More than $200 billion in pandemic relief potentially squandered, says government watchdog report

The sum amounts to approximately 17% of the $1.2 trillion dispersed by SBA.

June 27, 2023, 2:08 PM

The federal government squandered more than $200 billion in potential fraud in its aggressive rush to prop up small businesses as the COVID-19 pandemic threatened to shatter the U.S. economy, according to a report published Tuesday by the inspector general of the Small Business Administration.

The hefty sum, which amounts to approximately 17% of the $1.2 trillion dispersed by SBA, updates previous estimates from the inspector general, Hannibal "Mike" Ware, as investigators from several federal agencies continue to trace and recover millions of dollars lost to fraud, waste and other abuses that occurred during the pandemic.

So far, nearly $30 billion of those fraudulent funds -- about 15% of the fraud that's been calculated as of May -- has been reclaimed through collaboration between the inspector general's office, the SBA, the U.S. Secret Service and other federal agencies, the report said.

Officials said the government watchdog report represents the first comprehensive estimate of fraud to date.

The report focuses on two programs created at the advent of the pandemic to support small businesses, both under the SBA's purview: the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL).

According to the report, there was a higher potential fraud in the EIDL program, which was a low-interest disaster loan that would later require repayment. The inspector general's office estimated there was $136 billion of potential fraud in the EIDL program, representing 33% of the total funds dispersed to businesses.

For PPP, which gave money to businesses that would later be forgiven -- similar to a grant -- the estimate of potential fraud was lower: around $64 billion, representing 8% of the total funds sent out.

PHOTO: A sign at a motel lobby states "WE ARE CLOSED FOR BUSINESS" during the coronavirus pandemic on May 7, 2020 in Atlantic City, N.J.
A sign at a motel lobby states "WE ARE CLOSED FOR BUSINESS" during the coronavirus pandemic on May 7, 2020 in Atlantic City, N.J.
Mark Makela/Getty Images, FILE

The programs flooded businesses with easy access to cash that likely rescued the economy, experts say. But for all the jobs they helped rescue, these programs' legacies may be tarnished by unprecedented amounts of fraud -- a turn of events that experts fear may impair efforts to pass future emergency relief programs.

All government programs suffer some amount of fraud, experts have said. But emergency programs are even more susceptible, due to the inherent tension between the pressure to approve loans quickly and the need to screen applications and maintain other fraud-prevention measures that may prolong the process.

In an October 2020 report, Ware's office found that "to expedite the process, SBA 'lowered the guardrails' or relaxed internal controls, which significantly increased the risk of program fraud."

"A decision was made at the outset of the pandemic: speed was the key," Michael Horowitz, the chairman of the Pandemic Response Accountability Committee (PRAC), a federal watchdog charged with tracking how much money was defrauded from the government during the pandemic, told ABC News in an interview on March 22. "It was a bad choice. It was the wrong choice. It never should have happened."

Ware predicted in a 2021 interview with ABC News that, "in terms of the monetary value, the amount of fraud in these COVID relief programs is going to be larger than any government program that came before it."

The latest estimate -- $200 billion in fraudulent funds -- puts the PPP and EIDL programs on track for such a record.

But the SBA, in a response included in the report, pushed back on that sum, saying that it welcomed the review but thought the report "contains serious flaws that significantly overestimate fraud and unintentionally mislead the public to believe that the work we did together had no significant impact in protecting against fraud."

The inspector general's review allowed for "a high percentage of false positives," or potential fraud cases that, upon further inspection, were not fraud, Bailey DeVries, Acting Associate Administrator of the SBA, said in the response.

The administration used its own investigation of fraud, which landed on a much lower estimate of fraud, as evidence: The SBA's own review, DeVries said, found over $400 billion "worthy of further investigation," but further review "revealed that the body of loans likely to be fraudulent is approximately $36 billion across PPP and COVID-EIDL."

DeVries also said the watchdog report “only minimally acknowledges a critical aspect of SBA’s fraud controls -- the material fact that SBA’s fraud controls improved dramatically over time.”

“SBA acknowledges the prior administration made decisions to prioritize speed and unnecessarily deflated the control environment for PPP and COVID-EIDL for the first several months of the programs. However, SBA introduced additional fraud controls over time and implemented a strengthened anti-fraud control framework in 2021,” DeVries wrote.

For its part, the inspector general's office said it holds firm in its estimate of $200 billion.

Ware will appear before Congress in July to discuss his findings under oath. Pandemic relief fraud has attracted attention from lawmakers across the political spectrum.

Many of those who defrauded the pandemic relief programs also victimized individual Americans in the process. Thousands of fraudsters who applied for funds used social security numbers stolen from innocent people, according to the PRAC. The committee wrote in a recent report that nearly 70,000 potentially suspect Social Security numbers were used to successfully apply for EIDL or Paycheck Protection Program (PPP) funds.

Both the SBA and the White House have pledged to offer better assistance to victims in the future, and to improve fraud reporting systems by using multi-factor authentication and a new process to pause billing once someone has reported identity theft, SBA spokesperson Christina Carr said in a statement earlier this year.

Many of those reforms will be guided by an expected executive order from President Joe Biden, who pledged over a year ago to sign an order in the "coming weeks" that would direct "new actions to support the victims of identity fraud."

Administration officials told ABC News that the action is still expected to come soon, though they didn't provide concrete timing.

All told, the government has doled out an estimated $5 trillion in relief funds since the beginning of the pandemic, across several programs. The Justice Department has brought charges against more than 2,230 defendants for pandemic-related fraud crimes, the Associated Press recently reported, and the inspector general's report specifies that at least 1,011 of those charges have been for EIDL and PPP fraud, as of May 2023.

Of those charges, there have been 803 arrests and 539 convictions, the inspector general's report said.