boost for people out of work due to the pandemic. Under the CARES Act, individuals were asked to self-certify that they were out of work due to COVID-19, a factor that state unemployment offices worried could lead to fraudulent claims.

No program has garnered as much attention, and potentially as much fraud, as the Paycheck Protection Program. Established under the CARES Act and overseen by the Small Business Administration, the PPP was designed to provide up to $10 million in loans to small businesses impacted by the coronavirus. If employers used the money to maintain or rehire workers, the loans could be forgiven.

Just two weeks after Congress allocated $349 billion for the program, the PPP ran out of money. Less than a month later, Congress replenished the program with another $310 billion

The program expired in August after making more than 5.2 million loans, the vast majority of which were under $150,000. Without a doubt, these loans provided a lifeline to businesses and saved an estimated 51 million jobs. But some people saw them as an opportunity to get rich quick.

To date, the FBI has investigated hundreds of cases of suspected pandemic relief fraud across the country. In recent months, the Justice Department has filed dozens of indictments and at least 130 individuals are currently facing federal charges for attempting to defraud coronavirus relief programs.

Some people were charged with creating fake companies to get loans. In other cases, people falsified payroll documents to qualify for bigger loans or submitted fake tax documents.

Last month, the Justice Department charged seven individuals in two states for allegedly filing more than 80 fraudulent PPP loan applications. They made off with $16 million that they spent on luxury items, including a Porsche and Lamborghini.

In October, a Texas man was charged with allegedly falsifying more than a dozen PPP loan applications. He claimed to own several businesses with hundreds of thousands of dollars of payroll expenses. He received a total of $17.7 million, which he spent on lavish personal expenses—multiple houses, several luxury cars, including a 2020 Bentley convertible and millions of dollars in international transfers.

Around the same time, a Virginia man was accused of filing two fraudulent PPP claims worth $2.5 million. Investigators said he spent the money on a Lexus and a private airplane.

The program even attracted foreign applicants. According to research by the Project On Government Oversight and the Anti-Corruption Data Collective, Chinese state-controlled private equity firms received as much as $6 million in PPP loans.

"Anytime you have free government money o the table, you know there are going to people who try to take advantage of that. That's nothing new," said Tim Stretton, a policy analyst with the Project On Government Oversight.

"Because it's nothing new, the government should have had systems in place upfront to make it that much more difficult," Stretton emphasized.

Already, government agencies are required to identify programs that are susceptible to fraud, estimate and report how much money is lost through improper payments and work to reduce those losses. Because the coronavirus programs are new, agencies like the SBA, Labor Department and Treasury may have up to a year to conduct that review. If the program runs out of money before one year, it may never have to identify its risks of financial fraud and losses.

The GAO urged the Office of Management and Budget to expedite reviews of the coronavirus relief programs to help agencies correct any underlying problems that led to improper payments. The longer the programs run without adequate oversight and transparency, the more difficult it will be to identify and recoup the funds lost to fraud—especially if a program, like the PPP, is renewed by Congress.

Ultimately, preventing fraud is more cost-effective than detecting it later and having to track down the money, prosecute the individual and try to claw back the money or assets.

"Unfortunately, we’re kind of past the point of prevention," Warren noted. "I think the more critical thing the federal government could do right now is to take a look at how improper payments got sent out the first time, understand the weaknesses in the system and make sure those get corrected before sending out another round of loans—if, indeed, there is another round."

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A majority of anti-fraud professionals reported having more difficulty preventing, detecting and investigating fraud during the pandemic, according to a study. As a result, they expect to see an increase in loan fraud and unemployment fraud in the next year.

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