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SBA bans staff from using word ‘fraud’ related to suspicious grant applications

Nov. 20, 2020 Updated Fri., Nov. 20, 2020 at 8:59 p.m.

Jovita Carranza, administrator of the U.S. Small Business Administration is seen in June. The SBA has privately directed employees to stop using the word “fraud” when looking at suspicious grant applications.  (Bloomberg)
Jovita Carranza, administrator of the U.S. Small Business Administration is seen in June. The SBA has privately directed employees to stop using the word “fraud” when looking at suspicious grant applications. (Bloomberg)
By Michelle F. Davis Bloomberg

A U.S. agency facing mounting scrutiny over how it doled out checks from a $212 billion pandemic relief program has privately directed employees not to use the word “fraud” in writing if they spot suspicious applications.

Workers reviewing requests for the Small Business Administration’s COVID-19 Economic Injury Disaster Loan program have instead been told by managers to use alternative phrases, such as “duplicate,” according to four people who received the instructions and asked not to be identified discussing internal policies. The terms varied among teams and could be misleading, the people said.

The rationale given to some employees: Aid documents could be targeted by public records requests.

The directive threatens to make it harder for the SBA to gauge the scope of abuse of the EIDL program as the agency faces congressional calls to explain how it will identify any grants and loans sent to scammers and recover taxpayer money. Democratic Rep. Judy Chu of California, who heads the House Small Business Committee’s panel on oversight, has said she plans to hold a hearing on those efforts.

While the guidance hasn’t stopped employees from flagging applications they view as needing more scrutiny, the lack of consistent language has led to confusion as workers try to relay their concerns to colleagues, the people said.

“SBA strongly denies that staff processing EIDL loans were discouraged from identifying suspected fraud,” Michelle Dawi, an agency spokeswoman, said in an emailed statement. “If red flags are triggered through system controls or manual review, actions are taken to put the loan application on hold so the agency can conduct additional due diligence.

“SBA takes fraud very seriously and is partnering with its Office of Inspector General and other government agencies to investigate and ensure fraud is prosecuted.”

Bloomberg News described last month how tutorials for illicitly tapping the small-business aid program went viral on social media, and how the agency rushed out grants of as much as $10,000 to applicants who weren’t eligible, sometimes ignoring concerns raised by loan officers.

A report the same week by the agency’s inspector general, Hannibal “Mike” Ware, found the SBA’s program was vulnerable to fraud and identified tens of billions of dollars in applications that he said need further inspection. That’s turned attention to whether the SBA will acknowledge such widespread abuses. Jovita Carranza, the SBA administrator, has said Ware’s report overstated the risk of EIDL fraud.

SBA loan officers stationed around the U.S., speaking on the condition they not be named, said that in recent weeks superiors have admonished them, usually verbally, not to use “fraud” when making internal notations about applications. One manager remarked to staff that “fraud is the new F-word,” according to one of the people.

Two people said managers cited concerns that loan officers’ notes could be subject to the Freedom of Information Act. Another person said a manager explained “fraud” was banned because it could eventually become public through lawsuits. It’s unclear which lawsuits. Loan officers aren’t expected to prove fraud, only to flag suspect applications, which could also contribute to the reticence.

The disaster-relief program has distributed 3.6 million loans worth $192 billion to small businesses since March, as well as 5.8 million grants that don’t have to be repaid totaling $20 billion. It’s distinct from the SBA’s $525 billion Paycheck Protection Program, which relied on banks to distribute forgivable loans meant to cover payroll.

Bloomberg News parent Bloomberg LP is among news organizations that have sued the U.S. Small Business Administration to obtain the names of the companies that received loans under the Paycheck Protection Program and the EIDL program, as well as the exact amounts. This month, a federal judge ordered the U.S. to hand over the data. The agency may appeal.

Loan officers said they received conflicting instructions about how to note their suspicions, resulting in an unsystematic approach that could later complicate attempts to track down scam artists.

Several said they were told to mark dubious applications as “duplicates” in the agency’s internal loan system, a label the staffers said was also used for requests submitted more than once that may need to be merged. Others said they were told to annotate questionable files with terms like “unusual” or “inconsistency.”

There are also doubts about how effective the “duplicate” label is at raising alarms. The SBA’s inspector general last month found that the SBA had disbursed $58 billion of funds to entities whose applications had duplicate information, including more than 110,000 examples in which the agency approved multiple loans to businesses at the same location. The agency said that a similar address alone isn’t reason to suspect fraud.

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