More ways businesses may regret getting stimulus loans

Simon Moss

If you thought getting a stimulus loan as a startup was hard, wait till you try to get it forgiven. Banks are only now starting to sort out the fine print on who won’t have to pay the money back and who will. It’s not going to be pretty. What are banks afraid of?

Let’s start with something fraud experts called “shedding.” The team the business has taken stimulus funds for can be removed and ghost payroll payments made, relying on whistleblower hotlines to be caught.

There’s also “employee stuffing,” where banks are left wondering exactly how many employees are in the firm? Are they consultants, do they have 1099 tax forms, do they actually exist? Did they ever? Even better if we can get an accountant involved in the scheme making sure the paperwork looks solid.

Another form of abuse is a “shuck and clean” operation where multiple distressed firms become prime targets for cash takeover by organized crime, giving criminal direct access to the financial system by buying distressed businesses at a cash discount. Desperate or conniving businesses can also engage in “cross-system abuse” where multiple banks have a relationship with one company. The business makes multiple applications for the same staff pool, and same receivables. This is all complicated by the sheer volume of applications, many of them new ones by legitimate companies finding it hard to get through diligence with their existing provider, and looking to move to other banks with quicker loan processes.

Finally there’s old fashioned identity theft, elder abuse and trafficking, which will be part of the mix, but will metastasize, supercharged by the money on the table.

Should I take the money?

Given the rules for sorting this out are being made more or less after the money has dropped into a business owner’s account, many small businesses and startups are sitting it out. Or they are taking the money and putting it aside in another bank until they know how the situation will unfold.

That doesn’t do their employees or the economy any good.

On one hand there is a panic to find a bank that is willing to give a stimulus loan. Consider shopping for a bank that can explain how they will measure the qualifications for forgiveness. Ask them what systems they have in place to do that, and where they have used those systems in the past, for money laundering or “Know Your Customer” rules for instance.

If you can get a loan through one of these banks, they are also more likely to be able to spare you the headaches later when they try to figure out if you are who you say you are, and you’ve done what you said you would do.

A free lunch

The prime attraction of the Paycheck Protection Program and the other stimulus programs that go along with it is the loans become grants if they’re used to protect workers or go toward other good things. It’s free money.

But that’s a lot of free money, and someone has to pay. Given the amount of fraud we know from past experience is hiding in the mess, it’s going to be hell on small businesses trying to reconfirm who they are, and that they’ve done what they said they would do.

More than two trillion dollars of U.S. stimulus loans have been given out, or is still going out. The Paycheck Protection Program is only part of that larger equation. The total is nearly 11 percent of the economy. The total stimulus will be closer to 27 percent of the GDP of the country. All debt, and most horribly exposed to outright theft.

Banks are on the hook if the government decides bankers have made mistakes in giving the money to the wrong people. Taxpayers are on the hook if the government does not hold banks to appropriate standards. That means everyone is looking at the businesses who have taken the loans, or are taking them now, and trying to figure out who they really are, and whether they will meet the loan requirements.

Banks have to find the bad loan needles in the largest stimulus haystack ever, without burning the whole thing down with a faulty due diligence process.

How the haystack burns

Too much due diligence, and business owners will feel they can never prove to a bank that they should be forgiven. Too little due diligence, and the bad loans can overwhelm the system and bring on a new financial crisis on top of the existing one.

Estimates of potential stimulus fraud currently range between $30 and $100 billion in the U.S. But the most logical comparison is the Great Recession’s TARP stimulus.

Bill Barofsky, who ran TARP, talked about 10 percent fraud being assumed within that stimulus package. Simply using this estimate the exposure is a quarter to half a trillion dollars of fraud once you add in all the ways this risk is amplified, like securitization and selling it to other financiers. For effect, that’s a quarter of a trillion potentially being stolen. And TARP was considered a well-run, well-understood stimulus program, focused on a reasonably small number of participants.

Making matters worse for small businesses, today a significant majority of the fraud will come from entities who were fellow pre-existing customers of the bank. After all, money laundering is already an $800 billion to $2 trillion business. Shell companies, stolen identities, opaque high-net-worth individuals who already have an institutionalized relationship will pivot to this new opportunity.

That means banks aren’t really looking for needles in a haystack. They’re trying to find needles in a huge and moving stack of needles. Financial criminals want to look the same as everyone else, want to be innocuous, hiding in the noise. They are exceptionally good at it, and this single reason is why most financial crime surveillance technology is so ham-strung by false positives. And the CARES Act has created an incredible amount of noise and opacity, or an environment to both the organized and the opportunistic criminal.

The first bank that will say yes to a small business may also be the bank that will put that business owner through a Kafkaesque nightmare later. Vague loan documents are a tell-tale sign of trouble. Does the bank show how they’ll check to make sure you’re likely to do what you say you’re going to do not just at the end of the loan period but through its life cycle?

To the extent possible, look for a bank that can tell what kind of needle you are. Making sure they know how to see you well now, and finding that in your loan documents can save you from heartache later. Here great, local relationship management is key.

It the bank knows a business personally, the face time will be worth it. Digital applications will, this time, take longer. Banks with strong community relationships should have an advantage. It sounds old fashioned, but a face-to-face meeting is often the key to giving pause fraudulent applications.


Simon Moss is CEO of Symphony AyasdiAI, an artificial intelligence software company serving financial services and other industries.