Challenging the Government's Evidence in EIDL Fraud Case.

U.S.C. § 1344 criminalizes, in paraphrase, any scheme or artifice to defraud a financial institution and the obtainment of any or all of [a financial institution’s] money, funds, credits, assets, securities, or other property, by means of false or fraudulent pretenses, representations, or promises.

The two theories under 18 U.S.C. § 1344 have overlapping but distinct elements; the government must prove the elements of the specific charged prong, including knowing execution and, for § 1344(2), obtaining property by false or fraudulent pretenses.

It is important to remember that federal prosecutors are held to the same burden of proof as any other prosecutor in a criminal trial. To secure a conviction, the government must prove that you committed the charged fraud offense beyond a reasonable doubt.

If the federal government is pursuing a criminal fraud case against you and your business under U.S.C. § 1344, there will be a good-faith argument that you made an “inaccurate statement.” While an inaccurate statement may be required to sustain a criminal charge for fraud under U.S.C. § 1344, it does not establish the government’s burden of criminal fraud intent alone.

In fact, a good-faith misunderstanding can be sufficient evidence of a “lack of intent” to satisfy the knowing-falsity element that is required for fraud under U.S.C. § 1344. As a result, if an inaccurate statement on an EIDL application is caused by a good-faith misunderstanding of the law or a good-faith mistake of fact, this could be enough to challenge the government’s case.

What Evidence Supports Bank Fraud, False Statements, Wire Fraud, or Misuse Allegations?

The first theory is bank fraud under 18 U.S.C. § 1344. Under this federal statute, the government does not need to prove the bank lost money due to an alleged scheme, meaning that repayment of an EIDL loan may be irrelevant. Instead, the government only needs to show that there was a “scheme or artifice to defraud” a financial institution, meaning that the bank did not have to have actually lost money in order for the government to bring charges.

The second theory is false statements under 18 U.S.C. § 1014. Under this federal statute, it is prohibited to knowingly and willfully make “any false statement or report” or use any “Whoever knowingly makes any false statement or report, or willfully overvalues any land, property or security, for the purpose of influencing in any way the action of the Federal Housing Administration, the Farm Credit Administration, Federal Crop Insurance Corporation or a company the Corporation reinsures, the Secretary of Agriculture acting through the Farmers Home Administration or successor agency, the Rural Development Administration or successor agency, any Farm Credit Bank, production credit association, agricultural credit association, bank for cooperatives, or any division, officer, or employee thereof, or of any regional agricultural credit corporation established pursuant to law, or a Federal land bank, a Federal land bank association, a Federal Reserve bank, a small business investment company, as defined in section 103 of the Small Business Investment Act of 1958 (15 U.S.C. 662), or the Small Business Administration in connection with any provision of that Act, a Federal credit union, an insured State-chartered credit union, any institution the accounts of which are insured by the Federal Deposit Insurance Corporation, any Federal home loan bank, the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation, the Farm Credit System Insurance Corporation, or the National Credit Union Administration Board, a branch or agency of a foreign bank (as such terms are defined in paragraphs (1) and (3) of section 1(b) of the International Banking Act of 1978), an organization operating under section 25 or section 25(a) of the Federal Reserve Act, or a mortgage lending business, or any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974, upon any application, advance, discount, purchase, purchase agreement, repurchase agreement, commitment, loan, or insurance agreement or application for insurance or a guarantee, or any change or extension of any of the same, by renewal, deferment of action or otherwise, or the acceptance, release, or substitution of security therefor, shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.” with the purpose of influencing a financial institution, federal agency, or other entity to approve a “credit, loan, or deposit” application.

The third theory is wire fraud under 18 U.S.C. § 1343. Under this federal statute, the government must show that there was a “scheme or artifice to defraud” and the use, or the attempt to use, “transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice” to further the scheme.

The fourth theory is misuse of EIDL loan proceeds. Under the EIDL program, loan proceeds were only supposed to be used to pay for ordinary business operating expenses and working capital. Any misuse of these proceeds may be used by the government to substantiate its allegations of loan application fraud.

If the government is using these theories to pursue criminal charges against you, then it is important that you take steps to challenge the government’s evidence. While the government may have evidence of a bank loss, a false statement, wire communication, or misuse of EIDL proceeds, that is not enough to secure a conviction. To do so, it must prove that all elements of the accused’s “knowing” and “falsity” in your EIDL fraud case.

How Can Investigators Connect an Application Error to Knowing Fraud?

In many cases, there is some evidence of at least one incorrect statement on an EIDL loan application. The core issue that will be at stake in many EIDL fraud cases is whether that one inaccurate statement can be used to substantiate the government’s claims of fraud. If not, then it does not matter whether the federal government can prove the existence of an application error, the government still cannot meet its burden of proof. When defending against accusations of EIDL fraud, business owners and other applicants have the opportunity to make various arguments and call upon various evidence to mitigate the government’s case. For example:

What Were the Applicant’s Circumstances When Preparing Their EIDL Application?

Many business owners and other applicants who are facing allegations of EIDL fraud relied on accountants, loan brokers, or other professionals to prepare their EIDL loan applications. This reliance can be relevant to proving (or disproving) an applicant’s knowledge and intent, although signing an application may be evidence relevant to knowledge and intent.

As a result, the government will likely look for evidence of an applicant’s involvement in the preparation of their EIDL application. This can include:

Is There Evidence of Discrepancies Between the Applicant’s EIDL Application and Other Records?

When investigating for federal criminal EIDL fraud, agents will not look at an applicant’s EIDL application in a vacuum. Instead, they will compare the applicant’s EIDL application with various forms of evidence. This will include, but not be limited to, the applicant’s tax records, payroll records, business licenses, bank records, and other documents.

Do Bank Records Show that the Applicant Used Their EIDL Loan Proceeds for Improper Purposes?

Bank records can be used to demonstrate whether an EIDL loan proceeds were transferred into personal bank accounts. Likewise, they may show that the proceeds were used to make luxury purchases or for other personal or business expenses that are inconsistent with the program’s intended purpose.

Do Emails, Text Messages, and Metadata Shed Light on the EIDL Loan Application Process?

Similar to the documents listed above, emails, text messages, documents, and emails’ metadata can provide evidence regarding the preparation and submission of EIDL loan applications and the applicant’s intent.

Spodek Law Group is one of the few firms running every filing, invoice and document through an online portal, which is how it takes cases outside New York.

When Do Repayment, Authorized Spending, and Loan Size Change the Case?

Unlike federal business owners’ loans under the CARES Act’s PPP program, federal business owners’ EIDL loans were not subject to automatic loan forgiveness. EIDL loans generally required repayment regardless of spending, and the fact that a loan was repaid does not automatically eliminate criminal liability under U.S.C. § 1344 for fraudulently obtaining the funds. This is because obtaining a financial institution’s money or property by means of false pretenses is a criminal offense regardless of subsequent loan repayment.

However, prompt repayment of an EIDL loan can still have the potential to serve as mitigating evidence at sentencing, and it can even potentially be used as evidence of a lack of intent. When we defend business owners and other applicants who are facing federal criminal charges for fraudulent EIDL loan applications, prompt repayment of the loan is one potential factor that may be used to mitigate the government’s case.

Even if liability for a criminal EIDL fraud offense is established, federal defendants in sentencing disputes have the opportunity to challenge the government’s loss amount. Under the United States Sentencing Guidelines’ loss calculation rules (U.S.S.G. § 2B1.1), the amount of loss resulting from the fraud is a factor used to determine a defendant’s offense level. Whether authorized EIDL expenditures reduce the sentencing loss amount depends on the applicable § 2B1.1 loss rules and the evidence of actual or intended loss; authorized spending does not categorically exclude loan proceeds from the calculation. This can be critical to the defendant’s recommended sentence, and showing that some or all of the loan went toward authorized expenditures is important for avoiding an overly-harsh federal sentence.

How Do Limitations, Suppression, Disclosure, and Counsel Error Affect the Defense?

Can the Limitation Period Bar the Charges?

Under 18 U.S.C. § 3282, the general federal statute of limitations for noncapital offenses is five years from the date the offense is committed. However, In 2022, Congress extended the limitation period for certain COVID-19 EIDL fraud offenses to ten years. When assessing their clients’ potential for a successful limitations defense, lawyers who defend business owners and other defendants in pandemic-related fraud cases will first need to assess what offense(s) they are facing and what statute(s) apply.

Can a Pretrial Motion Be Used to Suppress Admissible Evidence?

In criminal proceedings, a defendant may use a pretrial motion to suppress or otherwise challenge the admissibility of evidence obtained through unlawful means. As a result, if the federal government obtained evidence by or through an unconstitutional search, or by or through an improperly conducted interrogation, this evidence may be inadmissible. However, the viability of a suppression motion depends on the specific circumstances involved.

Are There Any Favorable facts or Evidence and/or Constitutional or Statutory Issues That Require Disclosure?

There are a variety of reasons why the federal government might be required to disclose evidence in a criminal trial. While this obviously includes disclosing evidence that is favorable to the defendant, there are other federal procedural and constitutional rules that establish the government’s disclosure obligations.

Can the Case Involve a claim of Ineffective Assistance of Counsel?

The Sixth Amendment grants defendants the right to the assistance of counsel in criminal cases. If a defendant is tried or sentenced based on ineffective assistance of counsel, this may support a legal challenge; in a federal case, the claim may be raised in a later § 2255 proceeding.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 888 348 8028.