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.
Unemployment fraud
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:
Fictitious employer/employee fraud involves the creation of a fictitious company with fake employees claiming to have been laid off during the pandemic. Criminals filed false unemployment claims.
Employer/employee collusion takes place while the employee receives unemployment benefits while still receiving wages—often under the table—at a reduced rate. The employer is aware and part of the fraud.
Misrepresentation of income fraud is when someone returns to work and fails to report the income or claims higher wages than what they were previously earning.
Insider fraud occurs when state employees use their credentials to access or change unemployment insurance claims. In these cases, fraudsters approve unqualified applicants or improper payment amounts, or deposit funds in accounts not on the application.
Identity-related fraud takes place when criminals use stolen or fake identification to file 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.”
PPP loan 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:
Falsely claiming the company has fewer than 500 employees.
Falsely claiming the coronavirus crisis hurt the business.
Inflating the average monthly payroll costs to get more loan money.
Falsely claiming all of the loan money was used for qualified expenses (payroll, rent, mortgage, utilities) to obtain loan forgiveness.
Not disclosing when employees left, thereby reducing payroll expenses, to get more of the loan forgiven.
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.”
Unemployment fraud: 6 red flags
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:
Out-of-state unemployment insurance payments.
Multiple state unemployment insurance claims coming into the account.
Payments for different names than the accountholder.
Unemployment and direct deposits occurring simultaneously.
A high number of unemployment claims deposited into the same account.
Deposits that are quickly withdrawn or transferred.
“Hopefully someone in your credit union got this advisory and set up some system controls to look for these red flags,” Landauer says.
Credit Union Magazine’s Summer 2023 issue highlights the lending outlook for the rest of the year, how credit unions leverage fintech companies to boost digital lending, the power of lending partnerships, common Bank Secrecy Act violations, and the shift board members must make when becoming chair.
