AML/CFT Fraud Prevention Fraud Trends Lending & Credit Risk SBA Lending

Is Your Financial Institution Aware of These PPP Red Flags?

Kylee Wooten

October 15, 2020

Read Time: 0 min

Key Takeaways

Economic relief payments are often subject to fraud – PPP is no exception..
BSA Officers should be aware of PPP red flags to identify potential fraud.
Pay attention to key indicators, like new EINs, abnormal transaction activities, and new business incorporations.

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Economic relief payments are often subject to fraud, and the Paycheck Protection Program (PPP) is no exception. Of the $525 billion lent in the PPP, more than $4 billion of loans have already been flagged for fraud, and that number is likely to increase. From the application phase to forgiveness, there are many potential risks associated with PPP loans that BSA Officers should be aware of. To alert authorities regarding PPP-related fraud, BSA Officers should be familiar with the red flags.

The immediate financial impacts small businesses endured, as well as the finite nature of the program, created a frenzy as borrowers rushed to obtain a PPP loan, and lenders worked around the clock to issue loans. The Interim Final Rule from the Small Business Administration (SBA) encouraged lenders to process and disburse funds “expeditiously,” which limited due diligence requirements. The SBA’s Lender Application Form requires lenders to certify that they have “complied with the applicable lender obligations,” including confirming receipt of the borrower’s certifications, receipt of information regarding employee pay and taxes, and the average monthly payroll costs. The Interim Final Rule states that lenders may rely on the certifications of the borrower to determine eligibility of the borrower. However, if a financial institution does not conduct sufficient due diligence on a PPP borrower and a fraudulent loan is funded, the bank may have risk exposure and possible financial loss. Consider these PPP red flags:

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PPP Red Flags

Inflating numbers and false statements

One of the most common red flags in fraudulent PPP applications includes inflated payroll costs and employee numbers. Many fraudsters have used false statements regarding their companies’ payroll expenses, number of employees, and nature of the business.

Fraudulent (or lack of) supporting documents

Supporting documents are a critical part of both the application phase and forgiveness phase of PPP lending. Ensure that adequate and accurate documentation is available to show how the funds were used, including documents to support payroll and tax forms.

Misuse of proceeds

PPP loans must be used for eligible expenses, including payroll, business mortgage interest payments, business rent or lease payments, or business utility payments. Cases of misused funds have included payments for personal expenses or for shareholders’ expenses, as well as business expenses that are not authorized under PPP loan terms.

Unqualified borrowers

The PPP application requires a borrower certification stating that the “current economic uncertainty makes this loan request necessary to support the ongoing operation of the Applicant.” Ruth’s Chris Steakhouse, Shake Shack, and the Los Angeles Lakers made headlines when they, along with other public companies, received PPP loans. In response, the SBA and Treasury provided additional guidance in their FAQ stating businesses must “assess their economic need for a PPP loan” and certify “in good faith” that their request is “necessary.” Furthermore, the FAQ clarifies that the loans were not intended for companies with access to equity in the market.

Identity theft or corporate identity theft

In this form of fraud, PPP funds are acquired using fictional or stolen identities, including social security numbers, and funneled into an unrelated account. Many PPP fraudsters have fabricated identities and shell companies to apply for multiple PPP loans.

Download your complimentary PPP Fraud Detection Checklist here

Other PPP Fraud Indicators

New employer identification numbers (EIN)
Shell corporations or dormant EINs
Recent business incorporations (business must have been in operation on February 15, 2020)
Newly created bank account and/or multiple bank accounts with abnormal transaction activity
Consumer accounts rather than business accounts
Quick movement of money in and out of accounts (often within 1-2 days)
Withdrawals made via cash or apps (e.g., Cash App, Zelle)
Abnormal transaction activity for client, based on historical transactions
Transfers to overseas accounts known for poor anti-money laundering controls

Industry officials estimate that approximately 10-12% of PPP loans could be fraudulent, which would be consistent with loan fraud seen in other disasters. BSA Officers must remain vigilant in identifying and mitigating post-funding PPP risks. Financial institutions should follow all Suspicious Activity Report (SAR) requirements for fraud reporting and be sure to start the 30-day SAR clock as soon as fraud is detected.