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Exposing a fraud ring that stole millions in pandemic relief funds

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Introduction to the case

U.S. CARES Act exploited by fraudsters

To help individuals, businesses, and government organizations cope with pandemic challenges, the U.S. government dedicated trillions of dollars of support through programs under the Coronavirus, Aid, Relief, and Economic Security (CARES) Act—but the speed at which relief programs were rolled out lead to increased opportunities to defraud the system.

Using synthetic identities and forged documents, an eight-person fraud ring committed approximately 150 fraudulent loan applications and sought to steal millions in COVID-19 relief funds.

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Details of the fraud

The eight individuals involved in the fraud ring are Richard Ayvazyan, Marietta Terabelian, Artur Ayvazyan, Manuk Grigoryan, Edvard Paronyan, Vahe Dadyan, Arman Hayrapetyan, and Tamara Dadyan.

Taking advantage of the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL)—two programs under the CARES Act—the fraudsters misappropriated over US$20 million* in COVID-19 relief funds by falsifying a number of legal documents:

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How did the fraudsters commit the crime?

Three main factors created opportunities for the fraud to take place:

  1. Disaster recovery funds are often put together quickly and are focused on short-term solutions. They are also very vast in scope, with many eligible claimants. To reach those in need quickly, the system relies (at least in part) on the honour system. These factors create the perfect storm for fraudsters to exploit the relief programs.
  2. There was poor investigative due diligence over the identifications used in the loan application process.
  3. Unlike several other U.S. states, California’s loan application system did not have a cross-matching function to verify the identities of individuals. This allowed for the exploitation of fake, stolen, or synthetic identities, as well as the use of fictitious supporting documents such as fake identification, tax documents, and payroll records.

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What was the outcome?

The fraud ring was busted in 2020, when Artur Ayvazyan was stopped at a Miami border crossing and found to be in possession of contraband credit cards, driver’s licenses, and loan applications in the names of fictitious identities.  

Among the numerous charges laid against the group are:

  • Bank and wire fraud or conspiracy to commit bank and wire fraud;
  • Aggravated identity theft; and
  • Money laundering or conspiracy to commit money laundering. 

In November 2021, Ayvazyan and his accomplices were slapped with prison sentences ranging between 10 months to 17 years or required to serve probation, depending on the crime for which they were convicted.

The scammers were required to forfeit their bank accounts, jewelry, watches, gold coins, three residential properties, and approximately $450,000 in cash.

Richard Ayvazyan and his wife, Marietta Terabelian—who received 17 years and six years in prison, respectively—were sentenced in absentia and remain fugitives. Tamara Dadyan, who faces 10 years in prison, has also vanished after she failed to report to begin serving her sentence at the end of January 2022. They all remain missing as of Feb. 8, 2022.

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How could this have been prevented?

This is a classic case of white-collar crime that could have easily been prevented with adequate controls and policies in place.

A major limitation was that California’s Education Development Department (EDD), responsible for administering the state’s unemployment insurance program, severely lacked appropriate internal controls to address fraud.

According to EDD deputy director, Loree Levy, unlike the country’s 35 other states, California lacked a system that would crossmatch identification data with unemployment claims. This resulted in the use of fake, stolen, or synthetic identities such as those belonging to elderly or deceased individuals as well as foreign exchange students.

Key policies that could have helped the EDD maintain a robust set of safeguards against fraud include:

The significant increase in pandemic relief fraud highlights the importance of continuous monitoring and testing of internal controls within the loan programs.

This process should include checking a sample of loan applications periodically to ensure the validity of the data provided by requesting additional source documentation, cross-matching against government data, and reviewing eligible expense support.

By correcting any identified weaknesses in the application process, internal audits are crucial not just for detecting fraud before it becomes catastrophic, but also for fraud prevention.

One method of identifying any similar pandemic relief fraudulent schemes involves the utilization of the Department of Justice’s National Center for Disaster Fraud (NCDF) Hotline or the NCDF Web Complaint Form. This is an example of a whistleblower program that is operated by a separate third party to ensure that leads are investigated independently.

How can BDO help

BDO’s approach to fraud starts, first and foremost, with prevention. By performing a fraud risk assessment, developing a fraud response plan, and conducting a review of internal controls, pandemic relief fraud schemes can be thwarted before they become costly setbacks.

Experienced in litigation support, evidence discovery, and cybersecurity, our team can further help you protect your organization's reputation, finances, and stakeholders if a case of fraudulent activity is discovered.

*All amounts expressed in U.S. dollars unless otherwise stated.

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