SBA Inspector General’s report cites rampant fraud, misappropriation of COVID-19 small business aid

November 9-15, 2020

As Congress looks to restart talks on another round of coronavirus relief after the contested Nov. 3 election,  new reports are emerging that the two main programs to aid small businesses owners amid the COVID-19 pandemic were rife with fraud and misappropriated billions of taxpayer dollars.

On Oct. 28, the Inspector General Hannibal “Mike” Ware of the U.S. Small Business Administration (SBA) released a 72-page report lambasting the Trump administration’s initial response to the rush of COVID-19 relief applications through the so-called Economic Injury Disaster Loan (EIDL) program. 

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act approved by Congress on March 27, the SBA’s primary disaster program offered emergency assistance up to $2 million to eligible small businesses, nonprofits, farms, and other entities with few employees. The CARES Act also expanded COVID-19 EIDL eligibility to include larger businesses, cooperatives, employee-owned stock ownership plans, and Indian tribes with not more than 500 employees.

Although not as well-known as the SBA’s larger Paycheck Protection Program (PPP) that was centerpiece emergency relief plan under the $2.2 trillion CARES Act, the EIDL initial received more publicity due to a $10,000 grant that was provided to small business owners within days after COVID-19 was declared a global pandemic.

Under that enormous pressure, Ware wrote in his late October report that EIDL program made billions of dollars of capital available to hundreds of ineligible businesses and fraudulent players that gamed the lax SBA application system.

‘To expedite the process, SBA ‘lowered the guardrails’ or relaxed internal controls, which significantly increased the risk of program fraud,” wrote the SBA’s chief program auditor. “The unprecedented demand for COVID-19 EIDLs and the equally unprecedented challenges SBA had in responding to this pandemic combined with lowered controls resulted in billions of dollars in potentially fraudulent loans and loans to potentially ineligible businesses.”

Based on Ware’s analysis of EIDL data through the end of July, inspectors found SBA approved and disbursed $13.4 billion in COVID-19 EIDLs to accounts that differed from the original bank accounts listed on the loan applications. And although the CARES Act rules allowed only one loan per applicant, the SBA investigator found that multiple loans totaling over $58 billion was handed out to applicants using the same Internet link, email, bank accounts, or businesses listed at the same addresses.

The EIDL program kicked off with massive publicity after the passage of the CARES Act was approved on March 27 by Congress, promising loans for up to $2 million for more established small business firms with first payment is deferred for 12 months. As well, the CARES Act designated $10 billion for EIDL advance grants, which allowed approved small businesses to request up to $10,000 only three days after the SBA received the application.  The applicant was not required to repay any of the advance grant, even if later denied a COVID-19 EIDL.

However, along with the more popular Paycheck Protection Program, the EIDL initiative exhausted all its available CARES Act funding less than two weeks after its unveiling, prompting SBA to acknowledge that applications for both programs had been tabled by April 17.

In its effort to assist the greatest number of small businesses, the EIDL Advance payments were later halted for several weeks due to the rush of applications for COVID-19 relief. 

In his report, Ware said the OIG’s office found that nearly $1.1 billion in COVID-19 EIDLs and emergency advance grants of up to $10,000 were given to potentially ineligible businesses. Altogether, the report found that SBA approved 22,706 COVID-19 EIDL applications totaling $917.7 million and 45,385 advance grants totaling $135.1 million to potentially ineligible entities. 

Once it restarted after Congress provided additional funding in May, the SBA rules were altered to provide only $1,000 per employee up to a maximum of $10,000. Still, recipients did not have to be approved for a loan, which provided an interim but vital source of funds while applicants awaited a decision on their loan application.

In the OIG’s report, Ware wrote that SBA had difficulty from the onset of receiving EIDL and PPP applications after it turned to a contractor hired in December 2018 to streamline loan processing through data analysis and underwriting. That contractor, the report said, had done only limited work on disaster loans before the COVID-19 pandemic.

In early May, the SBA Inspector General released a similar unflattering report on the PPP program, saying it included loopholes allowing large corporations to apply for forgivable loans. Those eligible for the program were supposed to be “mom-and-pop” small businesses, certain non-profits, veterans’ organizations, self-employed individuals, independent contractors, and other businesses with fewer than 500 employees and less than $1 million in revenue, it said.

In a rebuttal of the OIG’s probe, the Trump administration disagreed with the findings “because there was insufficient evidence that loans were approved and disbursed to ineligible businesses,” said SBA Administrator Jovita Carranza.

On the same day that the OIG findings were released, Carranza released the SBA’s own fiscal year 2020 report noting that the enactment of the CARES Act dramatically increased loan volume guaranteed by the federal agency, which appropriated only $28 billion in fiscal year 2019. 

Noting the volume of coronavirus aid applications, Carranza said the SBA’s overworked staff with field offices in Arkansas and all 50 states processed an additional 5.2 million loans worth more than $525 billion through the PPP loan fund between April and August. At the same time, the EIDL program pushed through another 3.6 million small business loans valued at $191 billion, as well as an additional 5.7 million EIDL advances worth $20 billion.

“In response to the unprecedented challenges faced by small businesses this year, the Trump administration provided more than three-quarters of a trillion dollars in financial assistance to support impacted small businesses. SBA lending data further reflects the extraordinary commitment this administration has made to supporting entrepreneurs in underserved communities,” said Carranza.

Despite the Trump’s administration’s response to the OIG report, current talks before the Nov. 3 election on a new stimulus package ran into snags over details over an extension of the PPP fund’s forgivable loans to small business owners. The earlier PPP loan program expired on Aug. 8, leaving $130 billion of the $650 billion appropriated by Congress still on the table.

House Democrats are also looking to claw back some PPP funds after Ware’s congressional testimony said the CARES Act forgivable loan program tilted in favor of larger businesses, and left out many black and minority-owned businesses struggling to stay afloat. 

In the meantime, U.S. Treasury Secretary Steve Mnuchin, who is leading the Trump administration negotiations with U.S. House Speaker Nancy Pelosi, has refused to release detailed data on recipients of PPP loans. On Oct. 29, U.S. District Judge Maxine Chesney dismissed a Freedom of Information request by the American Small Business League for the Trump administration to release all the names of all firms that received PPP loans. 

In early July, a limited PPP disclosure data compiled by the SBA and U.S. Treasury showed that a significant number of publicly traded companies, billionaires, and large businesses received PPP loans. ASBL estimates that legitimate small businesses, with under a hundred employees, may have received as little as three percent of the total four trillion dollars that the government has allocated for economic stimulus.

“I’m very disappointed at Judge Chesney’s ruling. There’s no exemption in the Freedom of Information Act that would be applicable to this data and I think it should have been released for that reason. I suspect there’s something in this data that the Trump administration is very concerned about,” said ASBL President Lloyd Chapman. “That’s why they refused to release it. The Administration’s excuse of privacy doesn’t hold water because when the applicants filled out the forms, it stated that the information would be public.”

The Washington Post, New York Times, Dow Jones, Bloomberg LP, ProPublica and the Center for Public Integrity have also filed suit for the PPP data. That case will be heard in federal court in Washington, D.C. later this year. 

As of Oct. 19, Arkansas’ SBA District Office in Little Rock had approved 21.086 EIDL loans for loans totaling more than $1.01 billion during the pandemic. In late July, SBA officials in Arkansas had processed a whopping $3.3 billion in PPP loans that were made to 43,181 businesses across the state. The average PPP loan was a tidy $78,246, keeping nearly 400,000 Arkansas workers off unemployment rolls officials said.

Last month, the SBA and the Treasury Department also released a simpler loan forgiveness application for PPP loans of $50,000 or less. SBA officials nationwide, including the Arkansas District office, began approving PPP forgiveness applications and remitting payments to PPP lenders for borrowers on Oct. 2.