The headline last week read: “Three in drug bust received PPP loans.”
The story reported how three of the men and women who were among 15 arrested for alleged cocaine dealing last Wednesday had been approved to receive a total of at least $80,328 in loans through the Paycheck Protection Program, the federal loan forgiveness program to help small businesses cope with the COVID-19 pandemic. About half that money had been paid out, while the rest has not yet been disbursed.
The cocaine charges will, of course, have to be sorted out in court. But the arrests also raise suspicions over whether the federal loans were used to finance illegal drug activity. Suspicions, mind you – those dots have not yet been connected.
We would hope the Small Business Administration, which is in charge of administering the PPP program, and the U.S. Attorney’s Office, which prosecutes fraud, are looking at connecting those dots.
We would like to say we were outraged at the arrests and the suspicions they raised, but, in truth, we were not even surprised.
The simple fact is that the PPP program has been rife with lax oversight and allegations of fraud for more than a year. That’s what happens when the federal government places immediacy over financial checking and begins shoveling billions of dollars out the door.
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In March 2020, Congress passed legislation establishing PPP with an initial allocation of $349 billion in funding – which later grew to $800 billion—to help small businesses and non-profit organizations survive the coronavirus crisis by providing forgivable loans to cover payroll, rent and utility payments.
According to a Pro Publica report earlier this year, “At first, encouraged by the Treasury Department, traditional banks prioritized their own customers – an efficient way to process applications with little fraud risk, since the borrowers’ information was already on file. But that left millions of the smallest businesses, including independent contractors, out to dry. They turned instead to a collection of online lenders that have sprung up offering short-term loans to businesses.”
They’re called Fin-Techs – online financial technology lenders—and they proliferated under the PPP program – lured by the government’s allowance of 5% of each loan it made. With automated platforms and perfunctory reviews, the Fin-Techs were motivated to process as many loans as possible.
The New York Times reported this summer on an academic study that concluded Fin-Techs made around 29% of the PPP loans, but accounted for more than half of its suspicious loans. The researchers found that around 1.8 million of the PPP’s 11.8 million loans – more than 15% – totaling $76 billion had at least one indication of potential fraud.
That echoed an earlier report last spring by Pro Publica, a non-profit newsroom, that found one such online lender, Kabbage, Inc., (which was one of the lenders in the Racine loans) sent 378 pandemic loans worth $7 million to fake companies – mostly farms. “One entity categorized as a cattle ranch, “Beefy King,” was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township (along the New Jersey shore),” Pro Publica reported.
“There’s no farming here: We’re a sandbar for Christ’s sake,” Mancini said. The mayor said he had no cows at his home, just three dogs. The investigative journalism center said other apparently bogus farms that got PPP loans included potato farms in Palm Beach and orange groves in Minnesota.
That reporting, in part, led U.S. Rep. James Clyburn, chairman of the Select Subcommittee on the Coronavirus Crisis, to send letters to Kabbage, Inc. and three other Fin-Techs, seeking documents and information on their loan handling.
“I am deeply troubled by recent reports alleging that financial technology lenders and their bank partners failed to adequately screen PPP loan applications for fraud,” Clyburn wrote, “This failure may have led to millions of dollars in Fin-Tech facilitated PPP loans being made to fraudulent, non-existent, or otherwise ineligible businesses.”
So, no, we wouldn’t be surprised if some of those government millions ended up financially supporting a local cottage industry like cocaine dealing. Now we’ll have to wait and see if they can connect the dots.