September 28, 2020

Why PPP Loan Fraud is on the Rise

In response to the global COVID-19 pandemic, the US Congress moved extremely quickly to enact the largest economic stimulus bill in modern history. At Anders, we’ve been dissecting the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including each of the stimulus elements in the Act. One major portion of that economic stimulus, estimated at $669 billion, came in the form of Paycheck Protection Program loans (or PPP Loans). These PPP Loans were potentially forgivable loans issued to small businesses with the intention of keeping their employees employed.

While PPP loans offered much-needed assistance to many businesses impacted by COVID-19, there have been a few instances where the relief efforts were abused. We are now in the midst of the first wave of notable PPP Loan fraud cases, which presumably will continue to make headlines for quite some time.

Uncovering PPP Fraud

PPP Loan issuance began in earnest in April 2020. In a matter of months, alleged PPP Loan fraud was already being reported across the nation.

In late July 2020, it was reported that a Miami, FL man had been charged with bank fraud for allegedly lying on PPP Loan applications. The alleged fraudster used the PPP Loan proceeds for luxury items such as purchases at Saks Fifth Avenue, luxury hotels, jewelry stores, and most notably a Lamborghini Huracán EVO, valued at nearly $320,000.

On August 4, 2020, the US Department of Justice issued a press release regarding a Houston, TX entrepreneur who allegedly obtained more than $1.6 million in PPP Loans, using those funds to purchase a Lamborghini Urus, a Rolex watch, and real estate among other things.

In September, Reuters reported that according to an internal memo, JP Morgan Chase & Co., one of the many banks tasked with distributing the PPP Loans, was investigating employees who may have been involved in the misuse of federal funds meant to help struggling small businesses hurt by the COVID-19 shutdowns.

Most recently, former NFL wide receiver Josh Bellamy was arrested as one of eleven participants in an alleged $24 million PPP Loan scheme. Bellamy allegedly used funds to purchase luxury goods from Gucci and Dior and withdrew over $300,000 in cash.

These are just a handful of notable PPP Loan fraud examples that have made the news headlines. As of mid-September, the Justice Department had charged 57 people with trying to steal a total of $175 million in PPP Loans, and this is likely just the beginning.

Preventing PPP Fraud

To ensure this type of fraud doesn’t happen in your company, businesses should become familiar with the concept of the fraud triangle, and how it can be a useful tool in understanding fraudulent behavior. Put simply, the concept theorizes that fraud is likely to occur when three elements occur together. Those elements are opportunity, motive/pressure, and rationalization.

The COVID-19 pandemic prompted an unprecedented governmental response in an attempt to prevent millions from losing their jobs.

In a haste to distribute these funds, an unprecedented opportunity for fraudsters was created which would not have been available under normal circumstances. There was no time for the PPP Loans to go through the normal vetting and underwriting procedures required for most commercial loans, as more than 5.2 million PPP Loan applications were prepared and processed during a matter of months.

At the same time, in what was likely the worst economic downturn since the great depression, there was ample motive and pressure for many to commit fraud. That is casting the ever-present motive of greed to the side.

Finally, while we know fraud is not a victimless crime, some may find it easy to rationalize “borrowing” money from the Federal Government. Afterall, the Federal Government just prints the money, don’t they? And who is going to miss a few hundred thousand dollars from a $2.2 trillion relief bill?

In reality, these fraudulent actions hurt us all. Taxpaying citizens are the ones being taken advantage of. Further, people are stealing from a program designed to help struggling businesses keep employees on the payroll during a time of great turmoil.

Sadly, but predictably, these fraud cases are appearing, and unfortunately will likely continue for some time to come but preventing fraud in your own company is key.

If you have any questions regarding PPP Loans or fraud prevention, please contact an Anders advisor below. Learn more about Anders Forensic and Litigation services or how we help businesses with COVID-19 Business Recovery.

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August 6, 2020

The Fraud Triangle: Three Conditions That Increase the Risk of Fraud

In order to deter, detect and investigate fraud, one must understand how and why people commit fraud. Knowing the “how” helps managers and business owners create policies and design internal controls to reduce the occurrence of fraud. The “why” is more nuanced, but it is just as important in understanding fraud.

The fraud triangle has endured through the decades as a metaphorical diagram to assist us in understanding and analyzing fraud. The concept states that there are three components which, together, lead to fraudulent behavior. They are (1) a perceived un-shareable financial need (motive/pressure), (2) a perceived opportunity to commit fraud, and (3) the rationalization of committing the fraud.

Fraud Triangle - St Louis CPA Firm


The “How”

The “opportunity” element of the fraud triangle refers to the circumstances that allow fraud to occur. Without it, fraud becomes impossible. This is the only component of the fraud triangle over which the company exercises significant, or in some circumstances complete, control.

According to the ACFE’s 2020 Report to the Nations, 35% of reported fraud cases arise in organizations that lack internal controls. However, it is important to understand that even in organizations with a robust control environment, fraud is possible if employees circumvent controls. This can be accomplished in a number of ways, including collusion among employees or a lack of adequate management review.

Far too many fraud cases come to us where an employee was placed in a position of complete trust, only to betray the trust of his or her employer. A well-designed system of internal controls paired with strong “tone at the top” and management oversight are the best ways for a company to reduce fraud “opportunity”. And remember, trust is NOT an internal control!

The “Why”

Whether referred to as pressure, motive, or incentive, another key element of fraud is a perceived, usually unshareable, financial need on the part of the fraud perpetrator. It is the reason why a person commits fraud.

There is a nearly endless list of reasons a person would feel compelled to commit fraud. It could be personal financial problems, such as mounting medical bills, gambling debts or a spouse laid off from their job, employee’s compensation tied to financial performance, or good old fashioned greed. The reason the employee commits fraud can also evolve over time.  For example, several of the fraud investigations we have worked on began with an employee embezzling funds to take care of a personal financial problem and then changed to greed once the financial hardship had been resolved.

Companies can help alleviate some of this pressure by providing programs where employees can seek anonymous help in their time of need. These programs can range from providing resources for a person battling addiction, to setting achievable, realistic goals for compensation purposes based on input from the employee. Management should always seek to be “in-tune” with the needs of their employees as much as possible.

How Do Fraudsters Sleep at Night?

Rationalization of committing fraud is the most difficult condition to observe because it takes place in the mind of the perpetrator. Rationalization involves fabricating a moral excuse to justify the fraud. Many fraudsters view themselves as honest, ordinary people and not as criminals, so they have to come up with some reasoning to reconcile the act of committing fraud with their own personal code of ethics. Some common rationalization statements are, “I’ll just take this money now and pay it back later,” “No one will notice,” or “I deserve this after all these years with this company.” Some fraudsters rationalize their behavior by re-framing their definition of wrongdoing to exclude his or her actions. In certain rare cases, fraudsters may seem to abandon their moral code entirely.

The Perfect Storm

The convergence of these three conditions: pressure, opportunity and rationalization, form a high-risk environment ripe for fraud. Each element interacts with the others. While an employee may have a high degree of financial pressure, they will not commit fraud if there is no perceived opportunity or if the risk of detection is too high. Meanwhile a sufficiently compensated, content employee with little financial pressure is not likely to commit fraud, even if they may have the opportunity to do so. Similarly, a person who perceives an opportunity to misrepresent financial statements and has the incentive to commit the fraud is unlikely to do so if he or she knows it is wrong and cannot rationalize the fraud. However, as the pressure to commit fraud increases, a potential fraudster may begin to see more opportunities to circumvent controls, and may begin to rationalize these behaviors in their head. Keeping the fraud triangle conditions in mind can help managers and business owners minimize the risk of fraud in their organizations.

If you have any questions on preventing fraud in your organization, or suspect fraud may have already occurred at your organization, please contact an Anders advisor below. Learn more about Anders Forensic and Litigation services.

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March 16, 2017

Blockchain…What is It?

If you have attended a financial or business seminar in the past six months, I’ll bet you heard about the concept of Blockchain, as it is a hot topic nowadays. If you’re like me, you left the venue scratching your head, not quite sure exactly what Blockchain is. On the other hand, your single takeaway was this: you knew you had been introduced to one of the most transformational and misunderstood technologies of our times. Its admirers include Bill Gates and Richard Branson. Banks, insurance companies, and even IBM, Microsoft, UBS and PwC are racing to adapt Blockchain for use.

So what is Blockchain and why are the financial and technology industries so revved up about it?

To understand Blockchain, one must first have a grasp of the fundamentals of money transactions. When transacting money or anything of value, people and businesses have historically relied upon intermediaries like banks, financial institutions (e.g. brokers), and governments to ensure trust and certainty.

For example, consider the role of a title company, a bank, and a local governmental unit in facilitating a residential real estate transaction. The title company serves as the middleman for both buyer and seller, assuring that title is clear for transfer, new title is properly recorded, mortgage loans are paid, all liens against the property are released, real estate agents are paid their commissions, and net funds are transferred to the seller. Banks serve as financing vehicles to facilitate the funding of a portion of the sales proceeds to the seller. Governmental units (the local county) serve as the recording office to assure an authentic title and deed of trust are recorded. These intermediaries (or middlemen) perform critical tasks such as authentication and record-keeping, that build trust in the transactional process.

The need for intermediaries becomes especially acute when a digital transaction is conducted, because digital assets like money, stocks, and intellectual property are essentially files that are easy to reproduce. Hence authentication and the problem of double spending (the act of spending the same unit of value more than once) are serious flaws of the digital process.

But what if there existed a technology that provided a secure way to conduct digital transactions without the need for a third party intermediary? Enter Blockchain. In 2008, the innovative concept of a peer to peer electronic cash system called Bitcoin was introduced that enabled online payments to be transferred directly and without an intermediary. While Bitcoin was exciting and innovative, it was the mechanics of how it worked that was truly revolutionary.

Blockchain is a type of distributed ledger or decentralized database that keeps records of digital transactions. Rather than having a central administrator like a traditional database (e.g. banks, financial institutions, governments) a distributed ledger has a network of replicated databases, synchronized via the Internet and visible to anyone within the network. Blockchain networks can be private similar to an Intranet or public like the Internet, accessible to anyone in the world.

Let’s use a very simple transaction as an example of how a distributed ledger like Blockchain works. If Christina (in Italy) wishes to send money to her grandson Anthony (in the US) she initiates a transaction in the Blockchain. Christina’s transaction is grouped together in a cryptographically protected “block” with other transactions that have occurred in the last ten minutes and sent out to the entire network. Miners (members in the network with high levels of computing power) then compete to validate the transactions by solving complex coded problems. The first miner to solve the problems and validate the block receives a reward as compensation. For example, in a Bitcoin Blockchain network the miner would receive Bitcoins. The validated block is then timestamped and added to the chain in a linear, chronological order which provides an indelible and transparent record of transactions. New blocks of validated transactions are linked to older blocks making a chain of blocks that show every transaction made in the history of that Blockchain. The entire chain is continually updated so that every ledger in the network is the same, giving each member the ability to prove who owns what at any given time. The transaction is completed within 30 minutes rather than 3-5 days through the use of traditional financial intermediaries under our current system.

Blockchain technology is so revolutionary because it can work for almost every type of transaction involving value, including money, goods and property. In theory, if Blockchain goes mainstream, anyone with access to the Internet would be able to use it to conduct transactions.

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March 16, 2017

Blockchain: A Quiet Revolution? A Disruptor? Both?

Think about many of the technologies we now take for granted, like the smartphone. Think about how significantly the smartphone has changed the way we live and work. Think about how your business life was a mere 10-12 years ago. When you were out of your office, you were gone, because a telephone was tied to a place and not to a person. Contrast that to today, where we have global nomads building new businesses directly from their smartphones. Was the smartphone a quiet revolution? Indeed it was. Was the smartphone a disruptor of the status quo? You bet it was. Are there any quiet revolutions taking place today that will disrupt our world in a manner similar to the smartphone? Yep…….welcome to Blockchain. When one considers the fact that the country of Dubai has a strategy to issue all government documents on Blockchain by 2020….that’s right……2020…..the fact that many people have not even heard the term “Blockchain” is clear evidence that it is indeed both a quiet revolution and a disruptor.

Blockchain owes its genesis to the cryptocurrency Bitcoin. Blockchain, a peer-to-peer network that sits on top of the Internet, was introduced in October 2008 as part of a proposal for Bitcoin, a virtual currency system that eschewed a central authority (Federal Reserve, etc.) for issuing currency, transferring ownership, and confirming transactions. Although Blockchain technology was developed to implement Bitcoin, it’s entirely separable from Bitcoin. The realization that the underlying technology that operated Bitcoin could be separated from the currency and used for all kinds of interorganizational cooperation was an innovation in its own right. Almost every financial institution around the globe is doing Blockchain research at the moment, and 15% of banks are expected to be using Blockchain in 2017. As a result, Blockchain has the potential to dramatically shift the way we define, track, share, own and manage transactions because Blockchain is a distributed ledger.

Here’s an example of how Blockchain may disrupt the current business structure: the introduction of the shared ledger. If you run a business, you understand the concept of managing private ledgers in the financial side of your business. Your company has ledgers (usually software such as Quickbooks for example), that records your company’s many transactions, leading to a balance sheet and income statement for your business. Your private ledger is accessed and managed only by authorized employees or agents. At the end of the year, the auditors come out to conduct an audit of your company’s financial statements. Let’s say as part of that examination, the auditors confirm a $500,000 account receivable from Alpha Company by examining the invoice and by sending a formal confirmation. This receivable is only valid if Alpha Company’s private ledgers show that they owe your company $500,000. As it stands today, it takes significant time and cost to verify this transaction and others like it in a financial statement audit. Blockchain eliminates that because it is a distributed ledger.

By contrast to the private ledger concept, Blockchain comprises both the transaction itself and a shared (distributed) ledger for that transaction. Using Blockchain in the example above, your company and Alpha Company share the same data. There is one ledger for this transaction that is shared between the two companies. Therefore, confirmation is no longer necessary as one can conclusively say that Alpha Company owes your company $500,000 because both companies are looking at exactly the same ledger, the same data. Disruption? A resounding yes, as moving from a private ledger to a shared ledger is currently difficult for us to grasp. Predicting what direction Blockchain will take going forward is difficult at best. For example, did anyone see social media coming? The sense of scale by informed minds inside the Blockchain industry are that the changes coming will be “as large as the original invention of the Internet”. Perhaps disruption is in essence, the consequence of a quiet revolution.

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