Penalties for PPP Loan Fraud

Penalties Imposed on Businesses and Individuals

There are a variety of penalties that might be imposed on businesses and individuals found in violation of the law in regards to the Paycheck Protection Program, or PPP. Fraud is the most common charge levied against entities and persons who improperly used these funds. There are civil and criminal penalties associated with PPP fraud. Some of the penalties are simple fines and repayment orders. Sometimes, the guilty party may be sentenced to time in prison for committing fraud.

Paycheck Protection Program Fraud

Cases of PPP fraud are soaring around the country, as federal agencies have been granted funding to prosecute companies for fraud instead of converting the original poorly administered PPP program into a universal benefit. The ability to appeal a decision is an important part of any legal defense against accusations of fraud.

It is important to consider the cost-benefit ratio of enforcement activities against the collective social benefits that would ensue if these funds were instead used to ensure universal access to the PPP loan forgiveness program, for example. In a climate of uncertainty, it seems beyond the scope of reason to resort to such aggressive enforcement against businesses that face uncertain financial conditions amidst a deadly pandemic. Any legal reprieve that can be found under these conditions can only strengthen the economy while reducing the burden of hyper-regulating a skimpy social safety net during the pandemic.

PRAC Report and PPP Loan Problems

According to a report released by a body called PRAC, or Pandemic Response Accountability Committee, there were numerous problems in the way the PPP was structured, administered and delivered. Additionally, the fast rollout of the program gave businesses a reasonable appearance of uniformity and access. The SBA also increased their level of guarantee to lenders, and this caused a lowering of the requirements for due diligence. This also increased the likelihood of losses to the SBA.

Loan amounts tended to be unusually high, and there were also expedited timeframes for loan processing, which made it harder for the SBA to apply the normal red flags and weed out applicants who would otherwise disqualify. Due to the lack of sufficient internal controls, these programs were improperly administered in many cases. However, business owners charged with fraud often reacted with indignant outrage at the prospect of being forced to take up the slack of a poorly written and executed piece of legislation.

PPP Loan Fraud, Enforcement Funding

The numbers are substantial; there are over 4.5 million businesses that participated in the federally guaranteed and backed loan program. Charges of loan fraud are being levied against small businesses and individuals by the Department of Justice, or DOJ, the IRS and the SBA-OIG. The efforts to find companies who accepted PPP loans in good faith also uses significant resources; these funds were deliberately allocated to enforcing the exclusive nature of the PPP loan program instead of expanding the program itself to include more people; it could have been a more universally applicable program.

Fighting Unfair Enforcement Measures

Numerous cases have already been filed, and many more are being made against organizations and individuals charged with committing fraud. Effective legal defenders can help you to present a compelling case that proves within a reasonable doubt that the PPP was taken and used in the spirit of the law’s most likely intent.

Fraud and PPP Prosecution

Numerous types of fraud can also be prosecuted under these federal laws. This includes wire fraud, aggravated identity theft, tax evasion, conspiracy, attempted fraud and more. The penalties for false statements, tax evasion, wire fraud, bank fraud and other offenses can carry fines up to $1 million and imprisonment. Contact our law firm to defend your legal rights if your business took a PPP loan and is facing an investigation or charges of fraud.

Criminal Liability for PPP Loan Fraud

When the Paycheck Protection Program began in the early stages of the COVID-19 pandemic in 2020, many companies were forced to completely shut down their operations. Panic was widespread, the stock market had crashed for a brief period at the time, and supply chains around the world were completely disrupted. As a result, businesses hastily applied for any PPP assistance they could get.

Initially, the federal oversight aimed at determining which businesses would receive funds was relatively poor. Government agencies simply did not have time to scrutinize every application. In most cases, businesses were able to receive funds on the basis of very limited research and without any independent auditing. Additionally, since businesses were in a race to get funds immediately, they often did not work with legal counsel as much as they normally would when applying for assistance under the program.

Consequently, many businesses that received PPP funds are facing regulatory scrutiny and even criminal charges. For this reason, it is imperative for businesses to determine whether their use of PPP funds was legal.

How Is PPP Loan Fraud Defined?

Companies looking to determine the legality of their use of PPP funds need to first understand what PPP loan fraud is. It is important to keep in mind that in the U.S., fraud is a very broad legal term. Some frauds merely involve misrepresenting the nature or quality of a product or service in a way that causes very limited damage to another party. On the other hand, severe frauds can range from Bernie Madoff’s $65 billion Ponzi scheme to deliberate scams involving fictitious products that are never delivered.

Additionally, there are many different ways that fraud charges can be pursued in court. Most fraud cases are civil cases that are brought to court by the counterparty in a transaction. As a result, many civil fraud cases are dismissed or settled out of court. Other more severe fraud cases can involve criminal fraud charges that are brought by the federal government. However, most states have their own criminal fraud laws, so state and local governments are also often able to bring their own fraud charges against wrongdoers who are not pursued at the federal level.

Common Fraud Charges Involving PPP Funds

Currently, businesses owners who received PPP funds need to be most concerned about fraud charges brought by the federal government. Some businesses have been hit with fraud charges involving “loan stacking,” a practice that involves applying for multiple loans using subsidiaries. In some cases, the PPP program was so disorganized that business owners who submitted multiple applications had multiple loans approved. Even though the federal government may seem to be at fault for approving multiple loan applications, the reality is that depositing multiple PPP checks for redundant claims is usually considered fraud.

Other companies have faced charges for misrepresenting their payrolls or intentionally misclassifying employees to receive more funds. PPP loans are supposed to be limited to two months of a company’s average payroll, but some companies engineered ways to make their payrolls seem higher to get more funds. Loans were also supposed to only be taken out if they were necessary to support ongoing operations, but many businesses subsequently invested their PPP funds in acquiring new assets or even distributed their PPP funds in their next dividend.

Possible Charges for PPP Loan Fraud

No specific statute has been implemented to make PPP loan fraud a crime. However, any action that can be construed to involve defrauding the government can be considered a serious crime.

The False Claims Act can be used to indict businesses that made any misrepresentations on their PPP applications. Additionally, there are fraud laws that impose particularly steep penalties for making false statements to the Small Business Administration.

Many small businesses were led to believe that their PPP applications were approved by a private bank, but these applications were ultimately approved by the SBA. Of course, there is also a fraud law involving making false statements to an FDIC-insured bank, so businesses that made even the smallest misstatements in their applications could face multiple charges.

In some cases, common fraud charges, such as bank fraud and wire fraud, can be used in cases involving PPP funds. Charges can be even more severe when businesses or individuals engaged in deliberate fraud in an attempt to take money from the federal government. PPP-related schemes involving identity theft and tax evasion have been common, and many perpetrators of these schemes are starting to be prosecuted.

How Much Risk Exposure Does Your Business Have?

As always in criminal matters, businesses can never be certain that they will not face charges. Nevertheless, businesses can assess their risk by considering what actions could constitute fraud and reviewing the evidence that would be available to prove fraud charges in court. After all, businesses are protected by the fact that prosecutors have to prove that misstatements were deliberately made to defraud the government. In many cases, it is not possible to prove that a misstatement was made intentionally. Therefore, businesses that received PPP funds should work with their attorney to assess their risk and take the right actions to mitigate potential charges.