COVID-19 Stimulus Packages Attracting Fraudsters and Scam Artists

by Jennifer Smith, CPA, JD, CDEI | May 12, 2020
COVID-19 Stimulus Package Attracting Fraudsters and Scam Artists

In the wake of the public health crisis caused by COVID-19 and the resulting economic hardships, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide financial assistance for individuals and businesses affected by the pandemic.

But whenever federal relief money becomes available, it also becomes vulnerable to fraud.

Government Grant Fraud Isn't a New Problem

The new stimulus packages have already attracted fraudsters, scam artists, and identity thieves. But this type of activity isn’t unprecedented. It happened after the Great Recession when bad actors tried to take advantage of the federal government’s efforts to stabilize the economy, specifically with the Troubled Asset Relief Fund (TARP).

And after every major disaster that requires federal relief aid, some business owners and homeowners inevitably attempt to defraud FEMA. After Hurricane Katrina, the Department of Justice established the Hurricane Katrina Fraud Task Force, and during its three years of operation, the Task Force brought federal charges against more than 900 individuals. The prosecuted crimes included emergency-benefit fraud, investment fraud, charity fraud, contract fraud, procurement fraud, individual assistance fraud, identity theft, public corruption, embezzlement, and more.

Even municipalities can be the perpetrators of federal grant and loan fraud. For example, in 2019, New York City agreed to pay back $5.3 million to the federal government as a result of submitting fraudulent claims to FEMA after Hurricane Sandy.

COVID-19 Stimulus Packages Attracting Scam Artists

Some scammers and identity thieves targeting benefits from the CARES Act are brazen. For example, in late April, a man in New York City was arrested for allegedly stealing more than $12,000 in stimulus checks from mailboxes along with the recipients’ personal information.

However, some fraudsters — especially those who may target small business owners — are more deceptive, sometimes impersonating the IRS or Small Business Administration (SBA). The Office of Inspector General (OIG) has already begun warning small business owners of potential fraud schemes related to the CARES Act.

“Fraudsters have already begun targeting small business owners during these economically difficult times. Be on the lookout for grant fraud, loan fraud, and phishing,” the SBA report reads. The OIG reminded business owners that the Small Business Administration will never initiate contact on disaster loans or grants. “If you are proactively contacted by someone claiming to be from the SBA, suspect fraud.”

Businesses Defrauding the Payroll Protection Program

The Payroll Protection Program (PPP) provided nearly $350 million in forgivable loans for small businesses that were dispersed in only two weeks. This is a remarkable achievement — but whenever the federal government allocates this amount of loan or grant money, especially in such a short amount of time, fraud is inevitable.

Most businesses who received government loans through the PPP will follow the program. Some business owners will make innocent mistakes that can be rectified. Other businesses may skirt the line before committing a crime but open themselves up to lawsuits. And at least a few businesses will commit outright fraud.

The Payroll Protection Program does have some safeguards to help lower the number of fraudulent claims. For example, the PPP requires businesses to spend 75% of the funds on payroll to avert employee layoffs, and the SBA performs background checks on business owners before approving their loan.

However, the Department of Justice has said the government is already aware of some businesses sending in PPP loan applications overstating the nature of their business, their payroll costs, and their number of employees in order to fraudulently obtain a larger loan. And in early May, the Justice Department arrested two men in the first fraud case involving the PPP loan program. They attempted to obtain nearly $544,000 by fraudulently claiming to have dozens of workers when in reality there were no employees working for their businesses.

How CPAs Can Recognize and Address Government Grant Fraud

Remember — government grant fraud affects everyone. Fraudsters who take advantage of benefits stemming from the CARES Act and Payroll Protection Program, as well as from other government grant and loan programs, are taking money away from those who need it, hurting families, businesses, and communities.

It’s important for CPAs and auditors to understand the government grant process and the related fraud risks. When you understand how government grants are dispersed, the risk of grant fraud, and the popular scams those grants attract, CPAs and auditors can be an effective part of the front-line defense against fraud, waste, and abuse.

If government grant fraud is an issue in your work, order WebCE’s new course, Lying, Cheating, and Stealing: Government Grant Fraud. The course gives an introduction to government grants, how they’re administered, who they are intended to benefit, and what makes them especially vulnerable to fraud.

WebCE also offers Identity Theft: Taxpayers and Tax Professionals, a video course teaching accounting and tax professionals how to keep clients safe from identity theft, what to do if they are a victim, and how tax professionals can keep their identity, offices and data safe from being stolen as well.

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