The new Covid-19 Small Business Emergency Relief Plan signed by President Trump this week does not address any weaknesses in the original incentive legislation that allow businesses with a checkered history to receive billions of dollars in payments.
The $ 900 billion pandemic relief bill includes an additional $ 284 billion for the Paycheck Protection Program to support small businesses. In the previous stimulus, 5.2 million small businesses borrowed $ 525 billion in bad loans.
Nearly 1,500 companies that received about $ 2 billion in PPP loans, according to the Wall Street Journal analysis of loan recipients and news sources, have been involved in allegations of violating government regulations or criminal conduct.
Another 432 companies fired workers after they were approved for nearly $ 1 billion in loans, according to an analysis of national retrenchments mostly promoted by large corporations by Good Jobs First, a non-profit organization based in Washington.
The government has indicted dozens of people in at least 36 complaints related to obtaining funds for the relief of coronavirus, many of which allegedly falsify PPP loan applications and the illegal use of the funds, according to a magazine review of the data from the Department of Justice.
The original OOP program bypassed the typical money laundering scrutiny of speeding up money to struggling businesses. Issues such as violating regulations would likely be disclosed under typical loans. The requirements may change when the small business administration determines the application process and rules for the new cash. Investigators have begun unraveling the dubious loans and reports of possible fraud from the first round of OBP.
“Prevention is always better than detection,” said Bruce Dorris, CEO of the Association of Certified Fraud Examiners. “There will be tens of billions of dollars in fraud that we will find in the first round of funding.”
The latest round of OPS funding provides for loans of up to $ 2 million to businesses with less than 300 employees, compared to $ 10 million for employers with no more than 500 employees in the first round. Businesses must also show at least a 25% drop in revenue between comparable quarters in 2019 and 2020 to qualify for the new program.
This time, Congress has focused more on helping businesses than on keeping jobs by allowing borrowers to spend the funds on a wider range of non-payroll expenses.
The new legislation is not about how the government will verify revenue decline or whether companies that have lawsuits or that have violated government regulations should be eligible. The bill gives the SBA ten days to implement the changes.
As many as four million small businesses could be lost in 2020, analysts say, as the pandemic takes its toll on local economies. WSJ visits Yuma, Ariz., Where small business owners say a further stimulus from Congress may be too little. Photo: Adam Younker for The Wall Street Journal
“You do not get a mortgage unless you can prove that you are earning a certain amount of money,” said Ann Gittleman, managing director of Duff & Phelps, a multinational financial consulting firm. “I would assume that there would be more documentation needed for this interaction.”
According to an SBA spokesperson, the agency is working fast to update rules for PPP lenders and borrowers.
The Journal’s analysis is based on data from all 5.2 million OBP recipients released in response to a lawsuit filed by news organizations, including journal publisher Dow Jones & Co. The journal matches the names listed in the PPP database with news reports published since 2012, which include court cases and allegations of violations of government regulations from news sources. Matches were confirmed by comparing the address listed on their loan with the locations of the business identified in news reports.
The data contains details of 4.5 million borrowers who borrowed less than $ 150,000, which has not yet been issued. These smaller lenders accounted for 28% of the $ 525 billion spread between April and August.
The nearly 1,500 companies with difficult backgrounds received an average of $ 526,000 in loans to support an average of 36 jobs. Nearly 400 of the companies have borrowed at least $ 1.5 million, including a television evangelist who has been warned by authorities for allegedly using fake coronavirus treatments, and a private equity firm accused by investors, and a government bond regulator of the management of a Ponzi scheme, reports Journal.
Many of the loan recipients are accused of more typical business offenses.
PPP’s role in Covid Aid
The Rhode Island-based Madeira Restaurant Inc. received a $ 143,000 PPP loan in April. The U.S. Department of Labor filed a lawsuit against the restaurant in 2019, accusing it of violating the Labor Standards Act by withholding overtime pay from employees who worked more than 40 hours a week. A court ordered the restaurant in May to reimburse employees $ 40,000 in wages and damages.
Restaurant employees mentioned in the complaint declined to comment, or could not be reached.
The SBA said in November it would audit businesses receiving loans of $ 2 million or more. The new legislation also increases the SBA’s supervisory authority and allocates an additional $ 50 million for future audits. The new bill prohibits the participation of companies that are publicly traded, and disclosure of some government officials who have received loans but do not set out the documentation requirements for borrowers.
The SBA is working with investigators to return funds of clear fraud, but loans that are inappropriate at the border need other remedies such as fines, said Tarek Helou, a former prosecutor who is now a partner of Wilson Sonsini Goodrich & Rosati is, said.
“Someone who lies about having a business and buying a Lamborghini, it’s clearly criminal,” he said. Helou said. ‘Someone who’s not sure what’s going to happen to their business in a week or two, because they’re getting different sources of information about their income … Should the person go to jail? I do not think so. ”
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Porch.com, which received an $ 8 million PPP loan in April, illustrates three different gray areas of the law. The software provider for home services and relocation companies is being sued for violating federal rules for non-calls, according to court reports.
The founder and CEO of the company, Matt Ehrlichman, said Porch.com is fighting the lawsuit and that the SMS system in question is no longer used.
Porch.com also benefited from the housing boom this year, and revenue is expected to reach $ 120 million next year, up from $ 36 million in 2018, according to a July press release.
When the company applied for the loan, the situation was very different. Mr. Ehrlichman said the transaction volumes fell off a cliff when the pandemic struck, and that dismissal was possible without the loan.
The company suffered its setback after a merger with an investment firm with empty checks that closed on Christmas Eve. The deal gave Porch.com $ 323 million in new capital and a Nasdaq stock list.
“I just want to give the government credit and make a call,” he said. Ehrlichman said. “I think Porch is an excellent example of the intent of the whole program.” He would not say whether the company would return the PPP money.
Write to Shane Shifflett by [email protected]
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