Best Practices: Lender Due Diligence Crucial to Identification of Covid-19-Related Financial Crimes

SBA’s Office of Inspector General (SBA-OIG) advises that financial institutions (FI) continue to serve an important role in uncovering and identifying thousands of fraudulent PPP (Paycheck Protection Program) loans and EIDL (Economic Injury Disaster Loans).  FI serve as the “Receiving Depository Financial Institution (RDFI)” for PPP program funds from a third-party FI (the PPP lender), or as the RDFI for EIDL funds received directly from SBA, for funds deposited into the account of the RDFI customer.  FI are reporting instances where PPP and EIDL loan proceeds are deposited into customers’ bank accounts under suspicious circumstances; including where the RDFI has no knowledge that its customer operates a business or is otherwise a Schedule C filer; or where the business account activity may not support the level of PPP loan deposit received. 

For example, PPP loan proceeds deposited with the RDFI may be equal to the maximum PPP loan amount for a sole proprietor with no employees: $20,833. RDFI should keep in mind that the maximum PPP loan amount of $20,833 for a Schedule C filer with zero employees would have been based on the borrower reporting a gross income of $100,000 on its PPP loan application.  While the PPP loan program requires that a business have been in operation since February 15, 2020, which allowed for recently-created businesses to apply for and receive PPP loan proceeds, RDFI should be alert to funds being deposited in the maximum Schedule C filer amount of $20,833, where the RDFI has no knowledge of the customer operating a business that would support the maximum PPP loan amount. 

Similarly, where the RDFI customer maintains a business bank account, but deposits are made that appear outsize to the level or type of historical account activity, the RDFI may suspect EIDL or PPP fraud.

Fraud indicators seen by SBA-OIG that RDFI should be aware of include: identical deposit amounts across customer accounts; customer bank statements with activity insufficient to support a PPP or EIDL application in the amount of the deposit; deposits to newly-opened accounts with poor or illegible supporting documentation; deposits received into accounts with little activity, where funds are quickly transferred out; and deposits to business accounts where an internet search or other inquiry reveals little business presence.

Where the RDFI has reason to believe that the funds may have been fraudulently obtained, the RDFI can return the funds to the sending FI.  Lenders should select the Return Reason Code that most closely approximates the reason for the return; and consider that a business decision to return funds may fall outside of the standard timeframe due to the extraordinary circumstances of Covid-19.  

FI should also report any suspected fraud, waste, abuse, or mismanagement of federal funds involving SBA programs, operations, or personnel to the SBA-OIG Hotline at (800) 767-0385 or online here. For EIDL-related suspected fraud, Lenders may contact the National Center for Disaster Fraud Hotline at 1-866-720-5721 or fill out the Web Complaint Form here.

For more information on preventing fraud in SBA’s loan programs, contact Corrie at 404-389-9041.