Fraud Deconstructed Case Study: Fraud ring sentenced for COVID-19 relief scheme

To help individuals, businesses, and government organizations cope with pandemic challenges, the U.S. government dedicated trillions of dollars of support through programs under the Coronavirus, Aid, Relief, and Economic Security (CARES) Act—but the speed at which relief programs were rolled out lead to increased opportunities to defraud the system.

Using synthetic identities and forged documents, an eight-person #fraud ring committed approximately 150 fraudulent loan applications and sought to steal millions in COVID-19 relief funds.

What happened?

The fraudsters took advantage of the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL)—two programs under the CARES Act. They misappropriated over US$20 million in COVID-19 relief funds by falsifying legal documents.

They used the embezzled funds to purchase luxury homes in California, gold coins, diamonds and jewelry, luxury goods, imported fine goods, and a Harley-Davidson motorcycle.

How did the fraudsters commit the crime?

Three main factors created opportunities for the fraud to take place:

1. Disaster recovery funds are vast in scope, often put together quickly, and focus on short-term solutions. To reach those in need quicky, the system relies (at least in part) on the honour system.
2. There was poor investigative due diligence over the identifications used in the loan application process.
3. California’s loan application system did not have a cross-matching function to verify the identities of individuals. This allowed for the exploitation of fake identities.

What was the outcome?

The fraud ring was busted in 2020, when one of the perpetrators was stopped at a Miami border crossing and found to be in possession of contraband IDs and legal documents.?

Among the numerous charges laid against the group are:

• Wire and #BankFraud
• Aggravated identity theft
• #MoneyLaundering

In November 2021, the fraudsters received prison sentences ranging between 10 months to 17 years or required to serve probation, depending on the crime for which they were convicted. They also had to forfeit their bank accounts, jewelry, watches, gold coins, and three residential properties.

Several of the perpetrators vanished before serving prison time and remain unaccounted for.

How could this have been prevented?

This is a classic case of white-collar crime that could have easily been prevented with adequate controls and policies in place. A major limitation was that California’s Economic Development Department (EDD), responsible for administering the state’s unemployment insurance program, severely lacked appropriate internal controls to address fraud.

Key policies that could have helped the EDD maintain a robust set of safeguards against fraud include:

1.???Performing regular control reviews

2.???Conducting regular internal audits

3.???Implementing a whistleblower program

Learn more about this fraud incident in our full case study on bdo.ca