Illinois PPP Loan Fraud Lawyers.

One of the most-common misconceptions of the federal government’s pandemic-related prosecutorial efforts is that Illinois has its own “PPP fraud statute.” In fact, although the U.S. Attorney’s Office in Chicago has issued warnings about PPP fraud enforcement targeting Illinois businesses and individuals, there is no state-level criminal statute that is called the “PPP Fraud Statute,” or that specifically addresses violations of the PPP program. Instead, the federal government is prosecuting PPP loan fraud allegations in Illinois using existing federal statutes that are allegedly applicable under these circumstances. The Illinois PPP Fraud Statute does not exist.

Illinois PPP Loan Fraud Prosecutions Proceed Primarily in Federal District Court

The Illinois “PPP Fraud Statute” does not exist; so, Illinois PPP fraud prosecutions proceed in federal court. The Northern District of Illinois, Central District of Illinois, and Southern District of Illinois are the three federal judicial districts located within the State of Illinois. With Chicago and the surrounding suburban areas serving as the hub for most criminal cases in the region, many of these prosecutions proceed in the U.S. District Court for the Northern District of Illinois, but they may also proceed in the U.S. District Court for the Central District of Illinois, or the U.S. District Court for the Southern District of Illinois.

The Most Common Allegations for Illinois PPP Loan Fraud are Wire Fraud under 18 U.S.C. § 1343

Given that there is no “PPP fraud statute,” the U.S. Attorney’s Office has to charge Illinois PPP fraud suspects under the federal statutes that are most closely applicable. In most cases, this has meant that Illinois PPP loan fraud allegations have proceeded as charges of wire fraud under 18 U.S.C. § 1343. However, PPP fraud can also involve charges of bank fraud under 18 U.S.C. § 1344, attempt to commit wire fraud under 18 U.S.C. § 1349, conspiracy to commit wire fraud under 18 U.S.C. § 1349, and all other federal offenses as they apply to each specific case’s circumstances.

How Can Prosecutors Turn Illinois PPP Discrepancies Into Proof?

Prosecutors in Illinois PPP loan fraud cases can turn discrepancies into proof in a variety of ways, including:

• Application Fraud Allegations Involving Overstated Payroll or Employee Counts. To claim a PPP loan (or more money than they were entitled to), the business in question allegedly overstated its monthly payroll or employee count during the period prior to the application. This is one of the most common methods of fraudulent application.
• Loan Stacking. The business or individual fraudulently claimed to qualify for a PPP loan, and then proceeded to apply to multiple lenders or submit multiple applications through the Small Business Administration or other intermediaries. This is referred to as “loan stacking,” and it is often how prosecutors end up starting their investigations in the first place. Once the government notices that multiple loans are being issued (or sought), prosecutors can then begin comparing the details of the application to what the business’s payroll records, employee counts, and other information of record actually show. If the government sees evidence of discrepancies, it will then investigate to see if these discrepancies (i) qualify to be called fraud, and (ii) if the circumstances of these discrepancies suggest knowing fraudulent conduct on the part of the business, its owners, and its executives.
• Misuse Allegations. After receiving the PPP funds, the business or individual then misspent these funds by paying for personal or otherwise ineligible expenses, such as jewelry, luxury vehicles, private jets, and other personal expenses. This is also a very common scenario for federal PPP loan fraud prosecutions and is often what leads to significant news coverage. In these cases, federal prosecutors are able to follow the money to identify purchases and spending that were explicitly banned under the PPP rules.
• Forgiveness Applications That Create Separate Alleged False-Certification Conduct. When attempting to forgive its PPP loan, the business allegedly made false statements in its PPP loan forgiveness application, certifying that it met the PPP requirements for loan forgiveness when, in fact, it did not.
• Fraudulent Loan Forgiveness Certification. Along the same lines as above, when attempting to prove eligibility to have a PPP loan forgiven, the business’s certification form for loan forgiveness could potentially constitute a separate false-certification offense in itself.
• Knowing Fraudulent Conduct. The government generally must be able to prove “knowing” fraudulent conduct to overcome various defenses. The key here is that simply having a discrepancy is not necessarily fraudulent, and thus, PPP fraud prosecutions will not be successfully pursued if the allegations involve honest mistakes or simple clerical errors.

When Do Affiliation Rules and Changing PPP Standards Alter the Analysis?

At the outset, qualifying for the PPP seemed to be straightforward, with several conditions to determine eligibility:

• One condition was that the business had to be operating on February 15, 2020.
• The most commonly cited size limit is 500 employees, although exceptions existed.
• The loan amount was generally determined as 2.5 times the average monthly payroll costs, using the applicable reference period preceding the application.
• All other criteria should be clear to those that have applied for or received PPP funds, provided that the business is capable of handling the nuances of these eligibility criteria; however, the criteria was not as simple as it seemed to be.
• Affiliation rules under 13 C.F.R. § 121.301, subject to PPP-specific exceptions and waivers, also can potentially present a major issue in federal PPP loan fraud investigations. The rules explained in 13 C.F.R. § 121.301 address the circumstances under which a company can be affiliated with any other person or person(s) including owners, family members, related companies, and so on. If this occurs, that company’s size must then be added to its affiliate(s)’ company size. This rule makes it possible for an apparently qualified company to actually exceed the 500-employee size threshold and potentially make it ineligible to receive a PPP loan. This scenario could lead to the owners and executives being facing potential criminal allegations of fraud and civil allegations of false certification.
• If the company did not meet the under-500 employee rule, it could attempt to qualify under the SBA alternative size standard, which requires tangible net worth not exceeding $15 million and average net income after federal income taxes not exceeding $5 million for the two full fiscal years preceding the application. The SBA alternative size standard requires, again, for a company to be at peace with affiliation rules.

If any of this describes your situation, it is worth talking through with counsel. Spodek Law Group can be reached at 888 348 8028.

What Should Recipients Do After an Illinois PPP Subpoena, Audit, or Search?

If you have received a subpoena, search warrant, or other investigative demand from federal authorities, there are several urgent steps you must take in order to protect yourself and your company.

Who Is Typically Behind These Inquiries?

The SBA Office of Inspector General (OIG), Federal Bureau of Investigation (FBI), U.S. Department of Justice (DOJ), and Internal Revenue Service (IRS) Criminal Investigation are typical investigative agencies.

What Records Can the Government Obtain Through a Subpoena?

When federal grand-jury subpoenas are issued for PPP fraud, the government typically demands broad categories of documents and records. These subpoenas may demand:

• Business records
• Payroll records
• Tax records
• Banking records
• The company’s original loan application and certification (and any documents supporting the application, such as financial statements and payroll records)
• Relevant communications (including with the loan servicer, the lender, and any other third parties)

Can a Subpoena Recipient Have Their Lawyers Inside the Grand-Jury Room?

No; although counsel may not be present in the grand-jury room while a witness testifies, a subpoena recipient may consult counsel and may seek judicial relief concerning the subpoena. However, there are numerous ways to engage your legal counsel in the grand-jury process.

Should Recipients Delete Potentially Relevant Records or Alter Other Records When They Find Them Inaccurate?

Absolutely not. The most fundamental response to any federal investigation is to preserve all potentially relevant records and not delete, add to, or alter them in any way. This includes deleting records that may have caused an investigation to trigger, and this includes making what appears to be an innocent correction to a mistaken records. Trying to “fix” something during an investigation, or trying to clean up the evidence, may only create additional scrutiny, and it may even lead to obstruction charges.

Can Deleting Potentially Relevant Records Bring Additional Charges?

Yes. Knowingly deleting, altering, or concealing records with intent to impede a federal investigation can support federal obstruction charges. In many cases, these charges can bring even harsher penalties than the PPP fraud charges. If you have accidentally or unintentionally destroyed records or communications, you should quickly contact your counsel about how to address the situation as soon as possible.

Which Consequences Can Illinois PPP Allegations Create Beyond a Loan Dispute?

Although some Illinois PPP loan fraud investigations result in civil litigation with the SBA’s loan servicer or lender as a means to recover the loan balance plus interest, these investigations may also lead to federal investigations and subsequent litigation involving the following consequences:

Civil False Claims Act Liabilities (Treble Damages and Civil Penalties)

The federal government can also pursue Illinois PPP loan fraud allegations in civil court, under the False Claims Act (31 U.S.C. §§ 3729-3733). In these cases, the federal government can seek treble damages (three times the total amount of the fraudulent loan, or the amount obtained through a fraudulent loan forgiveness application) plus substantial per-claim civil penalties.

False Claims Act Qui Tam Liability (qui tam Complaints Filed Under Seal)

The False Claims Act also allows for qui tam complaints, also known as “whistleblower” lawsuits. In these cases, a private individual (the “relator”) files a complaint on behalf of the federal government. Qui tam complaints are filed under seal, and, while the federal government must determine if the case is valid, the case proceeds confidentially. The government may investigate and intervene in the civil action, or it may decline to intervene; any criminal prosecution would be a separate matter.

Scrutiny of Initial PPP Application and/or Loan Forgiveness Application

It is a common misconception that having the PPP loan forgiven is sufficient to protect against future scrutiny. The fact that the government will have processed a PPP loan forgiveness application does not mean that it cannot still investigate the initial application, the statements and claims made in the application, the process of qualifying to have the loan forgiven, and the documents presented in support of seeking loan forgiveness.

Federal Sentencing (Calculation of a “Loss Amount”)

In federal criminal fraud cases, sentencing depends substantially on the calculated “loss amount,” as well as other factors. Under the Federal Sentencing Guidelines, calculated loss amounts can vary greatly, while statutory maximums depend on the offenses charged, which makes an effective defense critical.

Restitution and Criminal Asset Forfeiture

Restitution and criminal asset forfeiture can both be separate and distinct remedies that the government will seek to impose following a conviction for PPP fraud. Along with attempting to make the government “whole” through restitution of the original loan amount, the government can also seek criminal asset forfeiture of property constituting, or derived from, proceeds of the alleged fraud.

Unlike restitution, which focuses on correcting the financial loss, asset forfeiture is considered an independent punishment that can lead to the seizure and loss of substantial business, financial, and other assets.

Professional-License Consequences

Lastly, alleging and establishing responsibility for PPP fraud can also lead to severe professional-license consequences. The precise professional-license consequences of federal PPP fraud prosecutions and enforcement actions will depend on the governing profession and its disciplinary process, and the specific federal charges and convictions that are sustained, if any.

Where to Go From Here

If any of this describes your situation, the next step is a conversation rather than more reading. Spodek Law Group runs a fully online client portal and represents clients coast to coast, with offices in New York, Brooklyn, Queens and Los Angeles. The number is 888 348 8028.