Coronavirus fraudsters keep prosecutors busy
A Hollywood film producer allegedly tried to use $1.7 million from the federal coronavirus business relief fund to pay personal credit card bills. Two New England men allegedly applied for more than half a million in refundable loans through the program by claiming to have dozens of employees at four businesses. They had none.
Many fraudsters have submitted false state unemployment claims. In Washington state, the unemployment system temporarily crashed under the weight of hundreds of millions of dollars in payments for fake claims.
These are just a few examples of what prosecutors say are tens of thousands of attempts to rip off governments by fraudulently filing for expanded unemployment benefits or lying on applications for the Paycheck Protection Program, which was designed to assist small businesses forced to close or drastically cut back due to the pandemic.
Because of the urgent need, officials designed the programs to send out money quickly, but that speed also presented more opportunities for scams, experts said.
State attorneys general from Massachusetts to California are watching for potential frauds and warning legitimate businesses to be on the lookout.
Attorneys general are cracking down on fake unemployment claims and working to recover the money. They also collect reports of alleged paycheck protection frauds; the U.S. Justice Department has prosecuted several high-profile cases.
And a number of attorneys general have warned banks that they are looking into the lenders' practices to make sure they catch bad PPP loan applications and don't add to the problem with any underhanded practices of their own.
The amount of scamming is significant. The FBI's PPP Fraud Working Group is investigating $42 million in fraud. The Federal Trade Commission as of June 8 received 91,000 reports of fraud costing victims $59.2 million. And Google reported it is blocking 18 million scam emails every day.
President Donald Trump signed a PPP extension Saturday that will allow businesses to apply for loans until Aug. 8. Otherwise, the program would have expired today with about $130 billion left unused. The extension increases the chances for fraud as well, experts said, and they expect more complex deceptions to continue.
Brian Hayes, a partner in the law firm Holland & Knight's Chicago office and a former assistant U.S. attorney and FBI special agent, said attorneys general are warning lenders to watch for applications from people purporting to own small businesses or claiming large numbers of employees when they don't exist.
Small-business owners should be leery of offers to help them obtain PPP loans, especially from companies that want a payment for doing so, since applying for a loan is free.
"Circumstances required that the aid be made available quickly to people," Hayes said in a phone interview. He said federal administrators "relaxed due diligence and underwriting standards that would otherwise apply to commercial loans. That made (borrowing) easier but it was necessitated by the crisis."
Hayes also noted that the pandemic aid has taken the form of large amounts of money sent out all at once. "That's different from other government programs like food assistance and unemployment, where the money (usually) trickles out in small amounts," he said. "You can end up with a really big check from some of these programs. That's unique in terms of fraud suspicion."
The extent of the unemployment fraud is now beginning to surface, with states paying out unprecedented millions to the record numbers of unemployed. In Washington state, officials announced a theft of between $550 million and $650 million, of which about $333 million was recovered. State officials said the thefts were the result of large numbers of false filings by individuals who were not entitled to benefits.
But efforts to root out the fraud continue to slow legitimate payments for tens of thousands of out-of-work people in Washington, said Suzi LeVine, Employment Security Department commissioner.
New York Attorney General Letitia James, a Democrat, issued a list of warnings for small businesses that are in danger of scammers seeking to offer "help" in obtaining the PPP loans. James issued a cease and desist order for a fraudulent company with a website labeled as SBA.com. The true Small Business Administration website is SBA.gov.
The fake site advertises a link to "Covid-19 Relief," James said in a news release, and a link to a button saying "Your Paycheck Protection Program Loan starts here." James advised small businesses seeking the loans to go straight to the SBA government website without looking for help from any third-party company.
"It's imperative that small businesses know about the financial aid that is available and aren't duped in the process of applying for these lifelines," James said.
The .com/.gov mix-up even fooled U.S. Treasury Secretary Steven Mnuchin, who incorrectly urged small businesses to visit SBA.com to learn more about PPP loans at a news conference in April. He was corrected by the White House.
Delaney Kempner, spokeswoman for James, said in addition to advising businesses on how to spot fraud, the attorney general also is accepting and pursuing consumer-based fraud complaints.
"In terms of price gouging, we've received more than 7,000 complaints, issued more than 1,590 cease and desist orders to businesses for price gouging essential goods," Kempner said in an email. "And we also sued a big wholesaler for drastically increasing costs of Lysol over the past few months."
Arkansas Attorney General Leslie Rutledge, a Republican and a senior member of the National Association of Attorneys General consumer protection committee, warned that scam artists are contacting business owners claiming to be affiliated with the federal paycheck program.
Like James, she advised shopkeepers to contact the Small Business Administration directly.
"These paycheck protection loans are a key part to our economic recovery to assist hard working Arkansas businesses and their employees," she said in a statement. "But, it is shameful and illegal to pose as a government entity to provide false and deceptive services to businesses that are trying to use the paycheck protection loan to survive."
Massachusetts Attorney General Maura Healey, a Democrat, is looking at several banks based in her state to see if they unfairly favored larger customers over smaller businesses when it came to facilitating the PPP loans, after her office received several complaints, the Boston Globe reported.
The banks under scrutiny include Bank of America, Santander, TD Bank and Wells Fargo. In addition, Bank of America, Wells Fargo, JPMorgan Chase and US Bank are the subjects of a class action lawsuit filed by plaintiffs' attorneys in California on behalf of an optometrist, a restaurant and a promotions company as representative clients of the class, charging that they favored large regular customers over smaller, newer clients in processing the PPP loans. Other suits are likely.
Bank of America spokesman Bill Halldin in an email denied the accusation. He said 73% of the loans Bank of America completed under the PPP program were for less than $50,000, and 82% were for businesses with 10 employees or fewer.
Fewer than 2% of the loans went to businesses with more than 100 employees, Halldin said.
Lee Henderson, a spokesman for US Bank, said it is "absolutely not accurate," that it prioritized wealthier clients, adding that the majority of loans the bank made in Phase 1 of the programs were to "very small businesses."
A Wells Fargo spokesman declined comment and the other banks did not respond to email requests for comment.
Healy, heading a group of 24 attorneys general, in May sent comments as part of rulemaking to the federal Small Business Administration and a letter to Congress calling for further clarity in obtaining the loans for small businesses.
Healy said that the program "suffers from a lack of transparency, technical savvy, and functionality that has led to funds being distributed in a manner overly benefitting large, well-connected companies and left many small businesses underserved."
Anne Hartman, partner in the whistleblowers group of the Constantine Cannon law firm's San Francisco office, said that when it comes to fraudulent loan applications, "it's up to the banks to perform their underwriting and due diligence." Law enforcement officials should go after banks that give out money without checking on the borrowers, she said.
"PPP has some rules that hold banks harmless. That only goes so far, when faced with a borrower that is making statements that no reputable lender would rely on." But, she said, those kinds of abuses will come to light more slowly.
The Hollywood producer, William Sadleir, 66, of Beverly Hills, allegedly paid off personal credit card debts and other personal expenses with the PPP loan, according to Brian Benczkowski, an assistant attorney general in the U.S. Justice Department's criminal division.
"As the department has made clear, those who defraud the PPP to line their own pockets at the expense of the American people will be brought to justice," Benczkowski said in a statement.
Samuel Yates, 32, of Maud, Texas, allegedly sought millions of dollars in forgivable loans guaranteed by the SBA from two different banks by claiming to have over 400 employees earning wages when, in fact, no employees worked for his purported business, Benczkowski said in a separate statement.
And prosecutors also charged David A. Staveley, 52, of Andover, Massachusetts, and David Butziger, 51, of Warwick, Rhode Island, with making up businesses and employees and seeking about $544,000 in loans under the program.