Felon on home arrest used business to fraudulently apply for pandemic relief

[March 01, 2023]  By Brett Rowland | The Center Square

(The Center Square) – A convicted felon who stole more than $400,000 from federal pandemic relief programs while serving a sentence for tax fraud and identity theft highlights what officials have said were lax controls on billions of dollars in aid given out in response to the pandemic.

Carlos Smith, 58, of Park Forest, Illinois, was sentenced this week to four years in prison for the pandemic fraud as part of an agreement with federal prosecutors.

Smith had been released from prison and was serving out the end of his five-year sentence under home confinement when he started applying for money from the Paycheck Protection Program and the Small Business Administration's Economic Injury Disaster Loan program, according to court documents.

In 2016, Smith entered a plea agreement for filing false income tax returns and aggravated identity theft. In that case, Smith used his company, CLS Financial Services Inc., to get names, social security numbers and other personal information from people seeking help with credit repair or setting up credit card processing programs for businesses. In other cases, he got names and personal information from an unnamed person who worked for the Board of Education for the City of Chicago, according to court records. From 2011 to 2014, he used that information to file false tax returns and pocket the refunds. In all, he filed 92 false income tax returns to get more than $1 million in tax refunds and he caused the Internal Revenue Service to issue $633,884 in fraudulent refunds, court records show.

In April 2020, after the pandemic hit, he used the same company, CLS Financial Services Inc., to apply for an Economic Injury Disaster Loan from the SBA. On the loan application, Smith claimed CLS Financial Services Inc. had two employees and gross revenue of $1.8 million in the prior year. But the company had no employees and no revenue. In July 2020, he used CLS Financial Services Inc. to apply for a PPP loan claiming he had 61 employees. Prosecutors said the company "had no ongoing operations, employees, or payroll" because Smith was in federal prison. In all, he got $421,900 in pandemic aid. In the PPP application, Smith also lied about his criminal history and submitted fake tax documents, prosecutors said.

The three biggest pandemic relief programs – the Paycheck Protection Program, the Economic Injury Disaster Loan and the unemployment insurance program – "have shown to be highly susceptible to fraud," Michael Horowitz, chairman of the Pandemic Response Accountability Committee, told federal lawmakers earlier this month. Those three programs account for just under $2 trillion in pandemic spending.

The federal government administered both the Paycheck Protection Program and Economic Injury Disaster Loan.

Horowitz said some fraud could have been stopped by simply checking if the applicant was a legal entity that existed.

"Was it from an IP address coming from overseas?" he said. "Did names, dates of birth and social security numbers match? That's an easy check. Were they on the Do-Not-Pay list? There were multiple steps that could have been taken in many of these instances that could have at a minimum hit the pause button and take a second look to make sure they were eligible."

As part of Smith's latest plea deal with prosecutors, he'll have to make restitution. In addition, he agreed not to conduct any business under CLS Financial Services Inc. A judge further ordered that he "refrain from tax preparation, fiduciary responsibility, telemarketing, direct mail or advertising, campaigns for businesses, and access to credit cards numbers, debit card numbers, social security numbers, or bank accounts" not in his name during his three years of supervised release after serving his prison sentence.

Smith's attorney did not respond to an email seeking comment.

Brett Rowland is an award-winning journalist who has worked as an editor and reporter in newsrooms in Illinois and Wisconsin. He is an investigative reporter for The Center Square.