State watchdog uncovers at least $7.2M in PPP fraud by state employees

[November 27, 2024]  By Amalia Huot-Marchand and Medill Illinois News Bureau

CHICAGO – A state watchdog has identified at least $7.2 million in fraudulent claims and more than 275 instances of misconduct by state employees accused of bilking a federal program designed to help businesses during the COVID-19 pandemic.

Since 2022, the Office of the Executive Inspector General has been investigating allegations that state employees fraudulently claimed Paycheck Protection Program loans for small businesses they didn’t disclose or entirely fabricated. State workers may engage in secondary employment, but only if it’s disclosed and permission is granted.

Employees from 13 different state agencies are involved in the fraud and have illegally taken these federal public funds, according to the OEIG, which is charged with investigating allegations of misconduct within state government. As of April, more than 60% of those implicated to date worked for the Illinois Department of Human Services, which operates mental health hospitals and developmental centers across the state.

The Paycheck Protection Program was an initiative established by the federal CARES Act in 2020. The Small Business Administration oversaw the implementation of the PPP to provide forgivable loans to cover payroll costs or other expenses for small businesses struggling during the COVID-19 pandemic. By October 2022, the program gave out $786 billion in loans and forgave 93% of them, according to the SBA.

Quickly, PPP loans led to “unprecedented fraud levels,” according to the SBA inspector general. Applicants self-certified their small business status and income. The OEIG is investigating only public employees who received more than approximately $20,000 from the program. To receive a $20,000 loan, businesses investigated by the OEIG typically declared $100,000 or more of net profit or gross income on the loan application.

The OEIG could not comment on whether this investigation was close to the end. Due to the sheer size of this fraud, investigations involve many different agencies. In May 2023, the Illinois legislature passed House Bill 3304, which allows criminal prosecutions for COVID-19 related fraud to start up to five years after authorities discover the fraud.

Rep. Fred Crespo, D-Hoffman Estates, who filed the bill, said most of the routine checks such as cross-referencing data on the loan forms with other agency databases were suspended for this program. A large issue was also the lack of personnel. According to Crespo, between April 2020 and April 2022, the fraud hotline of the SBA received millions of calls, of which a large number went unanswered.

“The vulnerabilities that led to the issues with PPP fraud weren’t really attributable to things at the state level. I would say that the issues had far more to do with the unaccountable nature of the program itself,” said State Rep. Mike Kelly, D-Chicago, who co-sponsored the bill.

IDHS employees have been heavily involved in the fraud. Since 2022, at least 43 employees have been discharged and 53 resigned before further action by management. In most cases on the OEIG website, the employees either lied about being self-employed or provided false information about their income.

Records show Deborah Reynolds-Jones was a human services caseworker who had been working for the IDHS since 2016. Reynolds-Jones told OEIG investigators that her barber recommended a company that could help her apply for the loan. She sent the company her personal information, including her Social Security number. The company filled out the form and simply asked her to sign. The information was inaccurate. Reynolds-Jones paid the company $3,000 for their service after she fraudulently received a $20,000 PPP loan.

Documents from OEIG cases. (Image by Amalia Huot-Marchand for Capitol News Illinois)

In another case, Shanythia Anderson admitted to the OEIG that she allowed a third party to apply for a PPP loan on her behalf and that the information provided was inaccurate. She began working as a mental health technician at IDHS in 2020. Anderson met a woman on Facebook, and she sent her personal records. In exchange for this service, the woman was to receive half of her loan, $10,000. Anderson worked at the Ludeman Development Center in Forest Park, where at least 36 other employees were accused of wrongdoing.

“It happens that in one particular location when you find out there are 37 people that have done this, they’ve obviously been talking to one another at work,” Gov. JB Pritzker said in a news conference last year. “Maybe somebody committed this kind of fraud and then tried to convince somebody else.”

IDHS declined to comment on why so many of its employees were implicated. IDHS is the largest public agency in Illinois, which could be one explanation. Crespo said that his best guess was that public employees had early access to the loan forms, so it was easier for them to understand how to file them, fraudulently or not.

“While the vast majority of IDHS’ roughly 14,000 State employees are hard-working people of strong character who work tirelessly to help the most vulnerable, it is deeply concerning any time an employee takes advantage of public programs,” IDHS said in a statement.

Other state agencies where the OEIG found multiple cases of PPP fraud included the Department of Corrections (31 cases), the Department of Children and Family Services (27), Pace (10) and the Department of Healthcare and Family Services (8).

The OEIG, through the Executive Ethics Commission, publishes reports of wrongdoings only if there is proof of employee misconduct. It can refer cases to the Attorney General if the fraud is significant enough. The Attorney General, specifically the Public Integrity Bureau, then conducts its own investigation in order to prosecute involved public employees.

Many cases mentioned third parties who applied for the PPP loan on behalf of an individual. The DOJ has gone after some of these third parties in Illinois, but it’s unclear that these are the same third parties that helped public employees.

In June, the a federal jury in Chicago convicted Hadi Isbaih on charges of wire fraud. According to the DOJ, Isbaih used his company, Flash Tax Service Inc., to file fraudulent loan applications on behalf of his clients. Isbaih would ask for an upfront fee to file the loan form, and when the client received the loan, he would charge an additional fee. A sentencing date has not yet been announced for Isbaih.

In September 2023, two Illinois businessmen were indicted on federal charges for obtaining $7.8 million in fraudulent business loans. According to the DOJ, they recruited self-employed individuals to provide personal information. With that, they would fill out loan forms with false data by inflating the individuals’ income, for example. They would then charge the clients up to $4,000 if the loan was successfully received. These two have not been convicted.

There are severe consequences for PPP fraud. Knowingly declaring false statements to a financial institution can result in up to 30 years in prison or a fine of up to $1 million. Wire fraud, the use of the Internet or electronic communication to carry out fraud, is a federal crime that can be punishable by up to 20 years in prison.

Amalia Huot-Marchand is a graduate student in journalism with Northwestern University’s Medill School of Journalism, Media, Integrated Marketing Communications, and a Fellow in its Medill Illinois News Bureau working in partnership with Capitol News Illinois.

Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.