Can the U.S. Government Stop Paycheck Protection Fraud?

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Paycheck Protection Fraud has evolved into one of the biggest issues facing the federal government this year as the COVID-19 pandemic wages on.  Signed into law on March 27th, the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act helped to keep small businesses afloat during pandemic-related shutdowns by providing these entities with significant cash-flow assistance via 100% federally guaranteed loans backed by the Small Business Administration (SBA). The funds, totaling over $650 billion in total assistance following its expansion under the Health Care Enhancement Act, were to be used to ensure improved job retention rates for employees of American entities during these trying times. Eligible small businesses and non-profit organizations could use the funds they received to cover “payroll costs” that included employee salaries, wages and commissions, employment benefits and state and local taxes assessed on compensation. While these funds were intended to be used for good, unsurprisingly, bad actors have seen these readily available government relief dollars as an opportunity to exploit the system for personal gain.

In early September it was reported that 57 individuals had been charged with crimes related to the government’s coronavirus relief program – totaling over $70 million in collective government losses – a number that appears to be growing as we approach the close of 2020. While almost all of the current PPP-abuse cases involve blatant fraud, the schemes themselves can come in varying forms. More often than not, these plots involve the exaggeration or underreporting of key information entered on loan applications, the falsification of business and/or tax records as well as employee information, or the gross misappropriation of funds altogether by individuals and small businesses alike. Fortunately for law enforcement, several individuals attempting to gain access to unwarranted funds were foolish enough to use their newfound wealth on flashy, flamboyant purchases. One of the more notable cases seen this year involved a group of fraudsters working in conjunction with one another across several state lines. A total of five people in Georgia, Ohio and California worked to obtain PPP loans worth several million dollars after making fraudulent payroll and company expense claims. They then used their newly acquired riches to purchase tens of thousands of dollars worth of jewelry and luxury motor vehicles before they were ultimately apprehended with their goods and remaining millions seized by federal authorities.7 Though these foolish fraudsters brought light to this troubling issue early on, in most cases PPP fraud remains quite difficult to snuff out.

The Small Business Administration’s Office of the Inspector General claims that the abuse and fraud related to this program is likely “widespread”, noting that thousands of companies have received loans that they should not have been eligible to receive, or received payouts exceeding what they should have received based on their numbers of employees and compensation rates for said workers.6 Some of these ineligible companies include those that either exceeded prerequisite workforce limits (meaning they failed to meet the definition of a true “small” businesses – i.e. 500 employees or fewer), as well as other firms that were created after the pandemic (albeit justly or fraudulently) in an effort to access these pivotal government funds. Additionally, the United States Treasury Department has reported that they have received a record number of suspicious activity reports (SRA’s) this year, which are directly correlated to the novel Paycheck Protection Program. For perspective, nearly 2,500 SRA’s involving small business loans were filed by firms in the month of September alone.6 The FBI notes that “several hundred PPP-related investigations have been opened since April, involving nearly 500 suspects and hundreds of millions of dollars of loans”,6while the aforementioned 57 suspects charged in related cases through September grew to a total of 73 by the end of October.

Unfortunately, the standards set by Congress for small businesses to receive said loans were so low initially that law enforcement has their hands tied in many cases where fraud has been suspected. Companies taking advantage of the system can often get away with cashing in on their requests because they fit the standards for employees and payroll required to apply, despite many companies actually seeing increasing revenue streams in spite of the economic effects of the pandemic. As ludicrous as it may sound for a government-run program, given the pressing need that American businesses had for money during the early stages of the virus outbreak, the CARES Act was essentially running on the honor system throughout the latter portion of the spring, with extensive due diligence into the validity of loan applications nearly nonexistent. If a company claimed they fit the criteria, they generally got approved without many questions asked.

Recently a federal judge decided that the Small Business Administration would be required to disclose the names and amounts received for all PPP borrowers, amending previous guidelines that only required such disclosures to be made on loans exceeding $150,000.4 A lawsuit was filed by multiple news organizations including Dow Jones & Co. and the Wall Street Journal under the Freedom of Information Act as part of an effort to increase transparency in regards to the SBA’s administration of funds. Analysts believe that an added benefit of this groundbreaking decision will be that it may dissuade potential fraudsters from taking a chance of being exposed via the disclosure of their personal identification information. For the time being however, it appears that the SBA has far more loans to audit than they can handle in a timely manner. Therefore, they have decided to focus their efforts on investigating the legitimacy of loan applications exceeding the $2 million mark. While representing less than 1% of the total number of loans issued to date, the SBA has reportedly levied over 29,000 advances of this magnitude.6 If individuals operating in the financial sector have learned anything from the ongoing COVID-19 saga, it is that even during the direst of historical periods, there is no shortage of individuals looking to capitalize at the expense of their peers, let alone the government.

 

 

Weekly Roundup

 

Pfizer Faces SEC Request for Information on China Operations

 Early last week, the news of biopharmaceutical firms Pfizer Inc. and BioNTech announcing a vaccine candidate that was found to be more than 90% effective in preventing COVID-19 amongst clinical trial participants dominated national headlines while providing a major boost to struggling travel service stocks in the process. However, just a few days before the big announcement, Pfizer’s 3Q financial results revealed that the New York-based company received an inquiry from the U.S. Securities and Exchange Commission’s (SEC) foreign-bribery unit in August in regards to the company’s operations in China. The New York Times writes that “companies in the health-care sector have long been the subject of scrutiny by antibribery authorities, in part due to their frequent interaction with foreign officials and regulators”, adding that in many countries, “hospitals and clinics are state-run, and doctors and other health-care professionals can be considered government officials.”5 Further compounding matters for the world-renowned drug company is the fact that the SEC’s inquiry reportedly came just two months after the U.S. Department of Justice filed its own informal request on Pfizer’s dealings in both China and Russia.

The company is no stranger to bribery claims. In 2012, Pfizer agreed to pay $60.2 million to settle a U.S. government probe of the drugmaker’s use of illegal payments to win business from overseas doctors and government officials. Unethical activity of this variety allegedly ran rampant over the span of a decade (1997-2006) where the pharma-firm was found to have paid bribes in countries throughout Europe, Asia and the Middle East. While company representatives have declined to comment on the case, they are in the process of producing records in response to the SEC’s request.

 

 

Singapore Steps Up Fight Against Money Laundering Threats

 The Monetary Authority of Singapore (MAS), the Southeast Asian island nation’s financial watchdog, recently announced that it is revamping its approach to thwarting illicit financial activity occurring in the region. Bloomberg writes that the regulator is “prioritizing its crack down on disclosure breaches, the misselling of financial products and anti-money laundering this year and next as the city state looks to cement its status as a regional financial hub.”1 A report released by the MAS on November 4th noted that they have seen an uptick in civil money penalties and fines levied for money laundering-related control breaches over the past 18 months, adding that they have focused their efforts on identifying financial institutions lacking adequate anti-money laundering (AML) and counter terrorism financing (CFT) systems. The regulator also noted that it convicted nine individuals for market misconduct or related offenses, issued 25 prohibition orders against unfit representatives, and revoked three banking licenses during this same time period.1

While Singapore has garnered cross-border support for also attempting to increase its digital footprint to bring itself up to par with many of its more-developed international counterparts, the country has taken steps to distance itself from recent international scandals. Just last month, the Singapore unit of Goldman Sachs Group agreed to pay $122 million to the country’s government for its respective role in bond offering related to the notorious Malaysian 1MDB Fund scandal. The payment came after Goldman Sachs entered a deferred prosecution agreement (DPA) with the U.S. Department of Justice in relation to the case just days before.

 

Swiss to Alter Tax Laws Related to Bribery Write-Offs

Long seen as one of the world’s premier tax havens, Switzerland recently announced a notable change to its tax laws that will begin on New Years Day of 2022. As part of a recent update on select financial legislation, the Swiss government on Wednesday announced that companies operating within its borders will no longer be able to deduct bribes paid to private individuals from their taxes. Reuters, citing a government release on what has been coined the Federal Act on the Tax Treatment of Financial Sanctions, adds that “Beyond bribes, costs from financing criminal activities or money paid in return for a crime to be committed will also no longer be tax deductible once the legislation takes effect after next year.”3

While punitive financial sanctions levied by the country’s federal regulator will remain non-tax-deductible, the Swiss Federal Council noted that “foreign punitive financial sanctions are to be tax-deductible in exceptional cases if they violate Swiss public policy or if a company credibly demonstrates that it has taken all reasonable steps to comply with the law.”2 Once the act comes into effect, Switzerland will also effectively transition to complying with recommendations from the Organisation for Economic Cooperation and Development’s (OECD) Financial Action Task Force on Money Laundering and financial crime.

 

Citations

  1. Chanjaroen, Chanyaporn. “Singapore to Prioritize Clamp Down on Money Laundering.”com, Bloomberg, 3 Nov. 2020.
  2. “Foreign Fines Tax-Deductible in Exceptional Cases from 2022.”The Federal Council of Switzerland, 11 Nov. 2020.
  3. Miller, John. “Swiss to Ban Deducting Bribes from Taxes Starting in 2022.”Reuters, Thomson Reuters, 11 Nov. 2020.
  4. Omeokwe, Amara. “Judge Orders SBA to Release Names of All PPP Borrowers, Precise Loan Amounts.” The Wall Street Journal, Dow Jones & Company, 5 Nov. 2020.
  5. Tokar, Dylan. “Pfizer Receives Inquiry From SEC Bribery Unit.”The Wall Street Journal, Dow Jones & Company, 6 Nov. 2020.
  6. Tracy, Ryan. “Evidence of PPP Fraud Mounts, Officials Say.” The Wall Street Journal, Dow Jones & Company, 8 Nov. 2020.

Tracy, Ryan. “U.S. Says It Is Cracking Down on PPP Fraud.” The Wall Street Journal, Dow Jones & Company, 10 Sept. 2020.

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