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The world feels more chaotic than usual. Promises of a vaccine and improving economic indicators provide reasons for hope, yet great uncertainty remains as to how this pandemic will evolve into the future – both from an epidemiological and economic perspectives. To add to our economic aggravations, fraudulent schemes are being perpetrated all around us. The scale, speed and magnitude of this economic downturn has created opportunity for fraudsters rarely seen before. While some fraud related to government programs have been detected and publicized, much of the fraud within companies is only beginning.
Generally, recessionary periods increase the likelihood of fraud due to increased financial needs and pressures felt by both companies and individuals. Financial need, along with perceived opportunity and rationalization, commonly known as the Fraud Triangle, are the three factors which may cause an individual to commit occupational fraud. This recession has also provided unprecedented opportunity for fraudsters to capitalize upon government funds being doled out at breakneck speed. Further opportunity has unfortunately also been provided by the number of people desperate for financial or healthcare assistance.
Across the country, states have reported hundreds of thousands of possible cases of fraud related to unemployment benefits. This has resulted in cash-strapped states being defrauded of millions of dollars, while countless individuals have either been denied their unemployment benefits or become subject to long delays in receiving those benefits. The disrupted distribution of benefits has undoubtedly wreaked havoc upon many lives, yet states have been unable to quickly address the issues due to their antiquated systems. According to Federal Trade Commission data, there were approximately 350,000 reports of identity theft in the second quarter of 2020, more than doubling the same figure from 2019. Much of the identity theft related to unemployment benefits. Other fraud activities with large increases since COVID-19 emerged include travel and vacation (mostly due to issues surrounding cancellations and refunds) and online shopping, which was fertile ground for fraudsters to exploit individuals stuck at home and eager to purchase anything which may lower their risks due to COVID-19. These online scams included everything from toilet paper and hand sanitizer to bogus cures and vaccines, testing kits, personal protection equipment (PPE).
Business loans and grants have also been the target of fraud schemes. The Paycheck Protection Program (“PPP”), which quickly disbursed almost 5 million loans worth over $500 billion, was particularly susceptible to fraud due to the pace and scale of this program. In addition, the program included a good faith certification requiring that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant”.¹ This rather subjective clause was clearly a trade-off with foregoing time consuming due diligence usually involved with loans of this size and nature. As expected, some individuals decided to take extremely generous interpretation of what is “necessary.” Egregious examples include a Floridian who was recently charged with fraud for making false statements to a bank which resulted in nearly $4 million dollars in federal loans, some of which went towards the purchase of a blue Lamborghini.² In Detroit, a man obtained $590,000 in loans from the Paycheck Protection Program for a business which was dissolved in July 2019.³ Apparently also being a car enthusiast, the man used the funds to purchase two Cadillac Escalades, a Dodge Charger, and a Hummer.
In contrast with most white-collar investigations which often take years to complete, investigations related to PPP fraud have been conducted with an apparent sense of urgency. As of early August, 30 cases had been filed by the Justice Department related to tens of millions of dollars.⁴ The pace of these investigations, as well as the number of federal agencies involved, indicates the federal government is attempting to deter further fraudulent activity and possibly encourage some businesses to save the government the resources by simply returning the loans. When Treasury Secretary Steven Mnuchin first mentioned that the government would be conducting investigations of fraudulent PPP loans, about $30 billion in loans were returned.⁵ The Small Business Administration has said it will investigate all loans over $2 million, however it is likely that many smaller loans will also be investigated if the related business raises red flags.
The proliferation of fraud related to government programs should provide ample reason for companies and shareholders to remain vigilant of occupational fraud within their organizations. As recessionary conditions continue, the three elements of the Fraud Triangle will become increasingly evident amongst both private and public companies; as a result of declining business performance and the economic hardships inflicted by pay cuts, furloughs, and layoffs. Such occupational fraud generally falls into three categories: misappropriation of assets, corruption, or financial statement fraud. The Association of Certified Fraud Examiners (“ACFE”) found that the most common form of fraud is asset misappropriation, with a median loss of approximately $100,000.
At a time when cash flow is vital, businesses must act to ensure all proper internal controls are in place. This should include mechanisms to both detect and report fraud. According to the ACFE, almost half of all occupational fraud occurs due to a deficiency in internal controls.⁶ Therefore today is the best day to reassess anti-fraud policies, implement anti-fraud training, and improve compliance with existing measures.