The Small Business Administration rushed to deliver $1.2 trillion in emergency grants and loans during the first two years of the Covid-19 pandemic, and while that spending likely played a major role in cushioning the economy and limiting the damage from the rapid-onset recession, more than $200 billion of it may have been lost due to waste, fraud and abuse, according to a new report from the agency’s Office of the Inspector General.
Most of the fraud occurred in the two largest pandemic-era programs run by the SBA: the Paycheck Protection Program (PPP), which provided $792 billion in assistance to small businesses, and the Economic Injury Disaster Loans (EIDL), which provided $405 billion. The EIDL program, which provided low-interest loans, had the highest rate of potential fraud, with about a third of its loans by value flagged as problematic, for a total of $136 billion. The fraud rate for PPP was lower at 8%, or about $64 billion of the forgivable grants doled out to business owners.
The watchdog said the fraud was inseparable from the speed at which the funds were dispersed, as directed by Congress. “Prior to 2020, the agency demonstrated a strong track record of managing fraud risk in its core programs,” the report says. “But in 2020, Congress mandated quick implementation of the pandemic relief emergency programs … Many of the existing controls and design features in SBA’s longstanding disaster lending and loan guarantee programs that largely worked to reduce fraud risks were removed in 2020. A failure to verify applicant data against existing federal government databases, such as the U.S. Treasury Department’s Do Not Pay system, and a statutory bar against obtaining and validating applications against tax records were two of the key missteps that took place in 2020.”
Newer aid programs were launched with more safeguards in place, and the report says that fraud rates at the SBA have plummeted. The watchdog called on lawmakers to support the development of more comprehensive and effective systems for the distribution of aid in future emergencies.
