IIT WAS A criminal’s paradise. In June 2020, a company in Milan obtained a government loan of €60,000 ($63,300) to cope with the pandemic-induced downturn. But the company did not exist. The Italian government had indeed sent money to the ‘Ndrangheta Mafia of Calabria. In the same month, six French citizens cheated €12 million in unemployment benefits by claiming funds for employees of 3,600 front companies. A Texan filed loan applications for 15 invented businesses and pocketed $24.8 million in government aid.
As countries scale back their unprecedented emergency relief programs, there is growing interest in where the funds go. the IMF estimates that since January 2020, governments have distributed $15.5 billion in non-health related spending and lending in response to the COVID-19 pandemic. The rush to support households and businesses has led to poor procurement, haphazard programs and inadequate oversight. The best fraud estimates, so far, come from Britain and America; other countries, where wrongdoing may have been more prevalent, lack audits to track where the money went. In the Americas, at least 4.5% of financing under the CARE Act, the biggest pandemic stimulus bill, went to cheaters. Applying this figure globally suggests that nearly $700 billion could have ended up in the wrong hands.
In Britain, fraud and errors – losses from crime and mispayments – in five economic aid schemes exceed £16bn ($21bn), around a tenth of the £166bn sterling spent, according to official reports. That tally could well rise: the National Audit Office calculates that fraud from just one of the schemes, the Bounce Back Loan Scheme – whose reported losses account for a quarter of the sum – could reach £26bn, or 55% of its total expenditure, when the investigations come to an end.
Spending in America was greater, as was wastage. The Secret Service estimates that $100 billion was stolen out of the $2.2 billion CARE Law. If pre-pandemic fraud levels had been maintained, at least $87 billion in unemployment insurance — which saw a budget increase during the pandemic — would have been captured by scammers. Auditors believe that the true fraud rate is much higher.
Scams and mismanagement are inevitable in programs of this magnitude. But past stimulus efforts were cleaner. In the decade since the financial crisis, investigators have recovered just $57 million in fraudulent funds through the American Recovery and Reinvestment Act of 2009, an $840 billion stimulus package. Fraud continues to come to light over time, but even if all cases still audited are confirmed as criminal, the program’s fraud rate will only reach 0.6%. Other government programs also lose less. The total healthcare fraud rate in the United States hovers around 3%. Britain mistakenly paid around 1.5% of work and pension benefits a year in the decade to 2019.
Estimates of covid-19 stimulus waste, on the other hand, are alarming, especially since the true extent of the fraud could take years to uncover. But some expenses may have been unavoidable. When the crisis hit, economists urged governments to do whatever it took to avert colossal damage. Quick action did just that. America has distributed stimulus checks to 90 million people in less than a month. In rich countries, real disposable income per person grew by 3% in 2020. This kind of compensation might not have been possible with slower, more carefully crafted policies.
More review is coming. In March, three dozen Republican senators demanded more transparency about how the funds were spent before signing up for more pandemic-related funding. Joe Biden has appointed a chief prosecutor to arrest criminals who have tried to profit from the pandemic. And part of the justice has already been done. The French fraudsters were arrested and the Texan creator of fictitious companies pleaded guilty to money laundering. As for the Mafia in Milan? The Italian government realized this and froze their assets. ■
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