Has There Been $1 Billion in PPP Fraud? A recent watchdog report found "significant risk" for fraud in the PPP. We spoke to a risk-management expert who identified the scope of the problem, and how to zero in on the seasoned fraudsters.

Last Thursday, the Government Accountability Office (GAO) released a report saying that the Paycheck Protection Program (PPP), which stopped accepting applications yesterday, almost certainly fell victim to a significant amount of fraud. Given the $670 billion scope of the program, that was a given ⁠— and there have already been charges from the Department of Justice in Massachusetts, Texas, Iowa and New York.

"Because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved," the GAO report stated.

The question that the report didn't answer was: How much fraud are we talking about? According to Tom Miller, the CEO of risk-management firm ClearForce, we're probably looking at a big chunk of stolen change — big with a capital B. "We estimate there's more than a billion dollars worth of verified criminal fraud within the PPP program," Miller says. "And the big point here is that there's a fixed pot of money in the PPP program. So that's a billion dollars that didn't make it to legitimate businesses who really need economic support because it was misdirected to fraudsters."

Zeroing in on the real fraud

The PPP application asked borrowers if they had been convicted of a felony in the past five years or were still on parole or probation. If so, they were disqualified. We have reported at length on why it's not good policy to exclude all small-business owners with felony convictions from receiving assistance. And Miller agrees with this.

But he says that it is important to zero in on one particular subsection of applicants with felony convictions: Those who lied on their applications and said they had not been convicted of a felony, when in fact they had been convicted of a fraud or financial felony.

"We did analysis around this and found that of the applicants who fraudulently reported that they did not have felony convictions ⁠— about half of those felonies were related to fraud and financial theft," Miller says. "So these are professional, serial fraudsters. In the past, they have defrauded the government or a financial institution or another individual, and here they are again in the system trying to access more money. And from our analysis, these crimes weren't being committed in some gray area of the five- or six-year window. The convictions were fairly well distributed across [the last five years]. Almost 20 percent of the fraud that we picked up on occurred just in the last 12 months."

Miller says that the amounts of the fraudulent claims range across the spectrum, and that — apart from potential $1 billion claimed by applicants recently convicted of fraud felonies — there will likely be many companies who stretched the truth, as well as small-business owners who made honest mistakes on their applications. "You're going to have some employers deflating the number of employees that they have on their payroll so that they can qualify as a small business," Miller says. "And you're going to have some companies inflating their payroll because they're trying to capture higher loan amounts. They're not using the proceeds for business purposes. They're using it for some kind of personal purchase of assets or whatever. And then you're going to have people who are just lying about different parts of the application to get money."

The most difficult thing for government prosecutors bringing fraud charges will be to prove intention on the part of applicants to defraud the government. "Was it willful deceit?" Miller asks. "Or is this just an inexperienced small-business owner who's never filled out a government loan application and didn't understand the way PPP was calculated? For the government, that becomes tricky, and nobody really wants the government's heavy hand of oversight going after people who may have inadvertently made mistakes. But if they can focus on these serial fraudsters, we estimate there's more than a billion dollars worth of that verified criminal fraud within the program."

Related: SBA Releases New EZ PPP Loan-Forgiveness Application