New York seeks to claw back $4.1M in COVID-19 grants from ineligible businesses and arts groups

More than 100 small businesses and for-profit arts groups across New York received thousands of dollars in state pandemic grants that they weren’t entitled to, auditors have found.

Now, the state agency which oversaw the relief program, Empire State Development, is trying to claw the money back.

Nearly $4.1 million was incorrectly awarded to 101 entities — including 17 on Long Island — from the $800 million COVID-19 Pandemic Small Business Recovery Grant Program, according to state Comptroller Thomas P. DiNapoli. 

The recipients weren’t entitled to grants because they’d already won federal aid via Restaurant Revitalization Fund grants or Paycheck Protection Program loans of more than $250,000, based on the results of an audit conducted by the Division of State Government Accountability, which is part of DiNapoli’s office.

“The improper awards occurred because ESD and the [program] administrator relied largely on attestations made by grant applicants that they had not received federal assistance — and did not develop procedures to verify whether this information was accurate,” the auditors wrote in their 25-page report.

Empire State Development officials have argued that under emergency conditions, the agency lacked a practical way to independently confirm eligibility for the state grants. They emphasized that only a small fraction of recipients was later flagged as questionable by the auditors.

The state sent $760 million to 40,842 small businesses and for-profit arts groups that were negatively impacted by the economic shutdown imposed by then-Gov. Andrew M. Cuomo in 2020 and 2021 to slow the coronavirus’ spread. 

Ninety-six percent of the money went to businesses with 10 or fewer employees, based on ESD records.

Long Island had 4,535 recipients who got a total of $110.6 million in grant funding, No. 2 among the state's 10 regions after New York City, records show.

The comptroller’s office denied Newsday’s request for the identities of the 17 ineligible grant recipients from Nassau and Suffolk counties. ESD said the information was only available via a Freedom of Information Law request, which Newsday submitted Sunday. The records are still pending. 

Help to bounce back from COVID-19

The recovery grant program, established in the 2021-22 state budget, was New York’s marquee pandemic relief initiative for employers. For some, the grants arrived in the nick of time as recipients had used up earlier help from the federal government or missed out on that relief and were hanging on by a thread, Newsday has reported.

The grant amounts ranged from $5,000 to $50,000 depending on the applicant’s gross receipts in 2019 before COVID-19 struck. The funds could be used for costs incurred between March 2020 and April 2021, including employee wages, rent or mortgage payments, insurance, utility bills, taxes and COVID-19 safety measures, such as masks, gloves and air filters.

While auditors blamed the improper awards on ESD's overreliance on self-reported statements from grant applicants and the lack of a reliable verification system for federal aid, ESD spokeswoman Emily Mijatovic said the 101 erroneously awarded grants represented just 0.25% of the total.

She said ESD and Lendistry, the Los Angeles-based financial services firm hired to run the grant program, did their best “during these emergency circumstances when there was no practical mechanism to independently verify” that applicants also had received federal funding.

So, ESD and Lendistry relied on eligibility declarations by the applicants, Mijatovic said.

She and others noted that data from the U.S. Small Business Administration about those receiving RRF grants and PPP loans was incomplete during the period when the state grants were given out, from June 2021 to January 2023. Recipients of RRF grants and PPP loans totaling more than $250,000 per applicant were ineligible for state relief. 

Lendistry, through a spokeswoman, declined to comment. 

Records show the firm was paid $34.7 million to administer the COVID grants.

Going after the bad actors

Empire State Development “has developed a plan to seek recoupment of program funds to businesses that are deemed ineligible,” Felisa Hochheiser, compliance director at ESD, wrote in response to the audit. 

She did not elaborate on the plan.

Eric Alexander, founder of the LI Main Street Alliance, a coalition of 45 local downtowns undergoing revitalization, said the ineligible grants represent half of one percent of the total funds distributed — much lower than the 17% fraud rate for the PPP and COVID-19 Economic Injury Disaster Loans program.

“You never want fraud of any kind, but this program provided far more benefits to local businesses than any kind of downside that we can see,” said Alexander, adding the five-year-old alliance publicized the grant program and helped business owners apply. “I’m glad the state is going after the bad actors.”

DiNapoli, the comptroller, told Newsday he doesn’t doubt that Empire State Development helped companies bounce back from the pandemic.

But he said the audit “revealed the need for better controls over where the money was going."

"Future programs should build in basic due diligence checks from the start without being a barrier to getting support to those in need," DiNapoli said.

 A lmost half of the program's beneficiaries were taxi, limousine and rideshare drivers. As a group, the 19,752 drivers received $184.5 million, or about one quarter of the total. Most were from Long Island and New York City, according to the audit.

“While rideshare drivers met program eligibility requirements," said the auditors, "we question whether the program intention was best served by allocating 48% of the awards made (totaling 24% of the total dollars spent) to one type of business.” 

The ESD spokeswoman said the agency “had no authority to unilaterally exclude them.”

By James T. Madore

james.madore@newsday.comJamesTMadore

James T. Madore writes about Long Island business news including the economy, development, and the relationship between government and business. He previously served as Albany bureau chief.