- DTN Headline News
PPP Loans Fueled Fraud From Fake Farms
By Chris Clayton
Friday, December 2, 2022 11:14AM CST

OMAHA (DTN) -- People set up fake farms around the country to secure Paycheck Protection Program (PPP) loans, funneling their loan applications through financial technology firms that collected billions in fees and disregarded red flags for fraudulent loans, a new congressional report cited.

Potato farms in Palm Beach, Florida, orange orchards in Minnesota, and cattle operations on a New Jersey pier were some of the fake farms that collected PPP money.

While hundreds of thousands of farms legitimately received aid through PPP loans in 2020 and 2021, the financial technology firms used by banks and other lenders to run through loan applications often failed to conduct simple due diligence. That opened up the program to a lot of fraud.

The fake farms were just a portion of the fraud alleged in the PPP loans in a report released Dec. 1 by the House Select Subcommittee on the Coronavirus Crisis. The committee's report examined how startup financial technology firms, dubbed "fintechs" approved a high volume of fraudulent loan applications with little vetting and in a lot of cases knew the loan applications were fake.

Set up to pay workers at small businesses during lockdowns or help keep businesses operating, more than 90% of PPP loans were forgiven.

During the height of the pandemic, the Small Business Administration approved more than 11.8 million loans for just under $800 billion, using more than 5,400 lenders in the process. In 2020 and 2021, "agriculture, forestry, fishing and hunting" businesses, all lumped together, accounted for 682,379 loans for just over $18.1 billion, or about 2.3% of total loan dollars in the PPP.

Farmers, foresters, etc., had significantly more loans approved in FY 2021 because Congress pushed SBA to include sole proprietor farmers and accept Schedule Fs on loan applications.

Banks turned over a lot of responsibility for loan applications to the Fintechs to handle the documents and vet them.

DTN reported in November 2020 about an Ohio family that created multiple fake farms generating hundreds of thousands of dollars in PPP loans by claiming to employ more than 180 people. The "farms" were instead listed at homes near Cleveland, Ohio.

FAKE FARMS IN ABSURD PLACES

A good chunk of the Select Subcommittee report confirms earlier reporting about fraudulent PPP loans from the news organization ProPublica. In May 2021, ProPublica reported about hundreds of PPP loans going to "fake farms in absurd places."

ProPublica noted one fintech firm called Kabbage approved hundreds of loans to fake farms. Rep. James Clyburn, D-South Carolina, cited ProPublica's work in a letter to Kabbage's CEO last year about fraudulent farm applications that included potato farms in Palm Beach, for instance. Clyburn cited some of the fraud "would have been obvious if even the bare minimum of due diligence had been conducted in the loan applications."

The report cited emails from Kabbage executives that showed they knew loan applications were fake, but "the risk here is not ours -- it is the SBA's risk" as well that the rules of the PPP created the fraud.

EASY TARGETS

SBA's Inspector General, testifying before Congress in October 2020, noted the agency granted more loans in 14 days than it would generate in 14 years, which opened up the risk for fraud.

The Select Subcommittee, in its 130-page report, found that many of the fintechs operated outside of the regulations covering traditional banks or lenders but "took billions in fees from taxpayers while becoming easy targets for those who sought to defraud the PPP."

The subcommittee report cites a high number of instances in which people fraudulently claimed to be farmers to receive PPP loans. In some instances, the "farm" ended up being an address of a single-family home in a residential neighborhood. One fake "beef cattle operation" had the address of a beachside residential property in New Jersey.

FRAUD RED FLAGS

Kabbage "overlooked significant red flags when it approved apparently fraudulent farm loans," the report cited. The report cited that "the improbable locations of the farms were only part of the story," as loans had a lot of other fraud red flags as well.

These fake farm applications often would end up with payroll calculations that came out to exactly what was needed to receive the maximum $20,833 loan amount allowed for a sole proprietor with one employee.

In one example, a company, "Deely Nuts" that claimed to be a tree-nut farm on a sand bar in New Jersey got a $20,833 loan. The application listed zero expenses for wages, labor or supplies "that would typically be required to operate a farm." The loan also listed a gross profit margin of 82% when the average gross margin for farms is about 13.6%, the Select Subcommittee noted.

The pattern used by Deely Nuts was similar to other fraudulent loans such as "Shaila Big Fresh Oranges," which claimed to have an orange grove in Minnesota and received $17,931. That loan application also listed no wages or labor expenses on its application and listed "an unusual gross margin of 84%." The grove address was a three-bedroom, single-family home.

Similar patterns existed for a variety of fraudulent applications. Internal emails at Kabbage indicate that a lot of the applications were confirmed but Kabbage failed to recover any of the loan funds.

Clyburn has called on federal regulators to pursue more investigations into fraud under PPP and further examine the roles of the fintechs in an effort to recover some of the fraudulent money lost.

The full report can be found at https://coronavirus.house.gov/…

See, "Aid Funds Went to Fake Farms," https://www.dtnpf.com/…

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN


blog iconDTN Blogs & Forums
Technically Speaking
Editorial Staff
Monday, December 5, 2022 8:19AM CST
Monday, December 5, 2022 8:19AM CST
Monday, November 28, 2022 9:02AM CST
Fundamentally Speaking
Joel Karlin
DTN Contributing Analyst
Friday, December 2, 2022 7:25AM CST
Wednesday, November 30, 2022 9:28AM CST
Tuesday, November 29, 2022 8:53AM CST
Minding Ag's Business
Katie Behlinger
Farm Business Editor
Monday, November 7, 2022 4:29PM CST
Friday, November 4, 2022 1:06PM CST
Friday, November 4, 2022 1:06PM CST
DTN Ag Weather Forum
Bryce Anderson
DTN Ag Meteorologist and DTN Analyst
Wednesday, December 7, 2022 10:21AM CST
Friday, December 2, 2022 8:15AM CST
Tuesday, November 29, 2022 9:56AM CST
DTN Production Blog
Pam Smith
Crops Technology Editor
Friday, November 25, 2022 8:40AM CST
Sunday, November 20, 2022 9:10AM CST
Sunday, November 20, 2022 9:10AM CST
Harrington's Sort & Cull
John Harrington
DTN Livestock Analyst
Monday, December 5, 2022 1:49PM CST
Monday, November 28, 2022 3:14PM CST
Monday, November 28, 2022 3:14PM CST
South America Calling
Editorial Staff
Thursday, December 1, 2022 3:56PM CST
Wednesday, November 23, 2022 2:18PM CST
Thursday, November 17, 2022 1:09PM CST
An Urban’s Rural View
Urban Lehner
Editor Emeritus
Thursday, December 1, 2022 4:51PM CST
Monday, November 21, 2022 11:38AM CST
Friday, November 11, 2022 4:44PM CST
Machinery Chatter
Dan Miller
Progressive Farmer Senior Editor
Monday, December 5, 2022 12:58PM CST
Monday, December 5, 2022 12:58PM CST
Monday, December 5, 2022 12:58PM CST
Canadian Markets
Cliff Jamieson
Canadian Grains Analyst
Wednesday, December 7, 2022 2:59PM CST
Tuesday, December 6, 2022 3:55PM CST
Tuesday, December 6, 2022 3:55PM CST
Editor’s Notebook
Greg D. Horstmeier
DTN Editor-in-Chief
Friday, November 25, 2022 2:35PM CST
Wednesday, November 2, 2022 11:48AM CST
Friday, September 23, 2022 2:18PM CST
 
Copyright DTN. All rights reserved. Disclaimer.
Powered By DTN