Now that we have surpassed the 2-year mark of lockdowns, shutdowns, and letdowns – what was expected by forensic accountants on day one has become painfully clear. Ultimately, based on my yet-to-be-trademarked 3-level fraud chart, the outcome was inevitable: where there is money, there is potentially fraud; where there is economic uncertainty, there is probably fraud; and where there is government funding, there is definitely fraud.
Throughout the United States, a major focus is now underway on fraudsters who descended like vultures to circle billions in COVID-19 relief funding meant for legitimate and suffering businesses. While the government, like most businesses, initially believed that adequate controls and safeguards were in place to counteract fraud – before the ink was even dry on the CARES Act signed in March 2020, the sheer volume of dollars at stake was too much of a temptation and opportunity for experienced schemers and first-time offenders alike. Two years later, the Department of Justice is acting on allegations of fraud connected to more than $8 billion in nationwide pandemic relief, relief money originating from taxpayers.
While the average person is not affected by losses passed down to the customers of defrauded companies with which they have no interaction – this money came directly from all of our pockets and will ultimately affect us all in years to come.
While each case is different, all the pandemic fraud related to government programs involves either:
- Identity theft/fraud;
- Bank fraud;
- Wire fraud and/or;
- Money laundering
In Phoenix, multiple defendants received millions cumulatively in kickbacks through co-conspiring businesses. They allegedly assisted in obtaining Paycheck Protection Program (PPP) loans by fraudulently stating gross earnings, costs of wages, and number of employees. Fraudulent PPP cases have been rampant in every state, with more identified each day.
Within businesses and non-profit organizations, respondents to the Association of Certified Fraud Examiners’ Occupational Fraud 2022: A Report to the Nations cited the following as the five most prevalent factors in their investigations (in order of significance):
- Shift to Remote Working
- Internal Control Changes
- Organizational Staffing Changes
- Operational Process Changes
- Changes to Strategic Priorities
The suddenness of office lockdowns and the unanticipated shift to remote working left businesses open to opportunities for fraud. Businesses had to scramble to keep some semblance of their internal controls to operate in a remote environment. Often there were exceptions to segregation of duties or changes in authorized system access protocols in a remote environment given out to keep operations, billings, disbursements, and payroll systems functioning.
The pandemic ultimately lit up the Fraud Triangle like a Christmas tree:
- Opportunity was created through the shifts to remote working, reactive changes in internal controls, and seemingly unlimited access to government programs and relief.
- Incentives abounded based upon two-income households suddenly became one or zero-income depending on the industry and whether you were deemed “essential” during lockdowns, businesses seeking PPP and other loan sources to keep their doors open, and the reporting pressures to meet financial statement and investor expectations in a panicked and uncertain economy.
- Rationalization became easier when people were faced with the possibility of losing their jobs, fears of the unknown future, and justifying their actions in defrauding government relief programs by the “everyone is doing it” or “my taxes funded that program” mantras.
Ultimately, we now know for a certainty that the pandemic created an environment ripe for fraud and that the total economic effects of COVID-19 are yet to be over. Since fraud by nature takes time to be identified and investigated, the number of frauds uncovered and the ultimate dollar effect of cases related to the pandemic will continue to grow and be quantified in months and, most likely, years to come.