WASHINGTON–The Economic Injury Disaster Loan Advance program gave money to 700,000 self-employed people who improperly claimed to have as many as a million employees, according to an inspector general’s report.
The funds were incorrectly distributed even though Hannibal Ware, the inspector general of the Small Business Administration, said basic fraud prevention measures would have spotted many suspicious applications for grant money, according to the New York Times.
The funds were paid out as part of the $20-billion EIDL program, which was hastily assembled in the pandemic, and which had such poor fraud protections that it improperly doled out nearly $4.5 billion to self-employed people who said they had additional workers — even those who made “wildly implausible claims, like having one million employees,” the report stated.
The Economic Injury Disaster Loan Advance program offered small businesses immediate grants of up to $10,000 in the months after the pandemic shuttered much of the economy. But hundreds of thousands of the grants it made were inflated because there was no system to catch applications with “flawed or illogical information,” Hannibal Ware, the Small Business Administration’s inspector general, wrote in a report released last week.
‘Obviously Bogus’
“The report, which described how the agency could have spotted obviously bogus applications by taking even rudimentary steps to prevent fraud, was the latest black eye for the SBA,” the Times stated. “The agency also ran the Paycheck Protection Program, which gave out $800 billion in bank-issued loans but often left lenders and borrowers scrambling to comply with confusing and shifting rules.”
The Times noted fraud was a problem there, too, and that tens of billions of dollars may have been taken improperly.
“The loan advance grants were created by Congress in March 2020 as part of its first coronavirus aid package. Intended to quickly get money to devastated companies, the program offered grants to businesses that applied for a disaster loan — and allowed applicants to keep the money even if their loan request was rejected,” the report continued. “In the 14 weeks the program operated before it ran out of money, nearly 5.8 million applicants received grants based on their company’s head count: $1,000 each for up to 10 workers.”
‘Bigger Checks’
Sole proprietors and independent contractors who employed only themselves should have collected a maximum grant of $1,000 — but many collected bigger checks, according to the SBA’s OIG.
In fact, the OIG said more than 700,000 solo business owners received larger grants by claiming additional workers. While sole proprietors can have employees, such an arrangement is unusual, with the Times noting that those that do have employees are required to have an Employer Identification Number from the Internal Revenue Service.
“But the S.B.A. skipped an obvious safeguard: It did not require sole proprietors claiming to have employees to enter their Employer Identification Number, instead allowing them to use their Social Security numbers,” the Times reported. “Although some of the outsized payments are likely to be the result of applicant error, the majority of the suspicious applications cited in the inspector general’s report maxed out their claims: More than 380,000 applicants said they had enough workers to get the full $10,000.
‘Outright Absurd’
“Some of the claims were outright absurd. Hundreds of applicants received the maximum grants after saying that they employed more than 500 workers, a number that would generally make them ineligible for the small business program,” the report continued. “Fifteen said they had one million employees — a figure that would put them in league with Amazon and Walmart.
The Small Business Administration “never requested additional information from these sole proprietors to verify the number of employees cited on their grant applications before approving and disbursing the grants,” the SBA Inspector General said.
By his calculation, those applicants were eligible for only $704 million of the $5.2 billion they received, the Times added.
Warnings about mismanagement in the SBA program are not new, with the OIG warning as early as July 2020 of “potentially rampant fraud” because of the program’s nearly nonexistent guardrails, the Times stated.
It further pointed toa Bloomberg article in 2020 that described how almost comically easy it was to scam the system. It cited how-to videos that circulated on YouTube with titles like “$10k SBA Loans & GRANTS Got The STREETS Going CRAZY!”
SBA Responds
In a statement, the agency told the Times that the loan policy began during the Trump administration and said the Biden administration’s disaster loan team had identified and worked on risk management improvements.
Sen. Benjamin L. Cardin (D-MD), who spearheaded the grant legislation, said the agency had thoroughly bungled the program.
“When Congress drafted the CARES Act, our intent was for S.B.A. to provide all businesses with E.I.D.L. Advance grants worth $10,000,” he said in a statement. “Not only did the Trump administration limit grants to $1,000 per employee, it failed to enforce its own policy.”
Added the SBA’s IG, the CARES Act mandate for S.B.A. to accept applicant self-certification does not relieve the agency of its fiduciary responsibility to the taxpayers to detect and prevent fraud,” he wrote.
The Inspector General is recommending that the government try to reclaim the $4.5 billion it overpaid.