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Everything You Need to Know About EIDL Fraud

Everything You Need to Know About EIDL Fraud
Lauren Ward

Lauren Ward

Updated December 21, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Fraud in the Economic Injury Disaster Loans (EIDL) program is definitely making the news. This is because it’s estimated that the Small Business Administration (SBA) was conned out of billions of dollars in EIDL funds since the introduction of the CARES Act, intended to help people through pandemic hardship. Is it possible that you have been victimized by this crime? In short, yes. Grant fraud, loan fraud and phishing have spread far and wide.

What Is EIDL Fraud?

SBA EIDL fraud is when a borrower either lies about his or her income or knowingly provides false documentation to obtain an EIDL loan. It’s estimated that the SBA overpaid $4.5 billion in fraudulent EIDL claims through grants alone. Perhaps the worst part about EIDL fraud is that money was kept out of the hands of the people who may have needed it the most.  

Common Frauds and Scams

EIDL fraud investigation often revolves around small business owners lying about their company’s yearly revenue or about how many employees they have. There’s even been outright lying about the existence of the small business at all. Though the SBA is no longer administering any grants, what is now known as EIDL advance fraud may in fact be one of the most abused aspects of EIDL. This is because small business owners who applied for an EIDL loan could request an advance in the form of a grant from the SBA that did not have to be repaid. With an EIDL grant, businesses could receive up to $1,000 per employee up to a total of $10,000. 

How to Protect Yourself

The Inspector General has released tips for how to recognize criminals at work.

Scrutinize Emails

SBA only communicates from email addresses ending in @sba.gov. If you are being contacted by someone claiming to be from the SBA who is not using an official SBA email address, you should suspect fraud.

Refuse to Do Up Front Payment

If you are contacted by someone promising to get approval of an SBA loan, but requires any payment up front or offers a high interest bridge loan in the interim, suspect fraud.

Double-check Numbers and Logos

If you are in the process of applying for an SBA loan and receive email correspondence asking for PII, ensure that the referenced application number is consistent with the actual application number.  Look out for phishing attacks/scams utilizing the SBA logo. These may be attempts to obtain your personally identifiable information (PII),to obtain personal banking access, or to install ransomware/malware on your computer

Notable EIDL Fraud Cases

Specific details of EIDL loan fraud cases are beginning to stream in, with more information expected to become public knowledge as time goes by. While there haven’t been too many EIDL loan fraud arrests in proportion to the amount of fraudulent loans that were given out, this might not be the case for much longer. What follows are some examples.

Conspiring to Get Loans

 A Florida tax preparer was indicted in Pennsylvania for conspiring to obtain more than $7 million in EIDL loans, SBA loans, and Paycheck Protection Program (PPP) loans. Working with eight other individuals, he had the other people produce the necessary paperwork to make it seem as if they had functioning companies with active employees. He even took it a step further by creating “forgiveness plans” so it would appear that all of the money was being used for payroll expenses and thus meet the SBA’s requirements for PPP forgiveness.

Falsifying Information

 A Pennsylvania man in Monroe County was charged with $450,000 in COVID-relief fraud. The defendant obtained two EIDL loans totalling $300,000 and tried to obtain a third loan in the amount of $150,000. He is accused of falsifying financial information for two small businesses and is charged with:
  • Five counts of wire fraud
  • Three counts of illegal monetary transactions

Financing Luxuries

 A Long Island doctor pled guilty to using more than $3 million in illegally obtained EIDL and PPP funds to buy a yacht and other luxury items. He faces a large forfeiture, a $250,000 fine, and a maximum of 30 years in prison. Many of the funds he stole he claimed to have used for payroll purposes, such as the $1.75 million yacht, which he bought by making the check payable to a family member. 

Using Identity Theft

Seven individuals in Los Angeles were arrested in a multi-million PPP and EIDL loan fraud scheme. The leader of the ring was sentenced to 17 years in prison. Using a combination of identity theft and falsification of documents, the ring leader and his entourage are alleged to have obtained more than $20 million in EIDL and PPP funds.

Avoiding EIDL Fraud

It’s easy to avoid EIDL fraud. Be truthful about your business’s income and provide the proper documentation to support your application. Here are three tips to remaining compliant throughout the process. 

Know the Regulations

The SBA states very clearly the proper uses for EIDL loans. They are:
  • Working capital
  • Operating expenses, which include:
    • Rent
    • Utilities
    • Healthcare benefits
    • Fixed debt payments
    • Payroll
EIDL funds cannot be used for:
  • Refinancing debt
  • Buying capital assets
  • Purchasing new vehicles
  • Paying off old debt
  • New construction
Using funds for anything other than working capital or operating expenses is a form of EIDL loan fraud.

Rightfully Qualify

What is required to get an EIDL loan?  Your business or work situation must be classified as one of the following:
  • Cooperative
  • Employee Stock Ownership (ESOP)
  • Small business
  • Tribal small business 
  • Agricultural enterprise
  • Sole proprietor (with or without employees)
  • Independent contractor (with or without employees)
  • Nongovernmental nonprofit
Additionally, you may not have more than 500 employees and your business must be located in either a U.S. territory or one of the 50 U.S. states. All potential borrowers will be disqualified from receiving an EIDL loan if:
  • The business is engaged in illegal activities
  • The owner is a member of Congress
  • The business is a state, local, or municipal government entity
  • The business is associated with lobbying
  • More than ⅓ of its income is received from gambling
  • One of the owners is 60 days or more behind on child support
  • The business receives revenue related to live performances that are sexual in nature
An online EIDL calculator tool doesn’t exist, but you may be able to estimate how much you’ll receive based on your pre-COVID 19 revenue. 

Be Wary of Suspicious Communication

If anyone tries to obtain information about you or your employees, cease all communication. Any personal information that is needed from you should never come through unofficial formats. Don’t provide personal information via email or over the phone.  

Tips if You Are Concerned About EIDL Fraud

As a Victim

Identity theft related to EIDL loans is very real. If you know or suspect that you are a victim of EIDL identity theft, the SBA asks that you download its COVID-19 Economic Injury Disaster Loan and Identity Theft Letter. From here, you will also be asked to submit the SBA’s Declaration of Identity Theft Also consider putting a lock on your credit report. This prevents borrowers from being able to use your personal information to apply for credit.

As a Perpetrator

If you're afraid you may have committed EIDL fraud during an application, you may want to contact a lawyer as soon as possible. While it is up to the government to prove that you knowingly and willfully lied on your EIDL application, a lawyer may be able to  help with your defense.  If you’re concerned that you’ve misused funds, refer to the official uses of EIDL funds discussed above. The important thing is to keep track of how you’re using every dollar. Do this by:
  • Creating a bank account exclusively for all EIDL funds and accompanying transactions
  • Keeping detailed records of how you spend every dollar 
  • Using all funds for only approved expenses 

The Takeaway

 Be on the lookout for any attempts at fraud. If you’ve been denied access to an EIDL loan, EIDL reconsideration is possible for up to six months after receiving an adverse action letter. However, keep in mind that EIDL loans are only one of many small business loans on the market. In fact, there are quite a few options when it comes to emergency loans for businesses. Be on the lookout for any attempts at fraud. At Lantern Credit, not only can you quickly and easily shop around for different types of small business loans, but it only takes one application to get offers from multiple lenders seeking to work with you. 
Photo credit: iStock/PeopleImages
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC112267

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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