When Congress hurriedly passed the Paycheck Protection Program in April 2020, there were some who warned that the taxpayer-funded program would be ripe for fraud without sufficient oversight or adequate systems in place for managing distribution.
Those warnings were prescient, as a damning watchdog report has now revealed that millions of PPP loans were flagged as potentially fraudulent but were never followed up on and closed out without investigation, potentially costing taxpayers upwards of $200 billion, Reason magazine reported.
That figure represents nearly a quarter of the more than $800 billion in forgivable loans doled out through the well-intended program that was supposed to help companies keep employees on their payrolls during the initial economic shock of the global pandemic.
Rampant and unchecked potential fraud
The Project on Government Oversight used the Freedom of Information Act to obtain data from the Small Business Administration related to its management of PPP loans and found that, between August 2020 and September 2021, of around 4.3 million loans flagged for various concerns, more than 2.3 million loans totaling around $189 billion had been flagged as potentially fraudulent.
Unfortunately, the data also showed that for some inexplicable reason, the overwhelming majority of those flagged loans were closed out and never investigated in the final days of the Trump administration, and with around 95 percent of all PPP loans now transformed into grants and forgiven, it has become exceedingly difficult, if not nearly impossible, to track down and recover those funds or hold potential fraudsters accountable.
To be sure, not every flagged loan was actually fraudulent — there were at least 57 different types of flags for a plethora of potential major and minor issues — and official government estimates place the amount of actual PPP fraud at around $100 billion.
That said, the data scrutinized by the watchdog group exposed a decided lack of sufficient oversight of the program within the clearly overwhelmed SBA, and the lengthy report — which is well worth a thorough read — should serve as a caution against similar taxpayer-funded emergency assistance programs in the future.
The grossly inefficient assistance program
The POGO report, while breathtaking in its scope and infuriating in its revelations, is not alone in exposing the amount of likely fraud and gross inefficiency that was inherent in the PPP.
The National Bureau of Economic Research issued a paper in January that estimated that PPP had saved during its duration “between 2 and 3 million job-years of employment,” albeit at a cost of “$170K to $257K per job-year retained.”
Further, despite the good intentions of the program, the NBER study found that slightly less than a quarter of all funds loaned out actually ended up in the wallets of workers, with the rest being pocketed by business owners, shareholders, creditors, and suppliers.
In other words, according to the Federal Reserve Bank of St. Louis review of the effectiveness of the PPP, only about $1 out of every $4 spent actually went toward protecting paychecks and saving jobs.
The idea of the PPP to help save jobs amid the initial economic downturn of the unprecedented global pandemic may have been sound — though that is certainly debatable — but the implementation of that program with little to no actual oversight was an absolute and unmitigated disaster that cost taxpayers at least $100 billion, if not actually much more.