In the mad rush to secure Paycheck Protection Program (PPP) funds, small businesses have faced confusion, anxiety, and often a lack of clarity as to when they will receive capital, if at all. The process has also been chaotic for lenders, creating greater potential for fraud as part of an unprecedented stimulus effort for SMEs.

Only a few days ago, the first case confirmed these expectations. Two New Englanders have been indicted by the US Department of Justice (DOJ) for allegedly fraudulently seeking PPP loans totaling over $ 500,000. The DoJ accuses individuals of misrepresenting their claims and reporting inflated payrolls.

As regulators issue warnings to the lending community about the potential of such fraud, banks and FinTechs are on high alert. But there are plenty of moving parts that cloud the picture of PPP loan fraud, according to David Barnhardt, head of experience at GIACT.

The PPP loan program was “put together very quickly,” he told Karen Webster in a recent interview. “We have already seen reports from regulators who criticize the way lenders have handled the granting of PPP funds.”

The haste with which these lenders were to receive applications and distribute funds created plenty of opportunities for fraudulent activity – but not all cases reflect the New England case.

Due diligence deficiencies

The possibility of fraudulent activity in any loan scenario exists early on, with the onboarding of customers. But the unprecedented nature of the PPP program meant less time to know your customer (KYC) and other due diligence checks that are so important to financiers.

This is probably why financial institutions (FIs) initially decided to to prioritize their existing small business clients when processing the first round of PPP loan applications, Barnhardt said, a move that was ultimately overturned by the bank after widespread backlash.

“The idea was, presumably, that they didn’t have time for their normal due diligence,” he said. “Time is running out because the money is going to run out.”

The integration The process is a great time to spot potentially fraudulent activity, including misinformation about candidates, like the alleged inflation in payroll numbers seen in the New England Department of Justice case. Yet, as Barnhardt explained, fraudulent activity can take many forms.

In addition to this type of first party fraud, there is also the possibility of corporate account buyouts, in which a fraudster obtains data from a small business to request funding. Barnhardt said he expects more of these cases to surface over time.

The lack of transparency and communication, which many small business applicants complained about during the eventful first round of PPP financing. A small business that has applied for capital with a lender and has not been informed of the status of that request may turn to a second lender to reapply.

Incoming waves

As new rounds of PPP stimulus finance arrive and the first round of funds is disbursed, FIs, small businesses and watchdogs will gradually have a clearer idea of ​​where the financing is taking place. fraudulent activity.

Lenders should be wary of other opportunities for bad actors, even after a loan is issued: when funds are disbursed through ACH, do they end up in the intended account? Are Small Businesses Really Using Capital for Payroll? Will good businesses qualify for loan forgiveness?

While fraud mitigation must be an ongoing process, Barnhardt stressed the the importance of integration and due diligence processes early in the funding process to prevent many problems before they arise. Fraud assessment tools are important, but they’re only good based on the data they contain.

By implementing automated modeling technology that can independently aggregate and verify borrower information like payroll data, and identify anomalies in candidate behavior, FIs can protect themselves without slowing down the funding process.

FIs will also look to policy makers for advice, but it is essential that lenders take the lead. Indeed, while small business borrowers will themselves be monitored, issuers of PPP funds must ensure that appropriate steps are taken to verify claims.

“Preparation really comes in. These KYC regulations won’t go away,” Barnhardt said, adding that the true picture of P3 loan fraud and criminal activity surrounding other federal stimulus initiatives will continue to grow in the months to come. and years to come, likely culminating in possible Congressional hearings. Bad actors are everywhere, and there are very likely PPPs loan fraud case on the verge of falling through the cracks, with loan requests well under $ 500,000.

With each new stimulus round, lenders will be better prepared to tackle fraud through proper onboarding procedures. But it will only be when the dust settles that banks, FinTechs and regulators will have a clear idea of ​​where the missteps have occurred and how to avoid them in the future.

“Banks are waiting for advice and worrying about their liability,” Barnhardt said. “There’s going to be a lot of responsibility on the lenders to see if they’ve done the proper checks or just approved these requests. I’m sure that will be a story that will play out as these funds are disbursed.”