For many small businesses, the Paycheck Protection Program (PPP) has been a lifeline during the pandemic. Nearly $525 billion in loans were distributed to 5.2 million companies in four months. With its recent reopening to applicants this month, PPP will once again provide much needed relief. However, it also creates challenges as the elements of PPP that quickly put funds in the hands of business owners last year, such as digital applications and minimal paperwork, resulted in fraud.
PPP Signals Opportunity for Criminals
The U.S. Department of Justice reports 75 percent of the approved PPP loans in 2020 were tied to fraud. Among the most egregious, a Florida man was charged after receiving $3.9 million in PPP loans and using it to buy himself, among other things, a Lamborghini sports car. The Small Business Administration’s fraud hotline received more than 100,000 complaints in 2020, a significant jump from just 742 complaints in 2019. Additionally, the U.S. Department of Justice has filed criminal charges against more than 80 individuals for suspected fraud in connection with applications for CARES Act relief, implicating nearly $127 million of the funding provided to businesses.
Because PPP loans are backed by the government, the real consequence for financial institutions, including community banks and lenders of all sizes, isn’t as much about the financial implications but instead, the reputation damage from being tied to fraudulent lending.
While a range of fraud schemes are used to exploit PPP, one of the most concerning is synthetic identity fraud (SIF) which, according to McKinsey, is the fastest growing type of financial crime in the U.S. A recent report by Aite Group revealed that among 47 financial institutions surveyed, 25% experienced an increase of 10% or more since the start of the pandemic. Our own research also underscores the SIF problem, with a 43% increase in SIF reported by respondents to the 8th Annual IDology Fraud Report.
How Better Know Your Customer (KYC) Can Help
During the first round of PPP, many synthetic identities were used to apply for loans, demonstrating the pervasiveness of SIF. With synthetic identities clearly being used to take advantage of government relief programs, it is critically important that community banks and lenders are prepared.
During the second round of PPP, all applications will be checked against the Do Not Pay list, which is obviously a wise requirement, but far from sufficient. To quickly issue PPP loans and prevent fraud, lenders should reconsider KYC measures. Placing a focus on strong KYC is not only best business practice, it also will help lenders prevent fraud and maintain integrity.
KYC and Identity Verification Best Practices
Deploying successful KYC measures starts with digital identity verification that streamlines the application process, improves the overall borrower experience and deters identity thieves, reducing the friction and risk often associated with the transfer of sensitive information. To easily and securely ensure a borrower is who they claim to be and provide a smooth experience while battling fraud, such as SIF, the identity verification process supporting KYC should include:
Multiple Layers. Detecting and preventing fraud while adhering to KYC and customer identification programs (CIP) requires more than basic identity matching—especially in today’s threat-heavy environment. Lenders need to employ multiple layers of identity attributes, including location, activity, device and email, that seamlessly work together to validate customers.
Data Customization and Transparency: The ability to customize and combine data attributes and rules for more granularity and sophistication is critical for reducing false positives, minimizing friction and adjusting to evolving fraud schemes. Control of the entire identity verification process and the flexibility to make and automatically deploy configuration changes, without requiring internal IT resources, are must-haves. To securely and quickly process PPP loan applicants, banks and lenders of all sizes need the ability to build a wide variety of industry and organization-specific identity attribute scenarios and make real-time, point-and-click adjustments to separate legitimate borrowers from fraud.
A Powerful Combination of Machine Learning (ML) and Human Intelligence. While ML is a useful advancement, it should be complimented with human intelligence. ML models should be based on a heritage of proven innovation and high-quality data from leading companies on the front lines of fraud. To be truly effective, ML needs to be supplemented with additional, high-touch layers of human intuition, proactive detection, fraud expertise and consortium intelligence from other financial services organizations, especially as COVID introduces novel fraud schemes that can fool pre-COVID identity proofing methodologies.
With the right approach to identity verification and a focus on KYC, banks and lenders can quickly approve borrowers for PPP loans while also preventing fraud. For more information on SIF, download Synthetic Identity Fraud: Fighting Back with Multi-Layered Solutions.