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SBA exempted lawmakers, federal officials from ethics rules in $660 billion loan program

A ‘blanket approval’ allowed Congress, officials and their families to receive Paycheck Protection Program funds without a required conflict of interest review

Jovita Carranza, administrator of the Small Business Administration, speaks during a Senate committee hearing. (Al Drago/Bloomberg News)

A brief and barely noticed “blanket approval” issued by the Trump administration allows lawmakers, Small Business Administration staff, other federal officials and their families to bypass long-standing rules on conflicts of interest to seek funds for themselves, adding to concerns that coronavirus aid programs could be subject to fraud and abuse.

Under normal circumstances, lawmakers and some federal employees who apply for small business funds in some cases have to seek approval of a little-known SBA body called the Standards of Conduct Committee. The rule applies to officials who are business owners, officers, directors or shareholders with a more than 10 percent business interest, plus any “household members” of those officials.

But in a rule the administration issued April 13, the administration disclosed that the approval requirement had been suspended for all entities seeking funds from the $660 billion program “so that further action by the [ethics committee] is not necessary.”

Policy experts and government watchdogs said the blanket waiver could allow officials to write the rules to benefit themselves. Josh Gotbaum, a Brookings Institution scholar who has worked in economic policy under Democratic and Republican administrations, said he was “appalled” by the waiver.

“The idea that the Small Business Administration can, without any review or publicity, secretly let all of its employees arrange loans for their family members or associates is outrageous,” Gotbaum said.

Because the administration has not yet released any information about the individual borrowers, it is unknown how many members of Congress or SBA officials have benefited from the nearly $700 billion program, but several representatives did, according to media reports and financial records.

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Rep. Susie Lee (D-Nev.) played a role in shaping the Paycheck Protection Plan when she joined other Nevada legislators to urge the Trump administration to make casinos eligible for funds. Excluding casinos from loans, as the SBA had long done, “unfairly impacts countless small businesses throughout Nevada” the legislators argued in an April news release.

What Lee did not mention is that among the businesses being barred from applying for the funds was her husband’s Las Vegas casino company, Full House Resorts. When the administration complied with Lee’s request and allowed casinos to apply, Full House received two loans totaling $5.6 million, according to securities filings.

Lee was not aware of her husband’s interest in applying for PPP loans at the time she was urging the administration to allow casinos to receive funding, according to her spokesman, Jesús Espinoza.

“Congresswoman Lee joined the rest of Nevada’s congressional delegation, which includes members from both parties, in fighting to reverse that decision and give our state needed resources in a crisis,” Espinoza said. He added that Lee played no role in Full House’s loan application or in the Treasury Department’s decision to issue a blanket waiver for members of Congress and their families.

Full House, where Lee’s husband, Daniel R. Lee, is president and chief executive, received its loans after the blanket waiver was put in place. The company did not return requests for comment.

SBA spokesman Jim Billimoria said the administration issued the blanket waiver because it treated PPP similarly to loan programs that the agency provides in the wake of natural disasters and because agency officials were concerned that there could be large volume of waiver requests.

The Standards of Conduct Committee is made up of the deputy general counsel, acting chief operating officer and associate administrator of human resources.

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“The Standard of Conduct Committee gave a blanket approval rather than case-by-case consideration in recognition that PPP loans were in some respects akin to disaster loans (which do not require any Standards of Conduct Committee approval) and in anticipation of the large volume of potential cases that might come before the Committee,” Billimoria said in statement.

Sen. Marco Rubio (R-Fla.), who chairs the congressional committee overseeing the SBA, said he wasn’t specifically aware of the blanket approval rule but that Congress doesn’t decide which loan applicants receive funding. Applicants are required to apply through their banks, which then send loans to SBA for final approval.

Although the first round of funding quickly ran out, more than $100 billion has been available in the second round for weeks. As long as the loans are used appropriately, they are turned into grants and forgiven.

“Congress plays no role in who gets a loan and who doesn’t,” he said. “If you qualified for the loan, you got one. If your business qualified for the loan, you got one. It wasn’t like Congress was deciding who got a loan and who didn’t.”

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Lee is not the only member of Congress to benefit. One of the wealthiest, Rep. Roger Williams (R-Tex.), said in a May 5 blog post that his auto dealerships had received loans. Rep. Vicky Hartzler (R-Mo.) said that businesses owned by her family had received PPP loans, after they were disclosed in the Columbia Tribune.

Connecticut artist Judith Pond Kudlow applied for PPP funds, according to remarks made in an interview with ABC by her husband, Larry Kudlow, White House chief economic adviser and director of the National Economic Council. Her application probably didn’t require a waiver because her husband’s job isn’t covered by the provision. Larry Kudlow has advocated against disclosing the names of PPP borrowers.

“Larry Kudlow’s wife is a small-business owner and private citizen,” said Kudlow spokesman Judd Deere in a statement. He called any speculation that something improper was taking place “false.” Judith Pond Kudlow did not return a request for comment.

Economists from both parties have mostly complimented the SBA for getting money out the door to millions of small businesses and their employees, buttressing the economy against staggering unemployment.

But the move to waive ethics rules is one of several high-level decisions that could hamper effective oversight of the program. The Trump administration has told congressional oversight committees it is not required to provide information about loan recipients. It also declared that the special inspector general leading Cares Act oversight cannot submit reports to Congress without “presidential supervision.”

The SBA in particular has been singled out by watchdog groups and members of Congress for poor transparency. The nonpartisan Government Accountability Office wrote in a recent audit of government-wide Cares Act spending that it had more trouble getting information from the SBA than any other agency. And the agency’s Office of Disaster Assistance has failed to communicate important policy changes affecting loan applicants, such as a $150,000 cap on coronavirus disaster loans.

Richard Painter, a lawyer who served as the top ethics adviser in the George W. Bush administration, questioned whether a “blanket waiver” would be legal in the first place.

“We watched [the SBA] very closely when I was in the White House because people were always trying to get their fingers in the pie over there,” Painter said. “It’s one of the areas that is very sensitive, where you have a ‘friends and family’ problem. SBA has often been a focal point of that problem, so we’ve kept an eye on it.”

He said the SBA is of particular concern for ethics watchdogs.

“Once you set up a system that says this is a conflict of interest, but there can be a waiver, the whole point of that system is it’s case-specific. If you do a blanket waiver, then you’ve basically repealed the rule,” Painter said. “This is a departure from the norm and I’ve never seen it before, where you have a rule and then you issue a waiver that essentially abolishes it.”

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Scott Amey, general counsel with the nonprofit Project on Government Oversight, expressed concern that the SBA is waiving its normal ethics rules as it rushes to spend hundreds of billions of dollars.

“This is the exact time when we should be worried about government officials, even members of Congress, taking money out of the hands of others in need,” Amey said in an email. “Let’s hope someone else is minding the store because SBA seems more about speed and less about accounting for taxpayer dollars.”

The SBA has previously said it would release “individual loan data” for PPP recipients the way it has for other loan programs since 1991. It also informed borrowers on the application form that the names of borrowers would be released to the public.

Despite a brief claim by Treasury Secretary Steven Mnuchin that PPP borrowers would not be disclosed, the SBA announced last week that it plans to disclose the names of borrowers receiving at least $150,000. That accounts for about 15 percent of the 4.5 million PPP loans, according to administration’s data.

A Freedom of Information Act lawsuit filed by 11 news organizations, including The Washington Post, seeks business names and loan amounts for all PPP recipients, including those receiving smaller amounts of funding.

Erica Werner contributed to this report.