Organized crime gangs looted COVID-relief programs of billions, feds say

Criminal gangs in the United States and foreign countries have stolen billions of dollars from three federal programs that helped small businesses, nonprofits and workers to survive the COVID-19 pandemic, law enforcement officials told Congress on Tuesday.

Gang members illegally obtained business and personal information, such as Social Security numbers, email addresses and telephone numbers. They used the data to successfully apply for COVID-19 Economic Injury Disaster loans and grants, Paycheck Protection Program loans and Pandemic Unemployment Insurance payments, the officials said.

Together, the three programs distributed more than $2 trillion in 2020-21 in federal money and federally guaranteed bank loans, according to a report from the House Select Subcommittee on the Coronavirus Crisis.

“We have several ongoing investigations … that do involve transnational organized groups,” said Roy D. Dotson Jr., coordinator of pandemic fraud recovery for the U.S. Secret Service, during a two-hour hearing held by the subcommittee on Capitol Hill.  “We are still trying to ascertain the amount of fraud that has occurred and who has committed it,” he said.

Dotson cited the example of the Black Axe organization in Benin City, Nigeria, which he said is being prosecuted for “pandemic fraud.” He didn’t provide details.

While the full extent of the fraud won’t be known for years, Dotson and others said it’s most prevalent in the COVID-19 Economic Injury Disaster Loan (EIDL) and Pandemic Unemployment Insurance (PUI) programs.

On Long Island, Glen Cove physician Konstantinos “Dino” Zarkadas was sentenced in March to four years and three months in prison for stealing $3.8 million in EIDL and PPP money. He lied on 11 loan applications and then used the money to purchase fancy watches and a yacht. The case is the most serious of its kind against a local resident to date.

Separately, a group of current and former employees of JetBlue Airways was indicted one year ago for allegedly defrauding the EIDL program of more than $1 million.

And in December 2020, the owners of Victoria’s Nails & Spa, with locations in Hicksville, Smithtown and Valley Stream, were indicted for illegally receiving $7.8 million in PPP loans — which were repaid after the business’ bank accounts were frozen “due to suspicion of fraudulent activity,” according to a criminal complaint.

On Tuesday in Washington, Kevin Chambers, director of COVID-19 fraud enforcement in the U.S. Department of Justice, said the agency was establishing teams of prosecutors to investigate the involvement of organized crime.

“We will be focusing specifically on large-scale, COVID-related fraud perpetrated by criminal organizations and foreign actors,” he said in response to a question from Rep. James E. Clyburn (D-S.C.), the subcommittee’s chairman. “In the not too distance future, [the Department of Justice will be] standing up strike teams in selected locations … who will do nothing but prosecute this type of large-scale fraud.”

Among the three relief programs, EIDL has the highest percentage of projected fraud: up to $86 billion out of $350 billion in total COVID loan funds, or nearly 25%, according to the U.S. Small Business Administration’s Office of Inspector General.

EIDL loans were made by SBA using money from the U.S. Treasury. The loans are up to $2 million per applicant and come with interest rates of 3.75% for businesses and 2.75% for nonprofits. The term is up to 30 years.

SBA also oversaw the PPP, which consisted of loans made by banks and other private lenders. The loans are 100% forgivable, with the federal government repaying the lender if the borrower maintains its workforce and follows other regulations.

Of the $800 billion in PPP loans, up to $117 billion, or 15%, may be fraudulent, according to a University of Texas study.

In terms of PUI fraud, state labor departments overpaid $163 billion in jobless benefits, or about 19%, of the total $872.5 billion in payments, according to the U.S. Department of Labor's inspector general.

SBA's inspector general, Hannibal “Mike” Ware, told the subcommittee on Tuesday,   “Tens of billions of dollars have been identified by my office as potentially fraudulent … This was a massive theft of taxpayer funds.” 

He and others said the institutions responsible for pandemic relief — SBA, the Department of Treasury, banks and state labor departments — were pressured in 2020 by then-President Donald Trump and Congress to quickly distribute money to struggling businesses, nonprofits and workers as the coronavirus caused a recession.

Ware said SBA gave less scrutiny to COVID EIDL and PPP applications until late 2020, when some precautions were reinstituted. He also said Congress last year gave the agency access to Internal Revenue Service documents to verify applicant’s information. 

Ware and Michael Horowitz, who chairs a committee of inspector generals looking into pandemic fraud, said law enforcement needs time to build cases against EIDL and PPP fraudsters – and time is running out. The statute of limitations is five years.

Horowitz called for Congress to approve legislation that would extend the statute of limitations to 10 years. “Finding domestic fraud is a lot easier than finding overseas fraud,” he said.

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.