Today, Explained - I should have applied for a fraudulent PPP loan

Episode Date: September 15, 2022

As the coronavirus pandemic disrupted business in the US, the government sent billions of dollars to people and businesses that were affected. That led to an epidemic of financial scams. This episode was produced by Jon Ehrens, fact-checked by Serena Solin and Tori Dominguez, engineered by Paul Robert Mounsey, and edited by Matt Collette and Noel King, who also hosted. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Looking back, we might have expected this. The U.S. is a nation of many hardworking, honest people. It is also a nation of a not insignificant number of scammers. When the COVID pandemic ravaged the country's economy, the federal government intervened with trillions of dollars in assistance for people and for businesses. Two-ish years later, we find the money helped many honest people. And the scammers? Wow. In the midst of the pandemic, the government gave unemployment benefits to the incarcerated, the imaginary, and the dead.

It sent money to farms that turned out to be front yards. It gave loans to 342 people who said their name was, quote, N-slash-A. There is, of course, a third type of American, the wide-eyed optimist who wants to make it right. My message to those cheats out there is this. You can't hide. We're going to find you. We're going to make you pay back what you stole and hold you accountable under the law. Coming up on Today Explained. Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit

superstore.ca to get started. It's Today Explained. I'm Noelle King. There is perhaps no one we wanted to talk to more about the scamming and the scammers than this man. My name is Dave Fahrenthold. I'm an investigative reporter for The New York Times. And in The New York Times, you call the misallocation of some of this money the biggest fraud in American history. Quite a claim, my friend. What happened? The short answer is that in the rush to get aid money out to people, the government took on a task it had really never tried to do before, which was to judge the individual needs of millions and millions of people and businesses. The closure of restaurants and bars could impact more than nine million workers nationwide. Layoffs for some 3,600 workers have been announced so far, with the majority being in the entertainment and leisure industry.

And then almost immediately gave up and trusted those people and those businesses to, quote, self-certify their need. Small business loans can be turned around within 36 hours for some businesses. Unemployment insurance will go up by $600 a week as soon as next week. Basically, it ran these giant aid programs on the honor system and allowed people just to swear that they met the qualifications, to swear that they were harmed by COVID-19 and sent the money out the door with minimal checks. So, you know, all it took to get that money was a willingness to lie and not much more. And I guess many Americans had that willingness. Where was the oversight? that all it took to get that money was a willingness to lie and not much more. And I guess many Americans had that willingness. Where was the oversight here?

There was some oversight when the money was given out. There were systems in place that were supposed to be checking to make sure people weren't defrauding the system, but they were just not very good checks. There is some enforcement on the back end. There is some oversight on the back end, but it is so much slower than the money went out. The money went out at a lightning pace, and now the oversight is coming at this pace of a snail. There was just this real mismatch that allowed a lot of money to get out the door to people who shouldn't have gotten it. And who's conducting the investigation into the fraud? Who's involved here? The better answer is who isn't. Oh, dear.

There are federal law enforcement from 21 different inspectors general, government of justice, the IRS, the postal service, the secret service. Lots of different government agencies are now trying to track these folks down, as are, you know, in some cases, states, bank officers. There's lots of people who are chasing after them now, but they move, even at their fastest, a lot slower than the fraudsters did to get the money. What are the most common types of fraud being investigated? One of them is unemployment insurance. There was also a $600 a week extra payment that you could get

if you got unemployment because of COVID-19. The other two programs are both loan programs at the Small Business Administration. The SBA, that's the U.S. Small Business Administration, is offering low interest rate federal disaster loans for businesses suffering as a result of the coronavirus. One of them, the Paycheck Protection Program, used private banks to lend money to businesses who were in trouble because of COVID, but the government guaranteed those loans. The other was called the Economic Injury Disaster Loan Program. And in that case, the government itself was giving out the money, both loans and in some cases what they called advance grants. Basically, money you didn't have to repay, unlike a loan,

the government would give you to tide you over until they could approve your loan. Is there a particular type or types of businesses that were especially involved in fraud? Well, at least the most commonly prosecuted kind of fraud against the loan programs involved businesses that just didn't exist. So now, when the phone rings, you have to answer. Bandalai Industries. I'm Bandalay Industries. I'm Bandalay Industries.

Right. And what is that? You're in latex. Latex, right. You know, or they existed on paper, but they had no employees. So people would say, in 2019, I had a million dollars of revenue and 100 employees, and, you know, get a loan on that basis to keep a business of that size going, when really they either didn't have a business at all or, you know, the business existed on paper, but it was,

you know, effectively defunct. So there were both businesses and there were individuals involved in the fraud. What are some of the flagrant examples involving individuals, people who got unemployment insurance? Unemployment insurance is overseen by the federal government, but run directly by the states. And so there was a kind of fraud that took advantage of individual state governments. The best example there is a rapper named Nuke Bizzle. He made a rap video in late 2020 about how he was scamming the California Employment Development Department by basically sending in fake unemployment claims, you know, with other people's information and getting money back. I just been swiping for EDD. Go to the bank, get a stack of leaves.

The rap video he made about that was called EDD, which is the name of the government agency. I got a shot at the Donald Trump. The Department of Justice says a rapper who bragged in a music video about getting rich from an unemployment scam is now facing federal charges. A second man in the video raps, quote, you got to sell cocaine. I just file a claim. There were people like him who were just scamming individual agencies. And there were also lots of people who were sending the same profile, the same social security number, the same information to a bunch of different states and getting unemployment benefits in many of them at the same time.

The most egregious example of that, there was one social security number. So one person who got unemployment benefits in 29 different states. You know, there are a lot of them that are just so ridiculous, you know, that you think, how in the world did anybody or any machine that was working in government look at this and think, oh, yeah, well, this seems like a reasonable one. There was an example we used in the lead of our story of people who put their name as N.A., like not applicable and still got loans from the Small Business Administration. Who looked at that? Who thought, like, how could the system allow that? We had this one example of a mother and daughter in Westchester County, New York, who've been charged with basically running a ring where they helped other people put in fraudulent

applications. And the whole time they're doing it, they're just joking and laughing and sending emojis, you know, laughing, crying emojis to their friends at how easy it is. You know, one example we said in the story, a friend of the ringleaders is like, I want to send in this application. And the ringleader writes back, you I want to send in this application. And the ring leader writes back, you bake for laugh, crying emojis. So they just made up a baking business. The co-conspirator writes back, LOL. And there were lots of examples like that. People didn't

steal because they were desperate. They stole and they spent the money on the most ridiculous luxury items, things that nobody needs. The best example is a guy who got an $85,000 loan for a fake business, and he used it to buy a $57,000 Pokemon card. Can you talk about the hierarchy of the investigation? Like, the woman in Westchester, how does the investigation into her begin, and then where does it get kicked to? The amazing things to me about this story was just the huge volume of tips and leads the investigators have.

You know, they don't have to go out and prospect around for tips and leads. They're buried in them. The way they get them is either banks call the government and say, look, X person has an account with us. It's just a personal account. It rarely has any money in it at all. And all of a sudden she just put in a small business loan for $100,000. You know, we think that's suspicious.

In some cases, the banks will freeze your loan until you can prove that you really have a business. Banks do more due diligence than the government. In other cases, the Small Business Administration will run checks after the fact and say, well, OK, in hindsight, we gave out a whole bunch of loans that had these red flags of fraud. People, a lot of loans came from the same address, a lot of loans used the same phone number, and they'll send that over to investigators. In some cases, there's a hotline

where if you feel like your brother-in-law stole money from PPP, you can call them up, and call up the SBA and tell them. So those are the ways that the cases get started. What we heard was just that there are so many cases like this that they've tried to triage them. And the way that they've tried to triage them is both to try to look for the cases, to start with the cases where the most money was stolen, to start with the cases where there was, like the one in Westchester, a ringleader, somebody who was organizing a whole bunch of other people to do small frauds, and then other cases where, you know, there's some sort of deterrent value.

You know, if they feel like there's something they can do that sends a message that this is a bad idea. We didn't find many cases where they went after somebody who just stole $10,000 or $20,000. Usually there had to be a bigger number involved or some other sort of aggravating factor. Okay, so a lot of people are going to get away with this unless they went big. How many people have been charged with fraud? About 1,500 so far. Which I started out thinking like, well, that's a huge number. It is a big number. The federal judiciary is a slow-moving, selective. I mean, they make a few cases at a time, but they make big cases. So 1,500 cases in that system is a lot, but it's just a drop in the bucket.

I mean, it's such a tiny fraction of the actual crimes that seem to be out there waiting to be investigated. Has anybody been convicted yet? At the last count, about 450 people have been convicted of one of these crimes. Because the evidence is so strong, this is not evidence you have to make with forensic tools or testimony or anything. It's the lie you told us in the government documents and the fact that you didn't have a business is in some other government documents. So one investigator compared it to footsteps left in concrete. The clues of these frauds are not going away. It's just a matter of getting to them. And have you gotten any sense of how much money the government hopes to recover?

No. One of the hardest parts about this story was trying to get people just to estimate how much they think was stolen. You know, what's the pool of money that's out there? And, you know, the floor is somewhere between one and six billion. That's what's been the amount of fraud that's been charged so far. What's the ceiling? And, you know, there's some really wild numbers out there, one hundred and sixty three billion dollars potentially in fraud in the Department of Labor from unemployment fraud, you know, somewhere in the high dozens, maybe even over one hundred billion dollars worth of fraud in the small business loan programs. You know, it's like

you're investigating a bank robbery and you still don't know how much was taken. Some folks are going to go down. It's just a matter of time. Do you have a sense of how long these investigations will be going on? When we talked to the investigators, they at the time were pushing for and later got Congress and the president to, essential to extend the statute of limitations for certain pandemic fraud to extend to 10 years to make sure fraudsters can't run out the clock. I don't know how realistic that actually is. A lot of things are going to happen in the next 10 years. A lot of other priorities will come along. But he said, you know, to make real progress in this, we can't do it in five years. We're going to need 10. The watchdogs are back. Coming up next, why so much of the scamming was actually legal. Support for Today Explained comes from Aura. Thank you. videos directly from your phone to the frame. When you give an AuraFrame as a gift, you can personalize it, you can preload it with a thoughtful message, maybe your favorite photos.

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iGaming Ontario. Today Explained, we're back with David Autor. He's a professor of economics at MIT, a labor economist who works on earnings inequality and technological and global forces that affect opportunity. Some weeks back, David, you co-authored a study with a title that deserves a shout out for clarity, quote, the $800 billion paycheck protection program. Where did the money go and why did it go there? David, what was the $800 billion Paycheck Protection Program, where did the money go and why did it go there? David, what was the point of the Paycheck Protection Program? The point of the program was to prevent small businesses from failing and in the process firing or laying off many, many workers. And so the name Paycheck Protection, I think,

conveys at least part of the purpose was to protect the paychecks of those workers. And so the name Paycheck Protection, I think, conveys at least part of the purpose was to protect the paychecks of those workers. Now, the program also authorized some expenditure on non-payroll expenses that could be used for suppliers, rents, etc. How is PPP supposed to work? Who would apply, who would be responsible, and who would get the money? So the criteria were very loose. The program was almost untargeted. Essentially, you had to be an employer with fewer than 500 workers, or in some cases, there were exceptions for that. And you had to say that you were significantly affected by the pandemic, which is, as you can see, a rather nebulous term. and then you could receive a check for up to 10 weeks of payroll, then you had to

use that to have that money forgiven. If it weren't forgiven, it would be a low-interest loan, but the vast majority of all PPP payments have been forgiven as of now, more than 90%. How many businesses received these loans? In total, about 11 million checks were written. Wow. These checks were much, much larger than the ones going to households or individuals. Some of them were as much as $10 million. So the potential for kind of misallocation of that funding is really vast when you're writing checks that large to a comparatively small number of businesses. Let's talk about some of the

misallocation. You recently, along with a number of colleagues, looked to see who benefited most from this $800 billion loan program. Broadly, what did you find? Found the program did some of what it was intended to do. We have close to 150 employees, and it allowed us to stay open, allowed us to compete with the unemployment benefits. It was such a blessing to be able to stay in business. We estimate that it increased employment by about two to three million person years of employment. That means, you know, one person for one year is a person year. Now, if you were to talk to the Small Business Administration at the time, they would say, well, 45 million jobs were supported by PPP. So how do we come up with

two to three million? Well, the answer is that the firms that took PPP loans did have 45 million employees. That doesn't mean they would have laid off 45 million employees had they not received these loans. Many, many firms were not that financially distressed during the pandemic. Construction, technical services, manufacturing and health care made up roughly half of the loans that had been approved. If you were in trucking, if you were in manufacturing, all kinds of services, they kept going. And so they would have largely retained employment. What that means is that effectively only about 25 to 30 percent of all of the PPP money ultimately went to paychecks that wouldn't have been paid, meaning the remainder went to business owners and creditors and so on. shareholders are drawn disproportionately from high-income households, we estimate that about three-quarters of the PPP money ultimately went to the top fifth of all U.S. households.

Two to three million people kept their jobs for a year because of PPP. That is not half bad. It's not. It's a success in that sense. However, the cost of that was extremely high. And it's important to remember that had those workers lost their jobs, they would have received pandemic unemployment insurance benefits, right? So they wouldn't necessarily have been in dire straits. Now, it did keep businesses alive on top of keeping workers employed. There are certainly small businesses that would have closed their doors had it not been for PPP. You know, if you talk to people, some small business owners will say, this program was a lif receive PPP loans, probably would have kept going just fine. It increased profitability. And another provision of the law that was changed ex post is you didn't have to pay

tax on that money, even if it recruited profits, like you would normally pay corporate tax on profitable year. PPP money wasn't counted against that. So if you made an extra million because you got a PPP loan for a million, you actually got a tax subsidy on that. So it was actually better than free money. It was money that you were subsidized to take. You said the words top fifth, and I took a notation. Can we return to that? This money seems to have ended up in the pockets of people who don't need that much money. But tell me what I may be missing. No, that's correct. You know, when you give money to business owners, business owners are

disproportionately, though not exclusively, members of high-income households as our shareholders, as our creditors of businesses. And as a consequence, if the money doesn't directly go to the workers of those businesses, that means that the remainder goes to those individuals. And they weren't necessarily using that loan money to keep people on payrolls. There were loopholes that allowed them to use it in other ways. Loophole is sort of too strong a word in the sense that the programmed rules were so untargeted

and so non-binding that once you got the check, most things that you would do with it would be legal. Not everything. If you went out and bought yourself a bright yellow Lamborghini and drove it around at super legal speeds around the highway and you never even owned a business, that would be illegal. But if you got the money, fired all your employees, and then at the end of the year, rehired them and just did your regular business, you could keep the money. For example, if you're a large hotel, you could receive the check, dismiss all your workers, claim that you were not able to because the pandemic reopened, and then you reopen at the end of the year.

You could hire a completely different set of workers, potentially at lower wages, and you would keep the money. All right. So if I'm taking money and I'm not paying my employees, but I have the money and I'm a business owner and I have any brains whatsoever, I'm going to pay off debts. I'm going to use it for operational costs. I'm going to pay off my landlord. Or you could pay yourself. Or I could pay myself. I mean, a lot of businesses are what are called S-corporations. They're kind of a, it's a cash accounting system.

So everything that isn't paid to suppliers and to employees and so on becomes personal income of the business owner. laid off their workforces. And even, for example, charter schools, for-profit schools or non-for-profit schools, continued to be paid for having their students. They received additional federal support during the pandemic. And they also, many of them, received PPP loans, forgivable loans, even though there's no sense in which their businesses were obviously adversely impacted. But again, I want to point out, that's not illegal. That is how the rules were written. To actually do something illegal under PPP, you have to do something fraudulent, meaning you'd have to claim you're a business when you weren't a business or that you had millions of dollars in payroll when you didn't. And then you took the money and used it for some,

you know, obviously illegitimate purpose that didn't qualify as, you know, suppliers, workers, or just standard profit-taking. Some of this seems understandable. I don't know, if I were a business owner and had some debts and the government was like, here's some free money, I don't know. Of course you would. Right? Yes, of course I would. And they all did. Okay.

No, there's almost nobody that didn't. So take-up of the program was, you know, approximately 94%. So in that event, what went so wrong here? Run through a list. Everything you would change. So the real fundamental deep problem is that the United States has archaic, ossified, neglected administrative systems that don't allow it to act like a modern country in administering a large insurance program. So in many other countries, for example,

Canada, our neighbor to the north, they have what are called short-time work programs. Short-time work means during a recession, an employer might say, oh, I'm going to send half my staff home, or I'm going to send everyone home with only 20 hours instead of 40 hours. The government can see that in real time through the unemployment insurance records, and it can just pay those workers for the lost hours. It doesn't have to pay, write a check to the firm to say, here, give that to your workers. It just pays them. The U.S. government does not have the capability to do that because we have 50 state unemployment insurance systems, each of them 50 years out of date. So there was no capacity

to do the type of targeted lending or giving that you would ideally want to do. And so if the federal government were to come to you and say, Professor David Otter, we are going to give you $800 billion to fix these problems, what would't view the unemployed as a cost, but rather as beneficiaries of the insurance program, and that had moderate administrative systems such that it could be used to help workers who are losing hours or losing employment as a result of economic conditions. Today's show was produced by John Ahrens. Congratulations to this man on his recent nuptials. It was edited by Matthew Collette. It was fact-checked by Serena Solon. It was engineered by Paul Robert Mounsey. I'm Noelle King.

It's Today Explained.