Loan Zone: Bad actors emerge in Paycheck Protection Program

Customer due diligence is critical in this era of COVID-19

Small-business owners aren’t the only ones eager to get their hands on Paycheck Protection Program funds.

From 9/11 to Hurricane Sandy and now, during COVID-19, federal relief funds aimed to help individuals and businesses recover following a disaster become subject to fraud. PPP loans are no exception, yet the nature of these loans makes them particularly susceptible to both fraud and misuse. Bad actors are surfacing, and the financial crimes divisions of community financial institutions are struggling with the realization that some of the loans they rushed through may be fraudulent.

The first federal arrests in connection with PPP fraud were announced in May. As the initial rush to secure PPP loans dies down, financial institutions now face a new set of questions: How do we handle misused, unforgiven and fraudulent loans? Is there a difference? What red flags should credit unions be on the lookout for?

Fraud and Disaster Relief: A Tale as Old as Time

The Department of Justice recently charged two businessmen in Rhode Island with fraudulently seeking PPP loans, the first in the country linked to the loan program. Industry officials warn this case won’t be the last. In fact, they estimate fraud rates could be as high as 10% to 12%—consistent with loan fraud from other disasters.


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