|This month I’m stepping away from the timber industry to discuss the broader topic of the changing fraud climate because of the pandemic.|
Even in normal circumstances, the fraud landscape is constantly evolving. Criminals and all industries are locked in a perpetual battle to maintain the integrity of their operations and of the clients they serve. This battle is not new.
Then COVID-19 spread around the world. This time, the organization that has been negatively impacted the most is the federal government and the people most hurt and taxpayers and legitimate individuals and small businesses who desperately needed government support to stay afloat. In its effort to quickly get financial relief to millions of individuals, families and small businesses, the door was opened for old and new fraudsters to emerge. Their efforts took money away from legitimate claims and has burdened the current and next generations with a trillion-dollar debt.
In this newsletter, I wanted to look at the face of fraud introduced by the PPP (Paycheck Protection Program). I can only touch the surface in this newsletter, but I thought we could at least get some idea of the breadth of the problem, the blatant spending of falsely claimed government funding, some cases of how it was done, and a warning to those who have accepted PPP funds.
Although these issues may not impact your business specifically today, it is a good idea to keep tabs on the changing fraud environment as fraudsters are not afraid of expanding their operations.
|How the Pandemic Changed Fraud|
PPP: Ushering in the Biggest Fraud in a Generation
The PPP (Paycheck Protection Program) was intended to help those harmed by COVID-19, but others could not resist purchasing luxury automobiles, mansions, private jet flights and swanky vacations.
Some experts say the theft amounted to about $80 billion – or about 10% of the total given out. To make matters worse, it is estimated that at least half of that was taken by international fraudsters as reported by NBC News.
The prevalence of COVID relief fraud has been known for some time, but the enormous scope and its disturbing implications are only now become clear. Programs in 2020 sacrificed security for speed. There were minimal checks on the legitimacy of the claims.
The PPP authorized banks and other financial institutions to make government-backed loans to businesses. The loans were forgiven if the companies spent the money on business expenses. Millions of borrowers inflated their numbers of employees or created companies out of mid-air. The Government Accountability Office warned of fraud risk, but the program continued.
The fraud not only hurt taxpayers, but also legitimate businesses who needed the funds to continue. When the money ran out, there was not enough for legitimate claims. Businesses closed and people lost their jobs. Never has so much been stolen so quickly.
David Hines, 29, of Miami, admitted to a fraud scheme that netted him $3.9 million, according to his guilty plea. He bought a $318,000 Lamborghini Huracan and spent thousands on luxury hotels, jewelry, clothing and dating sites. Prosecutors recovered much of the money.
In another Florida case, a man used a $7.2 million emergency loan to buy a 12,579-square-foot mansion, a Lincoln Navigator, a Maserati and a Mercedes-Benz.
A California couple were convicted in June of stealing $18 million and bought three houses, diamonds, gold coins, luxury watches, expensive furniture and other valuables. Just as they were to be sentenced, they cut off their ankle bracelets and fled, leaving their children behind. They were captured in Montenegro and sentenced to 17 years in prison.
Elias Eldabbagh from Washington, DC, had no prior criminal record, but was charged last summer with trying to steal $17 million. He earned a degree in computer engineering from California State University, Sacramento, and has worked in various technology jobs. Prosecutors seized his Tesla Model 3.
A Texas man was sentenced to more than 11 years in prison for wire fraud and money laundering charges for his scheme to obtain $24.8 million in PPP loans. Dinesh Sah submitted 15 fraudulent applications to eight different lenders of businesses he allegedly owned. He claimed numerous employees and hundreds of thousands in expenses and fabricated federal tax filings.
There’s More – Vacations, Unemployment, Food from Kids
Other frauds took place related to the Pandemic as struggling industries tried to save their businesses by whatever means possible.
In South Carolina, Troy Benjamin Bittner, of Myrtle Beach, was indicted by a Florence grand jury for defrauding a local resort of nearly $1 million. According to the indictment, during the pandemic, Bittner mishandled refunds for guests who canceled reservations. Instead of directing refunds to the credit cards on file, the indictment alleges Bittner issued the refunds to his own personal credit cards and received more than $800,000 in fraudulent refunds at the expense of Carolina Pines over a 26-month period.
In Minnesota, three plead guilty to stealing food money from kinds in a $250 million pandemic fraud. The money flowed to organizations that were supposed to be feeding needy kids, but instead pocketed most of the money. Their guilty pleas were made just three weeks after they were charged. They may have been dozens of other people part of the massive scam.
In addition to the estimated losses of $80 billion from PPP fraud, it is believed $90 – $400 billion was stolen from the $900 billion COVID unemployment relief program.
Much of COVID unemployment relief was carried out by individual criminals or organized crime groups using stolen identities to claim jobless benefits from state workforce agencies disbursing federal funds. Each identity could be worth up to $30k in benefits according to Justice Department Inspector General Michael Horowitz, who oversees COVID relief spending.
Most of the losses are considered unrecoverable. Fortunately, $600 billion has not yet been distributed and new verification rules imposed last year will help to curb fraud.
Finally, another $80 billion was potentially pilfered from a separate COVID disaster relief program.
A Warning if Your Business Received Funds
I’m sure we will hear more about all that happened as the investigators continue to review the cases.
The statute of limitations for False Claims Act cases is 10 years, so there is still plenty of time for investigators to dig into the claims related to the pandemic. They are starting with the low-hanging fruit – the claims on businesses that don’t exist.
The more complex cases are yet to come and will take longer to investigate. The government is making sure the funds are being used by businesses that need them and are being used for the business. So if you participated in this program document how the money was spent!
Because of the unprecedented nature of the pandemic, rules were changing daily. Sometimes business owners and financial institutions were unclear about how the program worked. Business owners need to make sure they keep good records. If the business gets it wrong, it’s potentially a false statement to the government.
Myrtle Beach Man Indicted for Fraud Scheme in RV Resort, by Christina Lee Knauss, South Carolina Business News, email@example.com, September 20, 2022.
Biggest Fraud in a Generation: The Looting of the Covid Relief Plan Known as PPP, NBC News.com, March 28, 2022, Ken Dilanian and Laura Strickler.
How Billions in COVID Relief Funds were Lost to Fraud, NBC News, Ken Dilanian and Laura Strickler
The Changing Face of Fraud During the Pandemic, by Will Maddox, Dallas, TX, Sep 8, 2021, D Magazine.
Three Plead Guilty in $250 million pandemic fraud that stole food money from kids. Stephen Dinan, The Washington Times, October 13, 2022.