Federal government struggles to understand scope of pandemic fraud three years into COVID-19
Sarah Westwood
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By the time Richard Ayvazyan, Marietta Terabelian, and Tamara Dadyan were arrested last year in Montenegro, a small enclave of wealth in Europe, they had already burned through millions of dollars they stole from pandemic aid programs for small businesses.
The three California residents lived lavishly. They bought diamonds, gold coins, three luxury houses, and a Harley-Davidson motorcycle.
CITIES GRAPPLE WITH MAJOR CHANGES THREE YEARS AFTER PANDEMIC
Ayvayzan bought a $35,000 Rolex. Terabelian and Dadyan, two of the women in the eight-person fraud ring, got designer handbags and fancy clothes.
They had already faced more than a year of law enforcement scrutiny before their arrests in Europe, where they’d fled to avoid prison.
Federal agents raided one of the high-end homes in a suburb outside Los Angeles that Ayvazyan and Terabelian, his wife, had purchased with stolen pandemic aid in November 2020. Terabelian ran out the home’s back door as agents burst in and was seen throwing a grocery bag into the bushes as she tried to escape; the law enforcement agents discovered $450,000 of cash inside it.
Ayvazyan and Terabelian allegedly cut off their ankle monitors after the raid and headed for Montenegro.
The Los Angeles fraud ring made a particularly brazen show of a type of fraud that riddled pandemic programs for small businesses.
Eight individuals involved in that scheme created fake businesses and forged payroll records, tax documents, and employee identities to apply for loans Congress intended to help small businesses stay afloat during lockdowns. In all, the California residents secured 151 small business loans, stealing $18 million.
The ability for fraudsters to exaggerate the size of their businesses, or fabricate them all together, was built into two programs Congress created in 2020 to blunt the impact of the pandemic.
One, the Economic Injury Disaster Loan program, was meant to help businesses withstand revenue loss, while the other, the Paycheck Protection Program, was meant to help businesses keep employees on the payroll.
Congress gave the Small Business Administration $377 billion to implement them. And the federal government is only just now beginning to understand how much money vanished due to fraud.
“These programs, these were the biggest welfare programs put in place since the New Deal, and they were put in place with weeks of development — not even weeks of debate,” Joel Griffith, a research fellow in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation, told the Washington Examiner. “These were just shoved through Congress as quickly as possible.”
The urgency of the situation contributed significantly to the prevalence of fraud.
“You had just a massive number; you had millions of entities that were applying for these government resources to ostensibly keep millions and millions of people on their payroll,” Griffith added. “The Department of Labor couldn’t expand their staff tenfold … it was not as if they had time to staff up.”
With limited staff and an unprecedented avalanche of applications, federal officials did virtually nothing to verify the identities of individuals and businesses seeking aid during the earliest months of the programs.
“Word spread very quickly that this was being done in an expedited manner, and people were getting away with it,” Griffith said.
Both the business aid and enhanced unemployment benefits to individuals drew rampant fraud believed to be on the scale of hundreds of billions of dollars. Still, the small business loan provided more lucrative opportunities for thieves.
The Pandemic Response Accountability Committee, a panel of 20 inspectors general from across the government tasked with overseeing pandemic aid, announced in January that its investigators identified nearly 70,000 “questionable” Social Security numbers that were used to obtain more than $5 billion from the Small Business Administration’s two pandemic loan programs, raising the prospect of massive fraud.
Some estimates place the amount of small business aid lost to fraud as high as $80 billion.
The Paycheck Protection Program, a relief fund designed to help businesses keep staff on the payroll during lockdowns with forgivable loans, was especially vulnerable to abuse during the early months of the pandemic. That’s because the federal government did not take even basic steps to verify borrowers’ claims in 2020.
“The initial implementation of PPP prioritized the speed of disbursing funds rather than the scrutiny of applicant eligibility, a trade-off that contributed to widespread fraud,” the pandemic watchdog committee wrote in a report published in January.
Small Business Administration officials did not even check applicants against an existing “Do Not Pay” list maintained by the Treasury Department to help verify potential recipients of federal money.
Some fraudsters barely attempted to conceal their work.
One woman in Louisiana, for example, applied for dozens of small business loans through PPP using the same name of the fake business she had invented, Natural Hair Afro LLC, according to prosecutors. Investigators caught wind of the case when they realized 110 small businesses in the small town of Thibodeaux, Louisiana, had all requested loans, and all of those businesses had the same name and forged documents on file.
Pandemic unemployment insurance programs also contained weaknesses that allowed for theft.
The Department of Labor’s inspector general testified last year that at least 1 out of every 5 dollars paid out through pandemic unemployment programs — around $163 billion — went to fraud or waste, and noted that based on the watchdog office’s work up to that point, the actual amount of money lost “was likely higher” than the 19% estimate.
In some states, officials found evidence that it was. California may have lost as much as 27% of the pandemic jobless benefits it paid in 2020 to theft.
Enterprising fraudsters used a number of tactics to cash in on the expanded jobless benefits. Some applied for the money in multiple states; others stole the identities of people, both dead and living.
The incentives to commit fraud were so strong that even some officials tasked with overseeing the distribution of benefits were tempted to siphon off a larger portion of the free-flowing funds.
In Michigan, for example, a contractor working with the state’s unemployment insurance agency used her access to the agency’s computer system to approve fake unemployment claims submitted by friends and other people they recruited.
In exchange for kickbacks, she doled out pandemic unemployment cash to people who either invented nonexistent applicants or stole identities from real people to file claims. According to the Justice Department, she now owes the state more than $300,000.
Some of the money squandered through COVID-19 unemployment programs disappeared not because of fraud but due to mismanagement.
Before the House last week, the Labor Department’s inspector general testified that guidance attached to pandemic unemployment programs released states from an obligation to chase down billions of dollars they paid out improperly.
The government watchdog said that the Labor Department gave “guidance to states on waiving the recovery of overpayments when the claimant was without fault and if the repayment would be contrary to equity and good conscience.”
“As of January 22, 2023, states reported waiving $4.7 billion in pandemic-related overpayments,” the inspector general testified.
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Still, the scale of pandemic aid fraud and waste is difficult to capture. Not only does the federal government not know where much of its COVID-19 money has gone, but it also has no way to track how much has disappeared.
President Joe Biden has pushed to step up efforts to recover some of the money lost to fraud. Earlier this month, Biden asked Congress to appropriate $1.6 billion specifically for fraud recovery work.