Justice Department Sees Early Fraud Signs in SBA Loan Flurry

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The Justice Department has begun a preliminary inquiry into how taxpayer money was lent out under the Paycheck Protection Program and has already found possible fraud among businesses seeking relief, a top official said.

Assistant Attorney General Brian Benczkowski, who runs the department’s criminal division, said prosecutors have contacted 15 to 20 of the largest loan processors and the Small Business Administration, which oversees one relief program, as part of an effort to police the trillions of dollars in federal aid being pushed out hastily to blunt the economic impact of the coronavirus pandemic.

The review has already turned up several red flags in the data prosecutors have examined over the past week, Benczkowski said Thursday in a telephone interview. Issues were found in both approved and rejected applications.

“Whenever there’s a trillion dollars out on the street that quickly, the fraudsters are going to come out of the woodwork in an attempt to get access to that money,” said Benczkowski, a former partner at Kirkland & Ellis LLP in Washington who has been running the criminal division for almost two years.

He went on: “There are unfortunately businesses that are sending in loan applications for large amounts of money that are overstating their payroll costs, overstating the number of employees they’ve had, overstating the nature of their business.”

The criminal division has tapped the fraud section’s market integrity unit to oversee PPP-related investigations and coordinate with various U.S. attorneys, Benczkowski said. That unit has been responsible for prosecuting Wall Street crime, most notably allegations of market rigging at major banks including JPMorgan Chase & Co. and Deutsche Bank AG. Prosecutors will also work closely with inspectors general and other monitors, he said.

The Justice Department’s efforts to investigate fraudulent use of Covid-19 aid is drawing on the model used by its health-care fraud strike force, which for more than a decade has been using data analytics to identify criminal activities tied to Medicare and other federal programs.

In those cases, prosecutors determine whom to investigate by monitoring for spikes in Medicare billing in certain geographic areas. Every year they charge hundreds of doctors, caregivers and others for bilking taxpayers, to the tune of $1 billion annually.

The Justice’s Department’s interest in the coronavirus stimulus funds comes as criticism mounts over the loan program, which was intended to help small businesses but has also sent multimillion-dollar checks to large corporations.

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Still, outright examples of fraud or legally questionable behavior have yet to emerge publicly. Banks were given wide discretion to issue the loans, and the guidelines for the program were drafted loosely. As long as borrower applications conformed to standards — and the money was used for its intended purpose, primarily to pay employees — it may be difficult to accuse borrowers or lenders of intentionally abusing the program.

The inquiries are general in nature, asking for information about borrowers and whether there was anything amiss with loan applications or the loan application process, according to a person familiar with the inquiries to banks. The inquiries have been broad-based and not centered on any specific borrowers. As of now, the inquiries seem to be focused on clients, not the banks themselves.

Several authorities will be empowered to watch how trillions of dollars in federal aid is distributed, including the Government Accountability Office, the nonpartisan congressional watchdog; a separate congressional panel that has yet to form; and an inspector general who is awaiting confirmation by the Senate.

The Justice Department can open investigations on its own or in partnership with those inspectors general or other overseers.

One of the first prosecutions to come out of the massive aid package during the 2008 financial crisis involved Taylor, Bean & Whitaker Mortgage Corp., a loan originator based in Ocala, Florida. Its owner’s $3 billion fraud, involving mostly Freddie Mac loans, was discovered after an Alabama bank the company was using sought a half-billion dollars from the Troubled Asset Relief Program.

At the time, prosecutors called it one of the largest bank-fraud schemes in U.S. history.

— With assistance by Greg Farrell

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