‘The more you submit, the more we get paid’: How fintech fueled covid aid fraud

The allegations against Blueacorn and several other firms are laid out in a sprawling, roughly 120-page report released Thursday by the House Select Committee on the Coronavirus Crisis, a congressional watchdog tasked to oversee roughly $5 trillion in federal pandemic aid. The 18-month probe — spanning more than 83,000 pages of documents, and shared in advance with The Washington Post — contends there was rampant abuse among a set of companies known as fintechs, which jeopardized federal efforts to rescue the economy and siphoned off public funds for possible private gain.

Some of the companies involved had never before managed federal aid, the report found. At the height of the pandemic, they failed to hire the right staff to thwart fraud. They amassed major profits from fees generated from the loans — large and small, genuine and problematic — that they processed and reviewed. And they repeatedly escaped scrutiny from the Small Business Administration, putting billions of dollars at risk, the probe found.

The trouble began under the Trump administration, after Congress first authorized the Paycheck Protection Program (PPP) in 2020. The roughly $800 billion initiative saw the government disburse more than 11 million loans to companies at risk of shutting their doors for good, helping keep them afloat until the health emergency eased. But the money became a tempting target for malicious actors, who took advantage of lax rules — and inadequate oversight — to bilk the government for staggering sums.

Fintech companies including Blueacorn, Womply and Kabbage were supposed to serve as middlemen — helping applicants complete paperwork and processing their requests for aid on behalf of banks and other large financial institutions. In some cases, though, the digital firms instead became vectors for the worst waste, fraud and abuse, according to congressional investigators led by Rep. James E. Clyburn (D-S.C.), the panel’s chairman.

At Blueacorn, for example, loan reviewers tied to the company told the select committee they were pressured to “push through” PPP applications even if they seemed suspicious. The company was especially interested in processing high-dollar applications, the report stated, even creating a special internal “VIPPP” label to ensure the biggest borrowers — which carried the promise of great fees — could receive expedited treatment.

The approach may have cost the government, though House investigators could not compute a final sum. It also came at the expense of smaller borrowers arguably in the greatest need, according to the report. As one Blueacorn co-founder, Stephanie Hockridge, appeared to remark over the messaging service Slack about these applicants: “who f—ing cares.”

The Covid Money Trail

It was the largest burst of emergency spending in U.S. history: Two years, six laws and more than $5 trillion intended to break the deadly grip of the coronavirus pandemic. The money spared the U.S. economy from ruin and put vaccines into millions of arms, but it also invited unprecedented levels of fraud, abuse and opportunism.

In a yearlong investigation, The Washington Post is following the covid money trail to figure out what happened to all that cash.

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The company did not immediately respond to a request for comment. Hockridge also did not immediately respond. Reached by The Post, a contractor that worked with Blueacorn rejected the conclusions of the report.

“As today’s report details, many fintechs, while promising to help disburse billions of Paycheck Protection Program dollars to struggling small businesses efficiently and expeditiously, refused to take adequate steps to detect and prevent fraud despite their clear responsibility to safeguard taxpayer funds,” Clyburn said in a statement.

The allegations underscore the challenge that the U.S. government faced amid the worst economic crisis since the Great Depression. Totaling more than $5 trillion, the country’s generous covid aid helped rescue millions of families, workers and businesses from financial ruin, even as it emerged as a tempting target for grift large and small, The Post has found in its year-long investigation, the Covid Money Trail.

The losses have been especially stark at the SBA, an agency tasked at the height of the pandemic to administer about $1 trillion in loans and grants. As it rescued businesses, the agency systematically failed to take proper care of its funds, opening the door for criminals around the world to use stolen or false information to obtain limited pandemic aid.

Repeatedly, the SBA’s inspector general, Hannibal “Mike” Ware, has joined other federal watchdogs in needling the agency for its poor oversight. In one early estimate, Ware said there could be more than $4 billion in PPP-related fraud, adding the losses are likely to grow as scrutiny of the program continues.

Yet fintech companies presented a special challenge to PPP. The firms were seen as critical in expanding access to capital, particularly for smaller borrowers, which could not obtain easy help during the pandemic from larger traditional lenders such as banks. But some fintech start-ups had few, if any, preexisting relationships with needy businesses. And in their haste to come online, the companies may not have been as diligent in scrutinizing PPP applications, experts later discovered.

“The involvement of fintech lenders in the paycheck was definitely a double-edged sword,” said Nick Schwellenbach, a senior investigator at the Project On Government Oversight, a watchdog group. “A lot of fintechs, but not all, really exercised insufficient due diligence in vetting loan applicants, and as a result, are disproportionately represented in the loans that have been deemed fraudulent or potentially fraudulent.”

Congressional investigators last year came to identify six firms in particular — Blueacorn, BlueVine, Cross River Bank, Celtic Bank, Kabbage and Womply — that they believed were associated with potentially fraudulent loans. Their report released Thursday, issued after the committee requested an intricate series of records from these and other companies, shed new light on what Clyburn described as troubling business practices that have cost the government immensely.

At Kabbage, a fintech firm later acquired by American Express, the company’s own workers repeatedly shared concerns in private about fraud risks. In the earliest days of the pandemic loan program, an unnamed employee remarked to their supervisor in July 2020 — according to internal chat records later obtained by the House committee — their fear that the “level of fraud we’re reviewing is wildly underestimated.”

Kabbage, like many fintech companies, sought to streamline the process for small businesses to obtain PPP loans. It pitched potential customers on the premise that it had helped a wide array of firms — restaurants, retailers, shrimp boat operators and beekeepers, to name a few — obtain aid through the program even when big banks had stopped accepting new applicants. The company in 2020 said its efforts alone had helped save about 945,000 jobs.

But the committee said that senior officials at Kabbage seemed to miss obvious flags for fraud — incorrect tax documents, names and addresses that didn’t match on applications, identities that may have been stolen, and profit margins that didn’t make sense. Internally, its leaders appeared to dismiss the warning signs, too. Explaining its approach, a risk manager at Kabbage acknowledged in a separate exchange obtained by Congress that they took a more lax view on PPP lending because “the risk here is not ours — it is SBAs [sic] risk.”

Another Kabbage policy official put it more bluntly over email in September 2020, using a profanity to blast the SBA’s “rules that created the fraud.”

For Kabbage, the consequences became apparent in October 2020, after American Express acquired much of the company, leaving a portion of its remaining PPP loan portfolio to a new entity called KServicing. That company filed for bankruptcy two years later, as agents for KServicing said its outstanding PPP loans — roughly $1.3 billion — had become “overburdened” by ongoing disputes and open investigations.

KServicing did not immediately respond to a request for comment. It said in its October bankruptcy filing that it has “successfully serviced approximately 80 percent” of its PPP loans. It added that it “vigorously disputed” allegations of fraud, citing probes by the Justice Department and the work of the House’s select committee.

PPP did not just provide financial support to businesses facing a sudden drop in customers as the pandemic forced people to stay home. The law setting the program up also allowed major banks and other firms to collect fees based on the sizes of the loans they processed. Lenders then paid some of those fees to fintech companies, which helped recruit applicants and vet them for potential trouble.

In August 2021, researchers at the University of Texas at Austin painted a staggering picture of those earnings: They estimated that PPP appeared to generate about $38 billion in fees for lenders, about $8.6 billion of which ultimately went to fintech companies. The numbers led the report’s authors to conclude that the pandemic program “had the potential to be a profitable business” for its participants.

Before the pandemic, the fintech company Womply had supplied other businesses with marketing software. Then arrived PPP, which helped spur the company to put together what it branded as a “fast lane” service in February 2021 — a way to market, underwrite and vet PPP applications on behalf of major lenders.

The endeavor would prove profitable for Womply, which over the life of the program earned more than $2 billion in fees, lawmakers found. But officials at one lender that worked with Womply — in conversations with congressional investigators, detailed in the report — said it had earned that money even as it ignored “rampant fraud.”

That lender, a Florida-based company called Benworth, later indicated in an email that Womply had “placed our company in a very bad predicament due to the high likelihood of fraud” in its referred loans. Citing significant glitches in its systems to evaluate loans, another described Womply’s fraud-prevention efforts as “put together with duct tape and gum,” according to an email cited in the report.

The report alleges that Womply itself may have received federal funds improperly. Congressional investigators said the company in 2020 and 2021 obtained about $7 million in PPP aid. This September, however, the SBA determined Womply was ineligible to receive the aid — after the company requested to have its loans forgiven.

Womply’s chief executive, Toby Scammell, signed key loan documents seeking the government’s permission to waive its outstanding debts, according to the panel. Scammell, who previously pleaded guilty in 2014 to federal insider trading charges, ran his business’s stimulus fraud prevention efforts, investigators alleged.

The lawmakers’ report contends that Scammell later resisted providing key documents to the SBA and its inspector general in the course of their fraud investigations. Congressional aides also alleged that Womply transferred millions of PPP applicants’ tax and banking information to a new company, Solo Global, for unclear purposes.

Solo Global did not immediately respond to a request for comment.

For taxpayers, the risk that even larger sums of money may be lost to fraud remains great.

Under PPP, Congress allowed the SBA to forgive the loans of eligible borrowers provided they followed the rules, particularly by maintaining their payrolls. Lawmakers wanted to ensure the money could keep Americans employed — while sparing hard-hit small employers from debts that they might struggle later to repay.

By October, 93 percent of PPP recipients had some or all of their balances forgiven, according to the SBA’s data. But the high degree of forgiveness — and the lack of internal oversight — prompted the agency’s inspector general to warn in March that the government probably was “forgiving PPP loans for potentially fraudulent and ineligible applicants.”

“It’s pretty clear there are a lot of suspicious loans being forgiven,” said Sam Kruger, an assistant professor of finance at the University of Texas at Austin McCombs School of Business, who has studied the role of fintechs in pandemic lending.

The losses also have added to pressure on the Justice Department, which tapped Kevin Chambers this year to oversee the government’s work to find and prosecute pandemic-related crimes. This spring, federal prosecutors said they had brought charges and secured convictions involving more than $8 billion in misused covid funds, a significant portion of which includes PPP and other aid administered by the SBA.

On Thursday, Clyburn and his aides called on federal watchdogs to “conduct further investigation into these companies and pursue all appropriate remedies.” That could include Blueacorn, a firm founded by Nathan Reis, Hockridge and other entrepreneurs in 2020 to facilitate PPP loans. They advertised “free money” and loan approvals in “less than 30 seconds,” according to their marketing materials, drawing a flood of applicants. Reis did not immediately respond to a request for comment.

Over the life of the loan program, the company would process roughly $12.5 billion in PPP loans, a level of involvement in 2021 greater than even the giant multinational bank JPMorgan Chase, the report found. Blueacorn ultimately would reap more than $1 billion in taxpayer-funded fees, according to congressional investigators, who said the company invested few of those dollars into oversight while enabling potentially widespread abuse.

Working on behalf of its lending partners, Blueacorn was supposed to oversee fraud and identity verification and other borrower support. But company workers and contractors would later tell congressional investigators that they were ill-equipped for the task: One witness claimed they submitted 300 PPP loans to the SBA before they even received training.

“The more you submit, the more we get paid,” one worker said they were told by Blueacorn management.

In doing so, Blueacorn often prioritized the largest applicants, seemingly hoping to extract the most in taxpayer-funded fees, the report alleged. In a Slack message obtained by the committee and cited in the document, Hockridge at one point called loan reviewers’ attention to a “fire” — a $1.9 million loan that had been in the underwriting process for five days.

“I don’t need to tell you how much Blueacorn makes off of that loan alone,” she wrote.

Most of the fraud reviews ultimately fell to outside firms, the report found, including little-known enterprises such as Elev8 Advisors. The company, an Arizona-based firm led by Adam and Kristen Spencer, hired family members and friends with seemingly “no connection to the financial sector, and with no apparent experience in financial crime compliance, fraud prevention, or underwriting,” according to the probe.

In an unsigned statement, the company accused the House subcommittee of engaging in “unfair and misleading tactics,” promising a more fulsome rebuttal to come.

“This report represents an unfortunate politicization of an important function of our government,” the statement said. “Congress’ responsibilities to the constituents they were elected to represent does not include engineering misleading and disparaging headlines for political gains.”

The statement added that Elev8 Advisors “did not engage in any self-dealing and their own loans were completely appropriate and would pass muster in any objective review.”

The congressional report also alleged the Blueacorn founders, Reis and Hockridge, personally obtained about $300,000 in PPP loans, in ways that raised congressional investigators’ suspicions. In one application, for example, Reis indicated he was an African American veteran, contradicting information he submitted in the context of other PPP requests. The report claims the duo lived lavishly as a result of their enterprise, pointing to a video that showed Reis “showing off large amounts of cash in a bar.”