How KYC in Banking Can Help Fight PPP Loan Fraud

Leor Melamedov

The Payment Protection Program (PPP), part of the $2 trillion Cares Act, provided desperately needed funds to keep small businesses afloat during the coronavirus pandemic. In exchange for keeping tens of millions of Americans on the payroll, these loans are being forgiven.

Yet the very strengths that allowed these funds to be deployed so quickly — minimal paperwork, online loan applications — have emboldened fraudsters to exploit the system.

But this doesn’t mean that the next economic relief program must revert to slow, paperwork-heavy processes. Banks that employ digital methods of KYC can beat the fraudsters while still quickly getting money into the pockets of law-abiding citizens.

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How Fraudsters Exploited the PPP Loan Process

With so many Americans on the brink of getting furloughed or laid off due to the economic crisis, it was necessary to get loans into the hands of small business owners quickly. That’s why the government allowed more agile web-based companies to arrange many loans.

Unfortunately, it turns out that fintech companies processed 75% of the approved PPP loans that were ultimately tied to fraud, according to the U.S. Department of Justice. This is shocking when you consider that fintechs (and banks that relied on fintech technology) composed just 15% of PPP loans processed overall.

In a great deal of these cases, a mere Google search or look into state records would have revealed that the applicant’s business didn’t exist. Normally, governmental bodies would penalize the financial institutions for approving fraudulent loans due to faulty KYC.

Under these unusual circumstances, though, fintechs and the banks that use them are off the hook for losses. Instead, taxpayers could carry the burden of fraud.

The fact that banks and lenders aren’t currently being held accountable doesn’t mean that this isn’t a serious problem. First of all, reputation damage cannot be dismissed, especially as stories of PPP fraud permeate the news. Second, the regulatory environment is always in flux and future economic relief programs may not be so lenient.

This means that lenders and banks need to be prepared to prevent fraudsters from taking advantage of the very digital systems that are designed to help Americans in need.

How KYC in Banking Can Help Prevent PPP Loan Fraud

The first rounds of PPP have already deployed funds, to real business owners and fraudsters alike. And the fraudsters played no small part in the lending activity. The Small Business Administration’s fraud hotline, which received fewer than 800 calls last year, has already had over 42,000 reports about coronavirus-related fraud. At least $62 million was fraudulently taken from the PPP using false documents, stolen identities, and forged certifications.

But it’s not too late for the banking industry to prepare for future relief programs. And a big part of that is figuring out how to preserve the strengths of the PPP programs — speedy and digital loan applications — without sacrificing crucial banking KYC measures that keep out fraud.

To pull this off, banks will need to rethink their KYC procedures for the digital era. Implemented the right way, the new KYC measures have the power to equal or even surpass the accuracy of traditional procedures. This will allow banks to stay on track with their digital strategy while keeping scammers out.

During the PPP, the U.S. Treasury Department instructed banks to prioritize their existing customers applying for relief loans. This meant that fintechs and alternative banks attracted new customers that required more careful vetting. But in this pressured environment, careful vetting went out the window and these fintechs bore the brunt of the fraud.

Banks or fintechs that choose to accept unknown business’ loan applications are taking on a risk. They must take KYC measures just as they would during any new customer onboarding process.

Financial institutions must employ KYC quickly and easily to accommodate unexpected surges in loan applications from new customers. Here are some steps they can take to get started:

1. KYC ID Verification

Banks and fintechs need to make sure that a new customer seeking to take out a loan is who they claim to be. This is especially critical given the prevalence of synthetic identity fraud in PPP loans. But the continued threat of coronavirus coupled with new remote expectations means that KYC ID verification checks need to go digital.

Before customers fill out their loan application form, they should be able to digitally submit their government-issued photo ID, where it can be automatically analyzed for authenticity. The next step is for the customer to take a selfie in live mode, which today’s facial recognition technology can analyze and confirm a match.

2. Digital Document Collection

The PPP required proof of business ownership, proof of payroll costs, proof that the business is Active and in Good Standing with the Secretary of State (SOS), and other official documents. In practice, some banks let some of these requirements slide due to the perceived time drain of collecting them. Today’s digital solutions allow borrowers to simply snap photos of their documents and send them through a mobile or online system. This speeds up collection time for legitimate customers while making it significantly harder for fraudsters to game the system.

3. When In Doubt, Look It Up

Digital KYC ID verification and document collection should be enough to verify the majority of loan applications with very little manual involvement. Yet banks that are committed to weeding out all fraud cannot forgo the human element. Bank employees should be trained to keep an eye on these automated processes. If red flags arise, they can take further action. Simply Googling the business’s name, looking for an established social media or website presence, and looking at state records is often enough to uncover a nonexistent or inactive business. Such searches are simple to conduct and require minimal effort or skill. Yet fraudsters are banking on agents to fail to run these basic checks.

Low-Touch, Digital KYC in Banking Can Eliminate PPP Fraud

Contrary to popular belief, lenders do not have to choose between quickly deploying essential money and keeping out fraudsters. Remote lending has indeed made it easier for fraudsters to dupe lenders. But remote KYC practices have the capacity to keep bad actors out, maintain the fast pace of loan deployment, and restore trust in emerging digital systems.

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