TheCorporateCounsel.net

The last time we checked in on the PPP loan program we found that the SBA had concluded that the level of fraud was apparently massive & that the loan forgiveness process was snarled in red tape. Now, bankrupt small business lender Kabbage, which was one of that program’s largest lenders, has agreed to pay up to $120 million to the federal government in order to resolve fraud allegations raised by the US Attorney for the District of Massachusetts. Here’s an excerpt from the US Attorney’s press release announcing the settlement:

The first settlement, which provides the United States with a claim for recovery of up to $63.2 million, resolves allegations that Kabbage systemically inflated tens of thousands of PPP loans, causing the SBA to guarantee and forgive loans in amounts that exceeded what borrowers were eligible to receive under program rules. As part of the settlement, KServicing Wind Down Corp. admitted and acknowledged that Kabbage double-counted state and local taxes paid by employees in the calculation of gross wages; failed to exclude annual compensation in excess of $100,000 per employee; and improperly calculated payments made by employers for leave and severance.

The United States alleged that Kabbage was aware of its errors as early as April 2020, yet Kabbage failed to remedy all incorrect loans that had already been disbursed and continued to approve additional loans with miscalculations. The resolution also provides for Kabbage to receive a $12.5 million credit for payments it previously returned to the SBA during the Department’s investigation of this alleged misconduct.

The second settlement, which provides the United States with a claim for recovery of up to $56.7 million, resolves allegations that Kabbage knowingly failed to implement appropriate fraud controls to comply with its PPP and BSA/AML obligations. In particular, the United States allege that Kabbage removed underwriting steps from its pre-PPP procedures in order to process a greater number of PPP loan applications and maximize processing fees.

The government further alleged that Kabbage knowingly set substandard fraud check thresholds despite knowledge of SBA’s concerns that fraudulent borrowers might seek to benefit from the PPP; relied on automated tools that were inadequate in identifying fraud; devoted insufficient personnel to conduct fraud reviews; discouraged its fraud reviewers from requesting information from borrowers to substantiate their loan requests; and submitted to the SBA thousands of PPP loan applications that were fraudulent or highly suspicious for fraud.

During the pandemic, we blogged about Kabbage’s problematic PPP loans to purported agricultural businesses located on Long Beach Island, NJ. In addition to being my summer vacation destination of choice, LBI has recently achieved notoriety for another summer resident’s regrettable outdoor decoration choices. Anyway, I can assure you that LBI has miles of beaches, and plenty of ice cream shops, seafood markets, restaurants and delis – but like most beach communities, it’s pretty devoid of agricultural businesses, unless the Wawa in Ship Bottom somehow counts.

– John Jenkins