History does indeed repeat itself.
How many times have you heard of the following chain of events? (1) Government rushes to authorize additional hundreds of billions of dollars during an emergency to be distributed throughout the land, but without much planning for accountability or protection against fraud. (2) Eligible recipients who get the biggest share of the money turned out not to be in much need for such money. (3) Fraudulent activities take place, and many ineligible people or fake companies get access to this money. (4) Congress is shocked – shocked! (5) Congress sniffs around for a generally blameless party to blame. (6) Congress learns nothing from the fiasco.
I have heard this story many times before. I was not surprised that the pandemic’s Payroll Protection Program was a mess. Leaving aside its disastrous first few weeks of operation that left small businesses fighting to get even a slim shot at applying for the program, data show that the PPP funds benefited mostly those industries with the largest share of employees able to work remotely (hence the least affected by the lockdown) as well as companies well capitalized (and hence not in need of a loan from the government to make payroll). It soon also became obvious that the largest share of the funds went to companies in areas of the country that were among least affected by the pandemic, and another significant share of the money was lost in huge numbers to fraud.
So now members of Congress are outraged. However, rather than wonder whether the whole blame should fall on their shoulders for authorizing so much money without thinking the matter through, they are writing reports to find out who is to blame for this mess. The latest report looking into PPP fraudulent activities comes to us via the House Select Subcommittee on the Coronavirus Crisis. It details how the Paycheck Protection Program was exposed to fraud by carelessness. Some financial-technology companies, hired by government to help implement PPP, failed to properly vet applications while making great profits in the process. The report states:
The Select Subcommittee’s investigation found that many fintechs, largely existing outside of the regulatory structure governing traditional financial institutions and with little to no oversight from lenders, took billions in fees from taxpayers while becoming easy targets for those who sought to defraud the PPP.
Sure, if only we had had more regulations, all would have been fine. Never mind that there have been many reports also about regular banks handing out PPP money to ineligible companies – maybe not to the same extent, but wrongly, nonetheless.
For the record, I have no doubt that many unscrupulous firms, fintech or not, stuff their pockets with money from the PPP. The subcommittee report highlights some bad moves from some FinTech companies:
The investigation found that two unvetted and unregulated fintechs that, together, facilitated nearly one in every three PPP loans funded in 2021—Womply and Blueacorn—failed to implement systems capable of consistently detecting and preventing fraudulent and otherwise ineligible PPP applications. Their lending partners, who were tasked with supervising the activities of these fintechs, often did little to oversee the activities of the companies to which they delegated their responsibilities.
The Select Subcommittee investigation found that established fintechs Kabbage and Bluevine also faced challenges in properly administering the program. Internal Kabbage documents show that the fintech missed clear signs of fraud in a number of PPP applications, including loans given to fake farms. Internal communications show that Kabbage’s staff expressed confusion and concern with the fintech’s fraud prevention processes. After Kabbage’s acquisition by American Express in October 2020, PPP borrowers were left at the mercy of an underfunded and understaffed spin-off company that failed to properly service their loans and would later file for bankruptcy.
These guys seem like bad apples. Yet ultimately, this mess is Congress’ fault. During the pandemic, legislators on both sides of the aisle paid no attention to how the money would be distributed. They simply threw as much money as they possibly could, and as quickly as they could, out the window. For instance, Congress intended for the loans to only be used by companies that needed the money to make payroll, but the application forms for a PPP loan required no proof that the funds were actually needed.
Ironically, the most shame-proof body in the country was hoping that the fear of being shamed in public for taking money they didn’t need would keep wealthy firms away. It didn’t work this way and many various public and large companies- along with other dubious or fraudulent players- took advantage of the program.
By the way, I can tell you the same story about how the pandemic enhanced unemployment benefit programs and the bailouts to airlines. Lots of money went to lots of people who didn’t need it and there was a lot of fraud in these programs, too. And again, Congress was shocked about the high level of fraud in the unemployment benefit programs and that airlines pocketed the money and still furloughed thousands of workers and then weren’t ready to fly when passengers returned.
But will legislators learn? No. I can promise you that next time around Congress will do the same thing all over again.
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.
READER COMMENTS
vince
Dec 4 2022 at 2:06pm
“Congress intended for the loans to only be used by companies that needed the money to make payroll, but the application forms for a PPP loan required no proof that the funds were actually needed.”
That wasn’t quite my interpretation of the purpose of PPP. It was to discourage layoffs, whether a company needed funds or not. The loan was based on a firm’s prior year payroll. If the loan proceeds were used for current year payroll, the loan was forgiven.
Regardless, I agree that the program was half-baked and an invitation to fraud.
Roger McKinney
Dec 4 2022 at 9:35pm
Great article! The people never learn.
nobody.really
Dec 4 2022 at 9:55pm
Really? I had always thought that the program was fully baked and an invitation to fraud.
During previous economic collapses, government had maintained liquidity by injecting money into giant banks and investment houses. Whatever the merits of his policy, it aggrieved blue-collar people who were also struggling through the recessions. So when Covid was tanking the economy, the Trump Administration looked for ways to inject money that seemed less conspicuously targeted to the rich. Much like the plan to maintain Iraq’s economy, the whole idea was basically a Friedman-ish “helicopter drop” of cash: Shovel it out the door! Keep the economy going! And if there’s any trade-off between economic stimulus and guarding against fraud, err on the side of the former!
I see no harm in government trying to prosecute fraud where they can, at their leisure and with the benefit of full employment. But guarding against fraud was very much a secondary concern. And to judge the policy by it’s primary objective, I’d say that it succeeded too well.
David Seltzer
Dec 5 2022 at 5:26pm
Prisoners filed false returns in their names or fraudulent returns with phony names and SS numbers to receive money. The IRS is scammed. No surprise PPP was an invitation to corruption. And the beat goes on!
Maniel
Dec 7 2022 at 4:20pm
Once congress has responded to the crisis du jour by extracting as much money as possible from the private sector, their job is done. Whether or not any of money is used for the stated purpose is irrelevant. Obtaining “other people’s money’ for them to distribute is the end, not the means.
Concepts such as starting small, pilot projects, and best practices are unlikely to be anywhere on the government radar. Such processes are only used by businesses interested in supplying useful goods and services to customers paying with their own money.
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