Note: This podcast was updated to correct an error in the introduction.
The Small Business Administration has process about $800 billion (not $8
billion) in loans to small businesses that were adversely affected by
COVID-19.


From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Potential Fraud in SBA's Paycheck Protection Program and
Efforts to Prevent It

Description: In response to the pandemic, the Small Business
Administration quickly implemented the Paycheck Protection Program to
assist small businesses adversely affected by COVID-19. However, there
are concerns that because SBA implemented the program quickly to respond
to the crisis, it was left without safeguards against payments to
unqualified businesses or fraud. We find out more from GAO's Bill Shear.

Related GAO Work: GAO-21-577, Paycheck Protection Program: SBA Added
Program Safeguards, but Additional Actions Are Needed

Released: July 2021

[Intro Music]

[Bill Shear:] Identifying and prosecuting those committing fraud after
the fact is very expensive and can take years to complete.

[Holly Hobbs:] Hi, and welcome to GAO's Watchdog Report, your source for
news and information from the U.S. Government Accountability
Office—celebrating 100 years, of fact-based nonpartisan government
oversight.  I'm Holly Hobbs. In response to the pandemic, the Small
Business Administration quickly processed about 11 million loans
totaling about $800 billion, to small businesses that were adversely
affected by COVID-19. While loans proved to be an important protection
for small businesses, there are concerns that the quick implementation
of this program left it without safeguards against misuse and fraud.
Today, we'll find out more from Bill Shear, an expert on federal small
business programs and a director in our Financial Markets and Community
Investment team. Thanks for joining us, Bill.

[Bill Shear:] It's a pleasure being here, Holly.

[Holly Hobbs:] So, Bill, let's start with--what does the Paycheck
Protection Program do?

[Bill Shear:] Holly. It's a little bit complicated. The program provided
loans to about 9 million small businesses. The loans were intended to
help small businesses that were adversely affected by COVID-19. For loan
recipients that meet requirements for spending loan proceeds on payroll,
the loans can be forgiven. And this effectively turns the loan into a
grant.

[Holly Hobbs:] And we've previously reported about suspicious activity
under this program. What do we know so far?

[Bill Shear:] We know that there's a lot of potential fraud out there.
So until someone is prosecuted, we don't really call it fraud. But the
indications are stunning. There've been over 20,000 suspicious activity
reports associated with the program that have been filed by financial
institutions. The Department of Justice has announced fraud charges in
over 130 fraud related cases associated with the program.

[Holly Hobbs:] So that seems like a lot of suspicious activity for a
program that's just a little over a year old. What is SBA doing to
respond?

[Bill Shear:] We've been reporting on this program for over a year now.
SBA started providing us information during the latter half of 2020
indicating that contractors would review loans already made using
automated and manual processes to determine eligibility for those loans. 
We also reported actions by law enforcement agencies, including the
Department of Justice and SBAs Office of Inspector General, to identify
and prosecute entities that committed fraud.

[Holly Hobbs:] And so you just discussed ongoing reviews of loans that
were made in 2020.  Did SBA make any changes for loans issued in 2021?

[Bill Shear:] Yes, SBA did make a change. In February of 2021, there was
new authorization that allowed more loans and it allowed those
businesses that already got one loan to get another loan.  And in
February, SBA started making upfront automated compliance checks for new
first and second round loan applications. So this was the first case of
actually requiring some verification before the loan was made.

[Holly Hobbs:] So let me ask this. With all the attention on fraud in
the program, should SBA's attention be focused on  preventing rather
than just responding to fraud after the fact?

[Bill Shear:] You're making a very good point. Our focus has been on
management practices that SBA should use to prevent fraud from occurring
in the first place. Identifying and prosecuting those committing fraud
after the fact, while this is important, it is very expensive and can
take years to complete. So this is why we emphasize preventative
measures to begin with.

[Holly Hobbs:] And businesses can ask for these loans to be forgiven.
What are the requirements for that, and what's the process for making
sure businesses meet those requirements?

[Bill Shear:] Borrowers are generally eligible for full-loan forgiveness
if 60 percent of the loan proceeds were used on eligible payroll cost.
To receive full forgiveness, the borrower first makes an application to
the lender. If the lender approves the application, it then sends it to
SBA. And if SBA approves the lender's decision, it remits the
appropriate forgiveness amount to the lender.

[Holly Hobbs:] And what are we hearing about this process?

[Bill Shear:] Although SBA developed tools such as a Web portal and
lender hotline, as part of our work, we conducted this very extensive
survey of lenders. Some lenders cited delays or unresponsiveness to
queries on the status of loan forgiveness determinations.

[Music]

[Holly Hobbs:] So Bill told us the Paycheck Protection Program has
played an important role in protecting small businesses affected by the
pandemic. But that while the Small Business Administration has taken
steps to improve its oversight of the program, there are still some
weaknesses that need addressed. So, Bill, did we make any
recommendations to SBA?

[Bill Shear:] We've been reporting on this program for over a year now.
In our previous recommendations included having SBA conduct a fraud risk
assessment of the program. In this report, our recommendations include
taking actions to complete a process for allowing lenders to claim the
SBA guarantee when they have evidence the business ceased operations or
declared bankruptcy. There are times when borrowers who receive these
loans will go out of business.  And this is a guaranteed loan. So there
has to be a process for that. Our report also includes a recommendation
to implement a process to ensure SBA responds to lender queries on a
status of loan forgiveness determinations on a timely basis.

[Holly Hobbs:] And last question, what's the bottom line of this report?

[Bill Shear:] The Paycheck Protection Program was a response to very
adverse impact from COVID-19 on millions of small businesses. It has
been an extremely expensive program. To limit cost and ensure that the
program serves the small businesses that are the intended beneficiaries,
SBA has to take actions to improve the integrity of the program, manage
fraud risk, and improve responsiveness to lenders and borrowers
participating in a program.

[Holly Hobbs:] That was Bill Shear talking about GAO's recent review of
SBAs Paycheck Protection Program. Thanks, Bill.

[Bill Shear:] Thank you for having me. Holly, it's been a pleasure.

[Holly Hobbs:] And thank you for listening to the Watchdog Report. To
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