5 Fraud Cases Where Perpetrators Misused COVID Relief Funds

The COVID-19 pandemic spurred governments around the world to take action to keep national economies running during extended shutdowns. In the U.S., Congress passed the CARES Act in March 2020 and the American Rescue Plan (ARP) Act in March 2021. These laws authorized billions of dollars in direct assistance to small businesses, employers, and unemployed workers.

As fraud investigators likely expected, bad actors targeted these programs for fraud. The differing eligibility requirements for assistance meant that these bad actors had to get creative in their efforts.

Here are five ways that perpetrators defrauded COVID-19 relief programs.

The Main COVID-19 Relief Programs

The CARES Act and ARP Act authorized five primary financial relief programs:

  • Economic impact payments
  • Paycheck Protection Program (PPP) loans
  • Economic Disaster Impact Loans (EIDL)
  • Unemployment insurance supplemental payment
  • Increased Medicare and Medicaid benefits

Of these programs, only the economic impact payments avoided substantial fraud. According to the IRS Inspector General’s office, the IRS correctly calculated and paid 98% of the economic impact payments.

Among the 2% that the IRS paid incorrectly, the sources of these errors were primarily clerical. For example, the IRS incorrectly paid people who had died since their most recent tax filing and parents whose children were too old to be eligible dependents.

The other programs were subject to fraudulent claims amounting to as much as $84 billion. These frauds were carried out in several ways including:

Phantom Employees

The PPP was intended to provide employers with liquidity during extended shutdowns to cover payroll. The hope was that employers would use PPP funds instead of laying off or furloughing employees without pay. These employees, in turn, would be able to make ends meet until the shutdowns ended rather than facing severe financial hardship including homelessness and starvation.

Lenders and the U.S. Small Business Administration (SBA) required payroll records to determine a business’s eligibility for the forgivable loans and calculate the loan amount. Bad actors quickly realized that they could fake eligibility or falsely increase the size of the loan they got by providing doctored payroll records. These records would include phantom employees or artificially inflate their wages.

One such example happened in U.S. v. Fayne. In this case, defendant Fayne used PPP funds to perpetuate a Ponzi scheme involving his trucking company. Fayne had a troubled trucking company that he was using to solicit investments. He had run up debt and owed investors money, so he saw the PPP program as a lifeline to infuse money into his fraudulent scheme.

To secure a PPP loan, he and an associate “made up a list of fake names” of people who “worked” at his trucking company. They also created false payroll records showing that his monthly payroll was over $1.4 million. Based on these false documents, he obtained a loan of $3.7 million.

The FBI investigated and prosecutors indicted Fayne for bank fraud for the false records he submitted to get the PPP loan. They also indicted him for wire fraud because he used the funds intended for payroll for personal expenses, including child support payments.

Fictitious Businesses

Another ploy used by fraudsters to secure PPP loans is to create phony companies. In one of the larger fraud cases, U.S. v. Quarterman, defendants Quarterman and Lawson created a fraud ring. Quarterman and Lawson helped eight friends and family members file fraudulent EIDL applications for non-existent businesses.

As part of the scheme, Quarterman and Lawson prepared false loan applications for the fictitious businesses asking for nearly $775,000 in loan funds. They took advantage of a gap in the EIDL process that Congress intended to speed up loans but also encouraged fraud.

An EIDL application did not require any supporting documents. Instead, the applicant merely filled out the application, then affirmed that the application was true and correct. In other words, the SBA trusted applicants to submit accurate applications without checking their veracity.

They were indicted for wire fraud and bank fraud. They also face charges of money laundering since they used the loan funds to buy vehicles, thus attempting to conceal the source of the money.

Fake Documents

The SBA’s exposure to fraudulent EIDL applications was somewhat limited. The EIDL program capped grants at $10,000 per business.

Its exposure to fraudulent PPP applications was much broader. Congress capped PPP loans at $10 million for the first draw and $2 million for the second draw. But this huge prize required perpetrators to work much harder.

PPP lenders required documentation to approve the loan. They often required tax filings, certificates of incorporation, and payroll ledgers.

In U.S. v. Hsu, defendant Hsu filed PPP loan applications for five corporations he owned. These applications led to Hsu receiving over $400,000 in PPP loans.

The problem was that these corporations had no employees and no payroll. Hsu pled guilty to wire fraud and admitted he created false IRS tax filings, including wage reports and withholding documents. Hsu was sentenced to two years in prison plus fines and restitution.

Workers Who Live Everywhere

Fraud was not limited to the business loan programs. The COVID relief programs also saw tens of billions of dollars in fraudulent unemployment claims.

State unemployment offices were defrauded in many ways, including individuals who:

  • Claimed unemployment while still employed
  • Submitted unemployment claims using stolen identities
  • Created false documentation to support unemployment claims

One of the most creative schemes came in U.S. v. Bosquez. Defendant Bosquez lived in Iowa. But she applied for and received unemployment benefits in Arizona, Colorado, Georgia, Michigan, and Ohio.

She received benefits in her name in several states, despite not living in any of them. She also stole identities and received unemployment benefits in those names. Over just three months, she received over $24,000 in unemployment benefits to which she was not entitled.

Prescription Fraud

Due to the pandemic, the government streamlined its processing of Medicare payments. This was intended to ensure that Medicare recipients did not have their medical services or prescription drugs held up due to an overwhelmed health care system.

But in U.S. v. Khaim and U.S. v. Khaimov, the defendants took advantage of some emergency shortcuts in the system to defraud Medicare of $30 million. In their scheme, they submitted false reimbursement requests to Medicare from a network of pharmacies.

These reimbursement requests were for cancer treatment prescriptions that were never issued by doctors or filled by pharmacies. Instead, the defendants conspired with pharmacies to submit these fraudulent requests using COVID-19 emergency override codes to bypass government oversight.

Fraud Investigation and COVID Relief Funds

Investigators will uncover more cases of fraud at the state and federal levels. According to a Congressional memo, only $626 million have been recovered from the estimated $84 billion in fraudulently obtained funds.

These frauds were carried out in several ways including:

  • Phony payroll documents
  • Contrived businesses
  • Stolen identities or false addresses
  • Forged tax, banking, and financial documents
  • Co-conspirators to assist in false filings

But with these past cases unveiling some of the schemes used, aggressive investigators with sophisticated financial investigation tools can begin to track down these funds.

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