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Inspector General Warns of Continuing Fraud Risks, Other Challenges in SBA Programs

  • U.S. Small Business Administration Office of Inspector General releases annual report on key challenges facing the agency
  • Report identifies fraud vulnerabilities as ongoing issue in the SBA’s financing programs
  • Other issues include ensuring that recipients of taxpayer-funded financing are eligible to receive the money and IT upgrades

Summary by Dirk Langeveld

The risk of fraud and mismanagement will remain a key challenge for the U.S. Small Business Administration in the 2022 fiscal year, a report from the agency’s inspector general anticipates.

The SBA conducts an annual assessment of its programs and activities to determine risks such as fraud, mismanagement, errors, and inefficiencies. SBA Inspector General Hannibal “Mike” Ware of the SBA, said that while the relief programs assigned to the agency due to the COVID-19 pandemic create new vulnerabilities, the SBA was already combatting misuse in its major financial lending programs before the pandemic.

“I believe managing COVID-19 stimulus lending is the greatest overall challenge facing SBA, and it may likely continue to be for many years as the agency grapples with fraud in the programs, particularly in the COVID Economic Injury Disaster Loan Program, and the process of Paycheck Protection Program loan forgiveness,” Ware states. “Pandemic response has, in many instances, magnified the challenging systemic issues in SBA’s mission-related work.”

Fraud concerns

While PPP ended earlier this year after exhausting the last of its funding, the agency is currently processing forgiveness applications for loans issued through the program. COVID EIDL remains open to applications until its funding is exhausted or until Dec. 31.

Ware’s report says that the relaxation of internal controls for the programs to allow for quick delivery of aid to small businesses increased the potential for fraud. The SBA has since implemented new controls designed to improve anti-fraud measures.

As of August, the SBA’s Office of the Inspector General had secured 307 indictments, 205 arrests, and 69 convictions related to PPP or EIDL fraud totaling more than $460 million. The office’s oversight and investigation work with the U.S. Secret Service also resulted in the seizure of more than $995 million in fraudulently used money through the EIDL program, and assisted financial institutions in recovering another $3.1 billion for this program.

PPP fraud has included borrowers inflating their payroll, misusing the proceedings, or filing applications to support nonexistent businesses. The SBA has identified 70,835 potentially fraudulent loans totaling $4.6 billion.

“We believe this is the tip of a much larger iceberg, and we are working to identify the full extent of PPP fraud,” the report states. “OIG has seen an increase in inquiries from financial institutions seeking guidance on how to address potentially fraudulent loans. The loan forgiveness process could evidence or potentially trigger more fraud.”

The SBA has identified billions of dollars more in potentially fraudulent loans through the COVID EIDL program. These include $62.7 billion to borrowers using duplicate information, such as the same IP addresses, e-mail addresses, or business addresses; $14.3 billion to borrowers who changed their bank account number to pay out funds to a different account; $6.2 billion in loans and $468 million in grants associated with potential identity theft; and $1.1 billion to ineligible borrowers.

Ware also identifies other areas with a significant risk of fraud, including the potential for the misuse of disaster loans that are disbursed quickly and misuse of a streamlined application process for the 8(a) program to expand federal procurement opportunities for disadvantaged small businesses.

“OIG remains committed to spurring the agency to correct problems that endanger taxpayer assets,” the report states. “However, our audits and investigations continue to find the agency facing significant risks of fraud because of the size and scope of its loan programs and related internal control environment; oversight of statutory programs, such as the 8(a) Business Development Program; and information technology security.”

Other issues

In addition to fraud risk, Ware said areas of concern that the SBA should work to address in the 2022 fiscal year include:

  • Inaccurate procurement data and eligibility concerns in the SBA’s small business contracting programs
  • Information technology investment challenges
  • Risk management and oversight necessary to ensure the integrity of SBA loan programs
  • Management and monitoring of the 8(a) program
  • Identification of improper payments in SBA loan programs
  • Improved management and oversight of new grant programs implemented in response to the pandemic

The report identifies a number of specific challenges in these areas as well. For example, it cites how the federal government aims to award 23 percent of its prime contracts to small businesses each year, and 5 percent to women-owned businesses. However, contracts can also be awarded to businesses that are ineligible or no longer eligible, or with no competitive bidding process or proper documentation to confirm that a participant in the federal women-owned small business program is eligible for the contract.

The OIG says the SBA also needs to upgrade its portal interfaces for small business borrowers, noting the month-long delay that hindered the newly launched Shuttered Venue Operators Grant program. The report says such upgrades also need to ensure that SBA portals are secure enough to protect sensitive information and guard against cyberattacks.

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