A Lecture by SBA Inspector General Hannibal “Mike” Ware to Students at the Perdue School of Business Fraud and Forensic Accounting Program
Last week Small Business Administration Inspector General Hannibal “Mike” Ware Zoom lectured at PursuitMag contributor David P. Weber’s class at the Perdue School of Business Fraud and Forensic Accounting Program. (The university and SBA have generously allowed us to share that video here — big thanks to them!) Ware’s lecture is packed with fascinating information about how the SBA OIG operates, how the CARES Act Covid-19 relief loan program rolled out at unprecedented speed and scale, and how fraudsters have exploited it.
Prospective Certified Fraud Examiners take note: the Perdue School of Business at Salisbury University in Maryland has launched a new upper-division certificate in fraud and forensic accounting, designed for accountants, auditors, and other professionals who want to add a new technical skill set to their career toolbox. You can learn more about that program here.
But first, jump start your fraud education with Inspector General Ware’s video lecture on SBA oversight, with a few highlights excerpted below:
On arresting fraudsters:
“That’s the part that gets all of the attention. But a well thought out system of controls goes a long way in mitigating the risk of fraud. The arrests are back end and reactive. Controls are proactive.”
On the CARES Act and the opportunity leg of the Fraud Triangle:
“SBA has now approved and distributed more loans for Covid-19 than for all other disasters combined in the agency’s history … in just a couple of months. They intended for that unprecedented lending authority through the CARES Act to happen rapidly. We know why: People are desperately in need, and the lending institutions and SBA stepped up to meet those challenges. But what do you think moving that amount of money in that amount of time comes with? You guessed it: An unprecedented amount of fraudsters looking to defraud the government.
“We started seeing it immediately. We had a 10,000% increase in our hotline complaints. It’s already climbed to over 75,000 complaints. We have been inundated with contacts to our investigative field offices across the nation from financial institutions across the nation.”
Example of a fraud scheme:
“This is how it went down: The fraudsters submitted more than 80 fraudulent PPP loan applications. They created some businesses out of thin air, falsified the number of employees, the average monthly payroll expenses and things you would need to apply for the loan, falsified all that. They submitted fraudulent bank records or fake federal tax forms.
“They then laundered a portion of this money by writing checks from companies that received PPP loans to fake employees — some of the fraudsters and their relatives. It just gets better and better: The fake paychecks were then cashed at a check cashing company that one of the fraudsters owned. They tried to pocket it all. So there were over 1100 fake paychecks totaling more than $3 million in fraudulent PPP loan proceeds that were cashed at this guy’s business.
“We executed 45 seizure warrants in conjunction with this case, and some of the items seized include a nice Porsche and a Lamborghini purchased with the illegally obtained funds.”
On SBA’s Investigative and Enforcement Efforts:
“This is a critical time for our nation’s small businesses. It is well known that fraudsters prey upon those in vulnerable positions. And SBA OIG and its law enforcement partners are actively working to bring these people to justice. When you roll with the mission, which is getting much-needed funds to the American public, who are in desperate need of these funds, that’s what’s driving our agency forward. Our auditors and investigators are deeply vested in that mission. And to have this type of stuff happen ticks us off.”
“We work with FBI, with Secret Service, with multiple partners. IRS criminal investigations, United States Postal Service, FDIC, FHFA, and that’s the reason these cases have developed so quickly. Normally, financial crimes take years to manifest and finalize, in terms of investigative effort. We are ahead of that by leaps and bounds. We are definitely not in this alone. We’ve already seized over $450 million in more than 15,000 fraudulent EIDL loans. That number goes up every single day. But it’s just the tip of the iceberg.”
How the Fraud Works:
“For PPP, the fraud comes primarily by false statements. Here’s how that looks: The fraudster sends in a fraudulent application based on inflated numbers of employees, fake addresses, just like in the case I told you about. The bank requests the loan approval from the SBA, the SBA approves the request, and then the fraudster gets a guaranteed loan from the bank with hopes it may even be forgiven. Better yet, they will say they went out of business. Then they buy Rolexes, Lamborghinis, airplanes, and property. Well, some have. That’s the type of thing we’re finding.”
“In the EIDL program, the level of fraud is far more pervasive. We’re seeing a lot of identity theft. The full numbers, we’re putting that together as we speak, but identity theft is off the chain. They don’t stop at one type of fraud. The stories we get on the hotline, they are heartbreaking, in terms of the damage it’s doing to people.”
On Social Media Fraud Schemes:
“We identified several organized fraud rings using social media to recruit applicants who split the advance money with ringleaders. Not to mention romance scams on social media, where they persuade people to provide your PII to get free money. Then they use the PII for fraud. But they even had companies out there advertising their ability to secure SBA money for clients to start businesses, and then used that information to apply for the bigger loans. There were online videos on social media instructing potential applicants how to answer certain questions falsely to obtain loan money.”
On Fallout and Harm Done:
“The way this affected people on the front end, remember that in 14 days, the money in the Paycheck Protection Program was done. Nobody knew at that point whether there was going to be a second tranche of funding. (Weber: Right, some of the people who were affected were people who never got the opportunity to apply because the fraudsters took their money.) Right! So that’s the reason why you should ensure that there’s integrity in your programs.”
About the guest:
Hannibal “Mike” Ware was sworn in as Inspector General on May 24, 2018, following his confirmation by the U.S. Senate. He is responsible for independent oversight of SBA’s programs and operations, which normally encompass more than $100 billion in guaranteed loans and nearly $100 billion in Federal contracting dollars. As a result of SBA’s role in the nation’s pandemic response, he is providing oversight of over a trillion dollars of lending authority aimed at stabilizing the nation’s economy and providing vital capital to the nation’s small businesses. (source: U.S. SBA)