Fraudulent loans and the United States paycheck protection program

Published date25 October 2021
Date25 October 2021
Subject MatterAccounting & finance,Financial risk/company failure,Financial crime
AuthorCristina Bailey,Richard Brody,Matias Sokolowski
Fraudulent loans and the
United States paycheck
protection program
Cristina Bailey,Richard Brody and Matias Sokolowski
Anderson School of Management, University of New Mexico, Albuquerque,
New Mexico, USA
Purpose Despite lessons learned from prior disaster relief funding programs, billions of dollars
in fraudulent loans were issued by the Paycheck Protection Program (PPP) during the COVID-19
pandemic in the USA. The misuse of funds prevented business owners and their employees who are
in true f‌inancial need from accessing program funds. The purpose of this paper is to identify
techniques perpetrators used to obtain funds from the program illegally since its inception in March
2020 and concludes with suggestions on internal controls to reduce fraud occurrences in future
relief packages.
Design/methodology/approach The authors analyze 106 loan fraud cases reported by the US
Department ofJustice and compiled by the Project on GovernmentOversight to examine methods individuals
used to illegally obtainfunds from the program. The authors complement the data with lendercharacteristics
from Call Reports and BusinessInsights. They further compare the fraud sample tothe entire population of
PPP loans, which is available on the US Small Business Administration website. The authors report
descriptivestatistics, correlations and multivariate regressions.
Findings The authors f‌ind that most fraud cases falsify tax data to access program loans and inf‌late
payroll numbersto obtain larger loan amounts. Applicants who sought largeamounts applied using multiple
companies and across multiple lenders, consistent with the use of multiple loans to avoid the scrutiny of a
single large loanwith a single lender.The authors f‌ind that cases with larger amounts relied on lessregulated
lenders,such as lending companies, rather than moreregulated lenders.
Originality/value The PPP is part of the largest ever US stimulus in whichthe private sector allocated
funds. This study provides novelevidence of how fraudsters adapted to the programs rules to defraudthe
Keywords Internal controls, Loan fraud, Paycheck Protection Program
Paper type Research paper
1. Introduction
The COVID-19 pandemic has adversely impacted individuals and businesses across the
globe. This unprecedented event heavily affected the global economy and resulted in over
$2.75 trillion in relief spending from the US Government [1]. Spending of this nature
parallels the governmental response to natural disaster events, such as Hurricane Katrina,
but the level and duration of spending are on a much greater magnitude. Similar to other
catastrophic events, the pandemic has opened up opportunities for many types of crime,
including cybercrime (Ma and McKinnon, 2021), fake vaccination cards (Federal Bureau of
Investigation, 2021) and counterfeit medical supplies, among others (Interpol, 2020). The
purpose of this paper is to examine how individuals attempted to defraud the US Paycheck
Protection Program (PPP) during the pandemic.We also suggest improvements on internal
controls for planning futurerelief packages.
Journalof Financial Crime
Vol.29 No. 2, 2022
pp. 519-532
© Emerald Publishing Limited
DOI 10.1108/JFC-07-2021-0165
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