U.S. watchdog sees signs of 'widespread' potential fraud in small business disaster loans

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WASHINGTON (Reuters) – The internal watchdog at the U.S. government agency responsible for managing COVID-19 emergency loans and grants to small business owners and nonprofits said it has found “strong indicators of widespread potential fraud” in the disaster loan program.

The Office of the Inspector General at the U.S. Small Business Administration (SBA) said it has been “inundated” with contacts to investigative field offices, receiving complaints of more than 5,000 instances of suspected fraud from financial institutions receiving economic injury loan deposits through the Economic Injury Disaster Loan and Advance grant programs, according to a public memo on Tuesday.

The emergency loan program, which is separate from the Paycheck Protection Program also administered by the SBA, is designed to provide economic relief to businesses experiencing a hit to revenues. The larger and more high-profile $660-billion PPP has struggled with technology and paperwork issues that led some businesses to miss out while some affluent firms got funds

SBA inspectors have launched numerous investigations into reports of suspected fraud in the disaster loan program, the memo from SBA Inspector General Hannibal “Mike” Ware to SBA Administrator Jovita Carranza said.

Nine financial institutions have reported a total of $187.3 million in suspected fraudulent transactions. The suspicious activity included use of stolen identities, attempts to transfer funds into foreign accounts or investment accounts, and deposits into personal accounts with no evidence of business activity, the memo said.

OIG’s review also found indications of internal control deficiencies. SBA approved more than $250 million in COVID-19 economic injury loans and grants to potentially ineligible businesses as of June 19 and had made duplicate loans to nearly 300 business, the memo said.

SBA management has taken steps to address the concerns, the memo said.

An agency spokesperson said in an emailed statement the SBA initiated safeguards that prevented processing thousands of invalid applications, “balancing the Agency’s fiduciary responsibilities against the urgent need to provide the small business sector with more than $184 billion it needed to weather the precipitous challenges created by this pandemic.”