GAO claims SBA obstructing oversight into COVID-19 relief loans as IG accelerates investigations

Conflict between the Government Accountability Office and the Small Business Administration around oversight into COVID-19 relief loans such as the Paycheck Protection Program and the Economic Injury Disaster Loan has escalated to the point that Comptroller General Gene Dodaro has personally reached out to Congress seeking a resolution.

“He personally called me, and I believe that he even called the ranking member. Can you imagine?” House Small Business Committee Chairwoman Nydia Velazquez (D-N.Y.) told William Shear, GAO’s director of Financial Markets and Community Investment, during an Oct. 1 hearing of the subcommittee on Investigations, Oversight, and Regulations. “It is our responsibility to protect taxpayers money, and to make sure that the program is implemented. And what we have seen is not only a case of fraud and abuse committed in the EIDL and the PPP, but mismanagement. Probably the obstruction coming out of the SBA is because they knew that they didn’t take or implement the kind of controls to prevent fraud and abuse. So what can we do? What can Congress can do to help you do your job going forward? Do you think that, for example, withholding agency funding, that that will be an option?”

Shear said he hoped it wouldn’t come to that point, but noted that Dodaro, as well as GAO’s general counsel, might be getting involved again if SBA doesn’t begin to cooperate with attempts at oversight, noting that “it is an extreme situation.”

“There was obstruction when we were trying to obtain low-level PPP data that went on for weeks, getting access to people to talk about how they were implementing PPP that went on for weeks, we still aren’t getting a lot of cooperation from SBA,” Shear said. “And yet they accuse us of not giving them credit for what oversight they have in place, when they provide very little information and don’t respond to what we’re asking. With EIDL, it is more extreme. We have asked a very long time ago for application-level EIDL data.”

One issue GAO has is the sparse information around the heavy reliance on contractors in the loan process. Shear said GAO only asked for the contracts themselves as a starting point, which should be readily available, and would likely lead to further questions in the future. But despite a meeting with SBA last week on this topic, no timeline has been put on providing this information.

Shear noted that SBA has been far more cooperative around other topics in the past.

Shear told the committee that SBA and GAO are having another meeting next week around what he referred to as “extreme data reliability issues,” including the fact that GAO has thus far not been able to verify whether the businesses that received loans have as many or as few employees as they stated on their applications.

Shear also noted a longer-standing data issue with SBA, namely that they don’t collect certain demographic data, including race and ethnicity. The CARES Act, however, required that data to be collected. But in this case, SBA and GAO have figured out how to come to terms.

“We’ve been dealing with that. So the workaround, I think, becomes for SBA and for us to geocode, where we’re not saying who are the borrowers, are they a minority owned small businesses, but at least what communities are they operating in? And that becomes the best we can do with that situation,” Shear said.

While he didn’t necessarily speak to the obstruction, SBA’s Inspector General, Hannibal “Mike” Ware said SBA has acknowledged that it lowered the guardrails against fraud in order to move this money into communities more quickly.

“The challenge SBA always has, especially in the disaster lending program, is they have to balance — balance is the key word here — the need of speeding aid to people in desperate need, but balancing against a proper control environment,” Ware said. “In this instance, SBA’s efforts to hurry capital into businesses were at the expense of controls that would have mitigated the risks of ineligible or fraudulent businesses obtaining PPP or EIDL loans.”

Ware said he’s received thousands of contacts from banks, and tens of thousands of hotline complaints. Some vulnerabilities he’s already identified are the self-certification process, as well as the fact that the contractor, after verifying a bank account’s eligibility, allowed the bank account to be changed between verification and dispersal of the funds, meaning there was no way to verify the money actually went to legitimate accounts.

But Ware said SBA has been applying controls after the fact that are triggering reconsiderations of loan applications.

And investigations into fraud have been similarly fast-tracked. Ware said the 50th arrest of a fraudster just happened recently, and that’s just the beginning.

“There are hundreds of investigations already in process by my office,” Ware said. “The FBI … stated that they had over 500 investigations initiated. And if you know how fraud works and fraud investigations work, that normally doesn’t take place until 12 to 18 months after these loans have gone out.”

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