Has the SBA improved in preventing fraudulent loans?
No one yet knows how much money allocated under the CARES Act last spring was spent on fraudulent loans. But for the second major chunk of business relief spending, enacted last week, the Small business administration revised its procedures. Gary Shiffman teaches national security at Georgetown University and is the founder and CEO of Giant oak and Consilient. He spoke to Federal Drive with Tom Temin about what he saw.
Tom Temin: Gary, nice to see you again.
Gary Shiffman: Tom, it’s great to be back with you. Thank you.
Tom Temin: And we talked last summer about maybe SBA’s inability to see in the data to know where the loans were going. But some rules also made it easier for companies, perhaps they intended to make money forget. What is different this time around?
Gary Shiffman: Yeah, Tom. So the big thing, the market, the trade-off, if you will, that we talked about last time, is that we have to get the money into the hands of the people as quickly as possible, because there are real suffering in the economy, and people need that money. But we also want to try to deter fraud, waste and abuse. And we talked about how it’s going to be a banner year for fraud in the United States and around the world. And I think the data will show that, in fact, this was a banner year, unfortunately for fraud in the United States and around the world. What is happening now is that the Biden administration has come along and put new rules in place around the PPP program, to get money faster and to solve the fraud problem. So I think we collectively get smarter about the P3 program and we learn a lot and we start to incorporate these lessons learned and I think this is all just kindness, and we are going in the right direction.
Tom Temin: So what should be a good surveillance regime? Because I think all of the oversight and setup for the CARES Act exam is barely on at this point.
Gary Shiffman: Yes, it’s true. So what, the purpose of law enforcement is to deter crime from happening. And sometimes people miss that point, because our focus is on catching perpetrators and arresting and convicting them. The goal is not to arrest and convict more and more people. But the point is to be so good at identifying crime and imposing punishment on a crime that people simply choose not to. And that’s what we’re missing. So in this market that I just spoke about, getting the money into the hands of the people as quickly as possible. Unfortunately, we either encourage crime or we do not deter crime. And that’s why there is this huge spike in fraud. What we need to do is realize that screening up front, screening beforehand has to be part of setting up the money fast. It is a false choice that you can either deter fraud or get the money out quickly. Technology allows us to do both. And I think we have to get past this false dichotomy or this false choice of you have to do one or the other, we have to do both.
Tom Temin: Because when you’re trying to put the money in the hands of micro-businesses, one- or two-person businesses, which is a fairer way, I guess, and a more even distribution of the money. money between everyone, it becomes more difficult. to establish, I think, is it really a business or just somebody called themselves or whatever, just to get a piece of dough? How does the federal government know that? You can check if the person has a D&B number, or if they are registered with a state authority that authorizes businesses, that sort of thing. So how can you be sure that individuals or very small transactions are what they say they are?
Gary Shiffman: Right. It’s exactly that. This is an excellent question. So when we first launched PPP, if you remember correctly, one of the big criticisms beyond the point of fraud that I raised was that only the larger types of businesses and more established either got money or they got it faster. And, you know, rural businesses, minority owned businesses, businesses under 20, sole proprietors, independent contractors were at the end of the line and disproportionately overlooked in the first bracket. The Biden administration is now prioritizing this class of companies. And I think again, this is a good lesson learned and we are going in the right direction. The other thing they add, or the SBA adds, is that they give the SBA the responsibility for clearing and auditing companies. So before the SBA gave the money to the banks and the banks were solely responsible for verifying this business, a legitimate business. SBA is now responsible for this verification. And they have to pass SBA fraud, SBA fraud checks, as well as database checks, public ledger checks, and in the banking world, they’re very, very familiar with what’s called media scrutiny. unfavorable. Unwanted media casts a very large net through publicly available information to determine who they claim to be? Do they have the employees they say they have? Do they run the businesses they say they do? And that’s what the SBA needs to incorporate, it’s those broader controls that the banking industry is already very familiar with.
Tom Temin: We speak with Gary Shiffman, Founder and CEO of Giant Oak Search Technology, also Professor of National Security at Georgetown University. That information is then in public databases, and it becomes a question of, what, subscribing to the right data, and then doing some sort of analytical approach?
Gary Shiffman: Yes, that’s right, the data is available and available. We did a study in my own office, where we looked at the first 70 cases brought by the Department of Justice for criminal fraud under the P3 program. And according to our internal research, 20% of cases brought by the Department of Justice should never have been issued, as the loan should never have been granted initially. It just proved that the checks were not taking place. So the ability to do both, the idea that we have to get past this false dichotomy between you, either getting the money out fast or doing the screening, is embracing the technology. So, machine learning and artificial intelligence technologies today allow us to do large-scale, high-speed screening of populations in a way that kind of allows you to break that knot of having to choose. between one or the other. We can do large-scale screening, we can mitigate risk, we can deter fraud, which is the point, not to detect fraud, but to deter fraud from happening, and put money in between the hands of struggling businesses and people of independent contractors and people wherever they are. We can get it into their hands quickly. And the answer is, we just need to embrace existing technologies. It’s machine learning. It’s artificial intelligence. We are living in this era. It’s already there. One of the things that has happened that the banking industry knows full well, Tom, is that the first year, after one year of Coronavirus, the digital transformation, which is a topic that I know you have covered, digital transformation is only accelerating, it is accelerating. across the banking industry. It is accelerating in government agencies. It has to happen as part of the SBA program, so we can deter fraud, deter crime, and get the money out fast.
Tom Temin: Because at some point it almost becomes surveillance in a way. Suppose someone is just by the innate nature of their business, I’m going to make one up, say they build houses, and they are not a massive, publicly traded home builder, but just a trader. private, they can have two or three full. employee time and use a bunch of 1099 to do the framing. It’s a small micro-business, and it would qualify for a loan. But shouldn’t the program also know well, maybe it applied for a loan, but how would you know if they also landed a $ 3M contract three days earlier?
Gary Shiffman: Right. This is an excellent question. And I think there are limits to what a government agency can and should do. We found three types of fraud after the first year of the PPP. There are people who claim to have a business that doesn’t actually exist. There are people who have a business but fraudulently claim more employees or more employees who are better paid than them, and there are people who have a business who rightly claim the number of employees but who use the money for fraudulent purposes. I think these are the trends we have seen for a year. And I think that’s where we need to focus on what is, does a PPP applicant, actually have a business? And does this company actually employ 10 people as it claims or does it employ 10 people and yet it claims to employ 100 people? A lot of the frauds identified by law enforcement are very simple, basic people who lie and say, well, I have 100 employees, and they all make exactly $ 150,000 a year. Like things like that, we shouldn’t trip over it anymore. We should do the screening, we should do the screening to determine if the business is real? And does the company have the number of employees it claims to have? And I think if we do that, Tom, I think it’s a pretty straightforward and straightforward step, and it’ll deter most of the crime we’ve seen after the first year.
Tom Temin: Gary Shiffman is the founder and CEO of Giant Oak Search Technology, teaches national security at Georgetown University. Thank you so much.
Gary Shiffman: Thanks, Tom. Appreciate it.