The coronavirus pandemic has led fraudsters to take advantage of lax controls, overwhelmed organizations, and the desire to quickly get money into the hands of those who need it most, says Sue Landauer, certified public accountant and partner at Forensic Accounting Services Group LLC.
“We’ve had a lot of fraud, and we’re still unraveling it all,” says Landauer, who addressed the CUNA Supervisory Committee and Internal Audit Conference. “Fraud tends to increase when a crisis occurs. They tend to prey on us.”
The most common types of fraud affecting credit unions during the pandemic involve unemployment benefits and Paycheck Protection Program (PPP) loans, she says.
During the pandemic, the government issued $630 billion in unemployment benefits. But nearly 10% of that—$63 billion—were fraudulent claims, Landauer says. About $565 million has been recovered.
The Financial Crimes Enforcement Network (FinCEN) released an advisory Oct. 13, 2020, alerting financial institutions to fraud related to unemployment claims:
In a nonpandemic setting, unemployment claims would be verified with company human resources departments.
However, the pandemic made it difficult to do this because many employees worked from home, Landauer says. Added to that was the sheer volume of claims coming in, which overwhelmed unemployment agencies and added to the inability to verify claims.
“The mandate was to get the money out to the people because they needed it,” Landauer says. “It was the perfect storm for this type of fraud.”
The CARES Act established PPP loans to assist businesses, but fraudsters found ways to take advantage of the program.
“We gave out these loans and, as long as they kept within [certain] parameters, the loans were forgiven by the government,” Landauer says. “There was a lot of money to be taken. This was another classic example of getting money into the hands of businesses quickly.”
Five examples of PPP loan fraud:
The Department of Justice announced the first federal accusation of PPP loan fraud on May 5, 2020. Two men allegedly applied for a PPP loan for $543,882 and claimed they had “dozens of employees” earning wages at four different businesses. But the businesses had no employees and weren’t operating prior to the start of pandemic, Landauer says.
As with unemployment fraud, Landauer says the pressure to process and disburse PPP loans quickly, the sheer number of applications, and failure to check payroll records played into the fraud.
“The world was at a standstill. The ways and means may have changed but the underlying frauds stayed the same,” she says. “We have to make sure the opportunities for fraud don’t exist and that controls are in place and functioning as designed.”
Financial institutions need to monitor accounts for unemployment fraud, says Sue Landauer, certified public accountant and partner with Forensic Accounting Services Group LLC. She cites six red flags that could signal fraud is taking place:
“Hopefully someone in your credit union got this advisory and set up some system controls to look for these red flags,” Landauer says.