In passing the CARES (Coronavirus Aid, Relief, and Economic Security) Act and related legislation beginning in March 2020, Congress provided for several different types of emergency pandemic relief to be administered by the Small Business Association (SBA) and other federal agencies. These include PPP (the Paycheck Protection Program), EIDL (Economic Injury Disaster Loans), PUA (Pandemic Unemployment Assistance), FPUC (Federal Pandemic Unemployment Compensation), and EIP (Economic Impact Payments). Of the more than $2 trillion dollars authorized under the CARES Act, over $500 billion dollars has been allocated to PPP loans. Many of these loans are forgivable in the event borrowers comply with rules regarding the use of PPP loan proceeds, such as maintaining employees on payroll.
Almost immediately after the CARES Act was signed into law, the SBA and the U.S. Department of Justice (DOJ) dedicated historic resources to ferreting out would-be fraud by individuals attempting either to obtain PPP loans illegally or divert PPP loan proceeds for personal or unauthorized uses.
Within seven months of the passage of the CARES Act, the DOJ had filed criminal charges alleging that 65 borrowers collectively tried to fraudulently obtain $227 million in PPP loan funding, in loans ranging from $30,000 to $24 million. These early criminal cases represent the most brazen examples of PPP fraud, such as borrowers claiming phantom employees and using PPP funds for personal items. To date, federal prosecutors have brought over 100 charges of fraud, alleging more than $360 million in wrongfully obtained government-backed loans and other benefits.
The DOJ’s vigorous prosecution of PPP borrowers shows no sign of slowing. These numbers are likely to climb dramatically in 2021 with the installation of new DOJ leadership under President Joe Biden.
In a recent speech, acting Assistant Attorney General Brian Rabbitt emphasized that the Justice Department is not slowing its efforts in this area. He delivered a stern warning to anyone misusing PPP funds: “You will be identified. You will be held accountable. You will face the severest of consequences for trying to exploit your fellow Americans’ suffering for your own personal gain.”
Increased Congressional Oversight and Scrutiny
Initially, the SBA announced that it would focus its limited audit resources on loans in excess of $2 million, which comprise only .6 percent of all PPP borrowers. In September 2020, the Senate Subcommittee issued a highly critical report identifying five categories of PPP loans in which fraud and abuse were most likely and recommending that the SBA adopt a risk-based approach to audit selection. This means borrowers with loans under $2 million are not immune from scrutiny and should be prepared for inquiries from government investigators. It is also anticipated that other regulatory agencies may assist the SBA in its herculean task of auditing PPP borrowers. For example, the Department of Labor has already begun auditing PPP loan recipients under the guise of routine wage and hour inquiries. We expect to see more coordinated federal agency action in the coming months.
What Could Subject You to PPP Fraud Investigation and Prosecution?
PPP loan applications are signed under criminal penalty of perjury; therefore, there are several acts involving PPP loans that could subject you or your business to prosecution:
- Submitting false supporting documentation or representations with your PPP loan application
- Applying for a larger PPP loan than your business is eligible for
- Allocating PPP funds for an unapproved purpose
- Applying for PPP loan forgiveness when ineligible
- Lying to PPP auditors
What to Do if You Become the Target of a Government Investigation
Any business owner concerned about PPP loan compliance should immediately consult counsel and not wait to be contacted by law enforcement. Prior to making any statements to law enforcement, any business owner who has received a subpoena or inquiry from any agency regarding a PPP application or loan should immediately consult with counsel who can assess the full potential for civil and criminal exposure.
Civil and Criminal Penalties
There is no statute or regulation specifically prohibiting PPP fraud. Rather, individuals suspected of PPP fraud can face a variety of charges that will be determined on a case-by-case basis. Borrowers who make misleading or erroneous statements on their PPP loan applications may be subject to civil liability under the False Claims Act (31 U.S.C. § 3729 et seq.). The three elements of a False Claims Act violation are (1) that a statement made to the federal government was false; (2) knowledge; and (3) materiality (i.e., the false statement influenced the payment decision). Actual knowledge is not required – instead “knowledge” can be shown through “reckless disregard” or “deliberate ignorance.” Statements made to PPP lenders (i.e. private lenders implementing loan programs that are federally-funded or federally-guaranteed) could also result in liability.
Civil penalties for violations of the False Claims Act may include treble (i.e., triple) damages (with damages calculated as the loss to the federal government or the amount improperly obtained), plus statutory civil penalties of over $22,000 per false claim. The federal government may also pursue criminal penalties, including jail time, in certain cases.
In addition, according to the loan application, knowingly making a false statement to obtain a guaranteed loan from SBA is criminally punishable under the law by imprisonment of not more than five years and/or a fine of up to $250,000 and, if submitted to a federally insured institution, by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
The most likely charges for fraudulent PPP loan activity, however, are bank fraud or wire fraud. The bank fraud statute criminalizes fraud against financial institutions. To convict for bank fraud, prosecutors need only to show that an individual had a plan or scheme to obtain money, securities, or credit from a financial institution. To obtain a conviction for wire fraud, prosecutors must prove that the individual used electronic communications for the purpose of committing fraud. “Electronic communications” is an umbrella term encompassing email, phone calls, texts, social media and other internet usage. To show that fraud was committed, prosecutors must show that there was a plan to cheat someone, that false statements were made, and that the individual did so with the intent to deceive. PPP loan recipients could also be prosecuted for conspiring to defraud the United States, money laundering, embezzlement and lying to investigators. In short, prosecutors will have a broad arsenal of weapons with which to conduct their investigations and prosecutions.
Similar to the prosecutions of the “no document” loans that fueled the mortgage crisis, but likely on a larger scale, PPP loan fraud will be investigated and prosecuted by the federal government presently and for years to come. Anyone investigated for, or alleged to have engaged in, PPP loan fraud should consult an experienced criminal defense attorney. If you have concerns about whether you have acted in compliance with PPP loan requirements, you should likewise seek legal counsel to minimize risks or penalties related to that conduct.