Red flags ignored as federal loans soar | Business

A woman being sued in Atlanta for defrauding the Paycheck Protection Program is a Walmart bakery worker. Authorities say she helped a cousin apply for pandemic rescue loans under a multi-state program involving fake companies.

Another accused runs a trucking business and, according to his indictment, hired a financial adviser who helped him and at least four other business owners obtain $300,000 in pandemic loans using falsified documents and inflated manpower.

A Roswell, Georgia limo service owner is also accused of orchestrating an $11.1 million scheme involving 21 other defendants and 14 businesses, none of which had actual employees. He reportedly used the proceeds of the loan to afford a Mercedes-Benz, an Acura NSX sports car, a Range Rover and a gold Rolex.

In all three cases, according to court records, the borrowers relied on New Jersey-based Cross River Bank to approve many of their requests. Cross River, along with fintech companies that automate lending, have processed hundreds of thousands of nonrepayable business relief loans.

These lenders have benefited the most from COVID-19 programs. Records show the federal government paid them billions in processing fees as loans soared.

Some fintechs even appeared to specialize in bad loans, according to a recent study by the University of Texas on how fintechs could have facilitated fraud in business aid programs.

Now some are wondering why these companies weren’t held accountable. They point to a Bloomberg analysis that found that while fintechs process about 15% of PPP loans, they are associated with 75% of the loans the Justice Department has linked to fraud.

And the University of Texas study found suspicious loans clustered in parts of the country, including Atlanta, where fintechs held the largest market share.

“Many of these lenders have made almost pure profit from this program by essentially allowing fraudsters access to billions of dollars in loans,” said Nick Schwellenbach, principal investigator for the Project on Government Oversight. “They probably won’t be held accountable, and that’s the biggest crime here, although it probably won’t lead to charges.”

The Justice Department has never acted against lenders whose approval processes have facilitated a high number of loans leading to fraud lawsuits.

This means that lenders are unlikely to face financial penalties either. Federal rules for the Trump-era program specified that lenders would not have to repay fees unless they were found guilty of fraud in connection with loans.

Easy Pickups

While federal prosecutors focus on the borrowers, the cases they present can only scratch the surface of the pervasive fraud that allegedly took place in the programs.

Small Business Administration Inspector General Hannibal “Mike” Ware called the scale of the fraud “unprecedented”, estimating that of the more than $1 trillion distributed, more than 5% of transactions could have been fraudulent.

In a report to Congress last month, Ware said less than $1 billion had been seized or recovered so far, with more than 300 fraudsters brought to justice.

This has led to accusations that US prosecutors’ offices pursue low-level defendants while ignoring or dropping those who executed sophisticated schemes.

For example, private equity firms that buy and sell other businesses were not eligible for PPP loans because they have access to other sources of funding. But federal data shows thousands of companies in private equity portfolios have received the money. Legal experts say it could invite federal scrutiny, but the Justice Department has yet to act against the private equity firms.

In the Northern District of Georgia, critics say prosecutors have focused on schemes that may be easy to spot due to false registrations or outlandish purchases.

“It looks like they’re looking for some low-hanging fruit,” said Francys Johnson, a lawyer and former NAACP Georgia president who sits on an advisory board to American senses Raphael Warnock and Jon Ossoff recommending candidates for judicial appointments. Federals of Georgia.

“I can tell you,” Johnson said, “the priority of these offices for far too long has been skewed by the pervasive type of fraud that occurs in banks, housing and other large corporations, while attacking smaller sources of fraud.”

This trend has also given rise to accusations of racial bias.

In the three Georgia fraud cases with loans through Cross River Bank, most of the defendants are black, as are the vast majority of those accused in the Northern District of Georgia of plundering PPP or disaster loan programs economic.

Of the 77 people prosecuted so far, identified in public records by The Atlanta Journal-Constitution and defense attorneys, at least 70 are people of color.

Three defense lawyers in PPP and EIDL fraud cases are seeking to have the charges dismissed, accusing the government of selective prosecutions. They face an uphill battle, however, as legal precedent requires them to prove that the government intentionally targeted people of color, not just that the statistics are skewed.

Atlanta attorney Saraliene Durrett was appointed by the court to represent Nikia Wakefield, the Walmart worker with an eighth-grade education who faces more than two years in prison if convicted. Durrett said his client was misled by a cousin, one of the accused ringleaders.

Durrett co-filed a motion to dismiss with defense attorney Leigh Ann Webster, who has a client facing charges in the same case and represents three other defendants in separate PPP cases.

Both complained that in other parts of the country, wealthy white men and corporations have been allowed to reach civil settlements in PPP or EIDL cases.

Webster and Durrett cited a California case where a company and its white CEO were allowed to settle by returning $350,000 and paying $100,000 in damages and penalties. They also cited a case in Florida where the owner of a charter plane company paid $287,000 to set up shop.

The lawyers said their clients, both black women, were not offered such an opportunity.

“I think there’s a racial component, absolutely,” Durrett said. “But I also think there is a socio-economic component. People who have the ability to mount a defense have mounted a defense, and they were able to pay it back very early on, saying, “Look, we just misunderstood. ”

A separate motion to dismiss has been filed on behalf of Travis Crosby, the owner of the trucking company who faces charges of fraud, conspiracy and money laundering.

U.S. Attorney for the Northern District of Georgia Kurt Erskine’s office said in an emailed statement that “race is not a factor in any investigative or prosecutorial decision,” noting that a federal magistrate has already eviscerated the defense attorneys’ argument in a ruling.

Rejecting their request to obtain investigative records by way of discovery, the judge said “the defendants have offered nothing to suggest that the government acted with a discriminatory purpose in prosecuting them”, indicating that he will reject probably also the motion to dismiss the charges.

Defense attorneys appeal.

Bigger fish

Vic Hartman, an Atlanta attorney and former FBI fraud investigation supervisor, said it was unrealistic to expect the government to bring all PPP or EIDL fraudsters to justice.

Prosecutors, he said, are looking for cases that might deter others. FBI analysts are most likely scanning the data for clear red flags, such as discrepancies between loan applications and tax records, Hartman said.

“And then you assess and say, ‘Okay, we’ll work on the 20 most egregious cases in our division in the field, or the 100 most egregious cases, and we’ll pursue them because it won’t take a lot of resources. , the dollar amounts are high and these are low hanging fruit,” Hartman said. “And then that’s what the government will pursue, but it will only be a drop in the bucket.”

Fintechs could have spotted some of the same red flags, according to the study by researchers from the McCombs School of Business at the University of Texas at Austin.

Instead, loans were too often approved involving unregistered businesses, multiple businesses at residential addresses, abnormally high implied compensation per employee, and large inconsistencies in reported jobs with other government programs.

Fintechs were also more likely than traditional lenders to process loans for people with criminal records, the study found. The four lenders he found with the highest percentage of such loans included Cross River and Atlanta-based Kabbage, whose PPP lending entity now operates as K Servicing.

Cross River is estimated to have received more than $1 billion in fees for PPP loans, according to the study. Kabbage was paid approximately $187.8 million.

Neither K Servicing nor Cross River Bank responded to emails requesting interviews for this story.

The only known investigation into the role of fintechs is being conducted by the US House Select Subcommittee on the Coronavirus Crisis, which wants to know if any have violated federal banking laws.

Cross River Bank and Kabbage are among the companies the subcommittee had in its sights.

Kabbage did not conduct even cursory vetting of borrowers, the subcommittee said in a letter asking the company for documents on how it reviewed and approved loans. In one case, a Florida corporation registered at a residential address and lacking the proper licenses received hundreds of thousands of dollars. The company was established nearly three months after the business qualification deadline, the letter said.

The day after receiving an application, Cross River Bank approved a $1.2 million loan to a Minnesota man who used his first and last name as a business name and claimed to have 120 employees working in an apartment , according to the subcommittee.

“There appears to be no penalty for suspicious loans so far…” the University of Texas researchers said. “If the system is not changed, the most likely outcome is even more the same.”

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