Prosecutors struggle to catch up to a tidal wave of pandemic fraud

President Joe Biden at the White House on Tuesday, Aug. 9, 2022. Biden signed bills extending the statute of limitations for some pandemic-related fraud to 10 years. (Pete Marovich/The New York Times)

In the midst of the pandemic, the U.S. government gave unemployment benefits to the incarcerated, the imaginary and the dead. It sent money to “farms” that turned out to be front yards. It paid people who were on the government’s “Do Not Pay List.” It gave loans to 342 people who said their name was “N/A.”

As the coronavirus shuttered businesses and forced people out of work, the federal government sent a flood of relief money into programs aimed at helping the newly unemployed and bolstering the economy. That included $3.1 trillion that former President Donald Trump approved in 2020, followed by a $1.9 trillion package signed into law in 2021 by President Joe Biden.

But those dollars came with few strings and minimal oversight. The result: one of the largest frauds in American history, with billions of dollars stolen by thousands of people, including at least one amateur who boasted of his criminal activity on YouTube.

Now, prosecutors are trying to catch up.

There are currently 500 people working on pandemic-fraud cases across the offices of 21 inspectors general, plus investigators from the FBI, the Secret Service, the Postal Inspection Service and the IRS.

The federal government has already charged 1,500 people with defrauding pandemic-aid programs, and more than 450 people have been convicted so far. But those figures are dwarfed by the mountain of tips and leads that investigators still have to chase.

Agents in the Labor Department’s inspector general’s office have 39,000 investigations going. About 50 agents in a Small Business Administration office are sorting through 2 million potentially fraudulent loan applications.

Officials already concede that the sheer number of cases means that some small-dollar thefts may never be prosecuted. This month, Biden signed bills extending the statute of limitations for some pandemic-related fraud to 10 years from five, a move aimed at giving the government more time to pursue cases. “My message to those cheats out there is this: You can’t hide. We’re going to find you,” Biden said during the signing at the White House.

Investigators say they hope the extra time will allow them to ensure that those who defrauded the government are ultimately punished, restoring a deterrent that had vanished in a flood of lies and money.

“There are years and years and years of work ahead of us,” said Kevin Chambers, the Department of Justice’s chief pandemic prosecutor. “I’m confident that we’ll be using every last day of those 10 years.”

The federal government provided about $5 trillion in relief money in three separate legislative packages — an enormous sum that is credited with reducing poverty and saving the country from a prolonged, painful recession.

But investigators say that Congress, in its haste to get money out the door, devised all three packages with the same flaw: relying on the honor system.

For example, an expanded unemployment benefit gave workers an extra $600 per week in federal jobless funds on top of what they received from their state. The program was funded by the federal government but administered by states, which often had loose rules around qualifying. Applicants did not need to provide proof they had lost income because of COVID-19; they simply had to swear it was true.

Also read: Health, nutrition, employment: The ground reality of social welfare schemes

A similar we’ll-take-your-word-for-it approach was used in two loan programs run by the Small Business Administration.

They were the Paycheck Protection Program, in which the government guaranteed loans made by private lenders, and the Economic Injury Disaster Loan program, in which the government itself gave out loans and smaller advance grants that did not have to be repaid. In both, the government trusted businesses to self-certify that they met key requirements.

Both the Labor Department and the Small Business Administration said that they had tried to screen those claims — and that they did reject billions of dollars’ worth of applications that did not make sense. But that was not enough.

In some cases, the programs missed schemes that were comically easy to spot: In one instance, 29 states paid unemployment benefits to the same person. In another, a Postal Service employee got an $82,900 loan for a business called “U.S. Postal Services.” Another individual got 10 loans for 10 nonexistent bathroom-renovation businesses, using the email address of a burrito shop.

In the Paycheck Protection Program, private banks were supposed to help with the screening since in theory they were dealing with customers they already knew. But that left out many small businesses, and the government allowed online lenders to enter the program. This year, University of Texas researchers found that some of those “fintech” lenders appeared less diligent about catching fraud.

In some corners of the internet, schemes to defraud were discussed in chat rooms and YouTube videos, where scammers offered to help for a cut of the proceeds. Some used the money on necessities, such as mortgage bills or car payments. But many seemed to act out of opportunism and greed, splurging on a yacht, a mansion, a $38,000 Rolex or a $57,000 Pokemon trading card.

Vinath Oudomsine bought the Pokemon card in January 2021, after receiving a loan from the Small Business Administration for a nonexistent business. He pleaded guilty in October to defrauding the loan program, leaving the U.S. government responsible for selling the card.

Pandemic fraud became such an open secret that it ceased to be much of a secret at all. In September 2020, a California rapper named Fontrell Antonio Baines, who performs as Nuke Bizzle, posted a music video on YouTube, bragging in detail about how he had gotten rich by submitting false unemployment claims. His song was called “EDD,” after California’s Employment Development Department, which paid the benefits.

All three of those programs are now over. There is no official estimate for the amount of money that was stolen from them — or from pandemic-relief programs in general. The Justice Department has charged people with about $1 billion in fraud so far, and is investigating other cases involving $6 billion more, investigators said.

But other reports have suggested the real number could be much higher. One official said the total of “improper” unemployment payments could be more than $163 billion, as first reported by The Washington Post. In the Economic Injury Disaster Loan program, a watchdog found that $58 billion had been paid to companies that shared the same addresses, phone numbers, bank accounts or other data as other applicants — a sign of potential fraud.

“It’s clear there’s tens of billions in fraud,” said Michael Horowitz, chairman of the Pandemic Response Accountability Committee, which includes 21 agency inspectors general working on fraud cases. “Would it surprise me if it exceeded $100 billion? No.”

The effort to catch fraudsters began as soon as the money started flowing, and the first person was charged with benefit fraud in May 2020. But investigators were quickly deluged with tips at a scale they had never dealt with before. The Small Business Administration’s fraud hotline — which had previously received 800 calls a year — got 148,000 in the first year of the pandemic. The Small Business Administration sent its inspector general 2 million loan applications to check for potential identity theft. At the Department of Labor, the inspector general’s office has 39,000 cases of suspected unemployment fraud, a 1,000% increase from pre-pandemic levels.

But prosecutors face a key disadvantage: While fraud takes minutes, investigations take months and prosecutions take even longer.

Baines, who detailed his jobless benefit scheme on YouTube, was arrested in September 2020 when Las Vegas police found other people’s unemployment-benefit cards in his car. Baines pleaded guilty to mail fraud last month. His attorneys declined to comment.

Hannibal Ware, the Small Business Administration’s inspector general, said his office has tried to focus on cases involving large thefts, career criminals or ringleaders who organized a fraud operation.

“Only about 50 working field agents, right? So how do I take one of my agents off of a $20 million case to work a $10,000 case?” said Ware, who is known as Mike. “Because they will tell me, ‘Mike, the work is the same.’”

That has allowed many individuals who took advantage of government programs to go unpunished. Despite ample evidence of people fraudulently obtaining $10,000 advance grants, Ware’s office has not sought charges for cases involving only a single grant, falsely obtained. It would cost more than $10,000 just to investigate each one.

In all, that program awarded 3.9 million loans totaling about $389 billion, on top of $27 billion in grants that did not have to be repaid, according to the Small Business Administration. Many of the allegations of fraud in the grants program date to the first weeks of the pandemic, when the government gave out 5.8 million advance grants worth $19.7 billion in just over 100 days. In that program, fraud was easy to pull off, according to a government watchdog, which cited numerous loans given to businesses that were ineligible for funding.

Biden administration officials say they are trying to prepare for the next disaster, seeking to build a system that would quickly check applications for signs of identity theft.

“Criminal syndicates are going to look for weak links at moments of crisis to attack us,” said Gene Sperling, the White House coordinator for pandemic aid. He said the White House now aims to build a continuing system that would detect identity theft quickly in applications for aid. “The right time to start building a stronger system to prevent identity theft is now, not in the middle of the next serious crisis.”

©2019 New York Times News Service