False Information on PPP Loan Application: Defenses Available.

Yes, false information on a Paycheck Protection Program (PPP) loan application can still lead to civil or criminal investigations and charges, even after the loan is forgiven. Under the PPP program, loans were designed to be forgivable in full (i.e., to become federal grants) if the borrowers used the proceeds for qualifying payroll and operating expenses. While forgiveness eliminates the borrower’s repayment obligation, it does not immunize them from liability for fraud committed in connection with the original application or the forgiveness application.

For a PPP loan application to lead to liability, the information contained must be materially false or otherwise fraudulent. The term “material” means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property. If an applicant provided misleading or fraudulent information on their loan application to get federal funds it was not entitled to receive, it could lead to prosecution for securities fraud or other crimes.

No single federal statute creates a standalone offense called PPP loan fraud. Instead, PPP loan-related crimes typically fall under broader federal fraud statutes. Two pertinent federal statutes include:

• 18 U.S.C. § 1014 makes it a criminal offense to knowingly make any false statement or report, or willfully overvalue land, property, or security, for the purpose of influencing the action of the Small Business Administration or another entity listed in the statute.
• Section 18 U.S.C. § 1344, which broadly prohibits bank fraud, including “executing or attempting to execute a scheme or artifice to defraud a financial institution,” as well as false representations for the purposes of obtaining “the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution”

PPP loan recipients also apply for PPP forgiveness applications. These applications may create separate potential liability from the original PPP loan application. This is because, while a borrower could have provided accurate information on their loan application and then incorrectly claimed forgiveness, the borrower could have also provided inaccurate information on their loan application and then incorrectly claimed forgiveness. In either case, prosecutors must still meet their burden of proving the elements of the charged offense, including any applicable materiality and intent requirements, as with all federal crimes.

When Does PPP Conduct Become a False Claims Act Case Rather Than a Criminal Fraud Prosecution?

The False Claims Act (FCA) is a civil statute, which means that FCA liability is civil in nature, and the penalty is financial. This is very different from federal criminal prosecution for fraud, which can result in imprisonment. With this said, both federal crimes and civil wrongs falling under the FCA can lead to liability and can trigger investigations and federal audits by various agencies.

Section 3729(a)(1)(G) imposes liability on anyone who knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases such an obligation. Thus, if the federal government alleges that an applicant or borrower knowingly used the PPP program to obtain funds to which it was not entitled, or “knowingly” misrepresents or conceals an obligation to repay, the applicant or borrower may be subject to civil liability.

If found liable under the False Claims Act, defendants can face treble damages and inflation-adjusted penalties. For borrowers that received PPP loans and are now facing investigation and litigation under the False Claims Act, it is critical to seek the advice of an experienced PPP defense lawyer.

The FCA’s core liability provision is 31 U.S.C. § 3729(a). Section 3729(b) defines what it means to “knowingly” present or cause the presentation of a false or fraudulent claim, and 31 U.S.C. § 3729(b)(1)(A)(iii) provides that a person acts “knowingly” if the person acts in reckless disregard of the truth or falsity of the information. This is similar to the criminal standard for fraud, which generally requires proof of knowing and intentional deception, not merely recklessness. However, as noted above, the FCA is a civil statute, and federal criminal prosecutions for fraud are pursued under federal criminal statutes.

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How Do Prosecutors Distinguish a Material Intentional Misrepresentation from a PPP Mistake or Business Dispute?

The difference between a material intentional misrepresentation and a mistake or a business dispute is one of the central issues in federal PPP fraud cases. From the prosecution’s perspective, demonstrating that an application contained a material misrepresentation (whether on the original application, a forgiveness application, or in connection with an SBA audit or other inquiry) is a key step toward securing a fraud conviction.

Examples of material misrepresentations that have been alleged in federal PPP fraud cases include:

• Inflated payroll and employee counts that increase the approved PPP loan amount or that make an otherwise ineligible business eligible to apply for a loan
• Misclassifying employees as independent contractors (or vice versa) to increase the available loan amount or to make an otherwise ineligible business eligible for PPP loan proceeds
• Creating a fictitious business, using a fictitious employee or loan, or utilizing fabricated bank statements and tax documents in support of a PPP application

While these allegations point toward fraudulent intent, from the defense’s perspective, they do not by themselves prove that an applicant or borrower committed fraud. A mistake made on a PPP loan application may, in many cases, be an honest mistake. Likewise, misclassifying a worker as an independent contractor rather than an employee is not necessarily an act of fraudulent deception, but may instead reflect a good-faith error of judgment or an open question of employment law.

Because of these issues, federal prosecutors must be able to identify clear evidence of fraudulent intent. For the defense, this presents an opportunity to challenge the prosecution’s allegations by pointing to evidence such as:

• A mistake made on the application
• A lack of knowledge or fraudulent intent
• Evidence of a third-party application submission, which can hinder the ability to properly attribute the fraudulent information to the defendant

While a material misrepresentation on a PPP loan application can provide the foundation for a criminal fraud prosecution, prosecutors must still prove the subsequent elements of a criminal fraud charge, including materiality, intent, and the other elements of the charged offense, before defendants can be held criminally liable. The same is true in civil enforcement actions under the False Claims Act (FCA). Understanding the nuances and available defenses is essential for any business owner, executive, or other individual facing federal PPP fraud charges.

What do an SBA Audit, FBI Interview, or Federal Document Request Mean for a PPP Borrower?

In recent years, the federal government has targeted PPP-related fraud on a large scale. While the majority of federal PPP fraud prosecutions target clearly fraudulent conduct, such as the establishment of “ghost companies” and fabricated employee rosters, there is also a growing body of case law focused on more nuanced forms of PPP-related misrepresentations.

If you or your business are facing an inquiry involving PPP loan fraud, contact our law firm promptly. We will take immediate action to speak with the investigating federal agent on your behalf, and we will provide ongoing representation throughout the investigation process. As with all federal inquiries and criminal investigations, speaking with an agent without the guidance of experienced counsel can carry substantial risks. For example, even if an individual was not previously subject to criminal exposure, making false statements to a federal agent can trigger criminal charges under federal false-statements law and, if the statutory elements are met, under other statutes such as wire fraud.

The FBI, the DOJ, the IRS, the SBA, and other federal agencies have all been involved in PPP fraud investigations. While the FBI has been particularly active, the SBA has used its program management authority to actively investigate PPP fraud as well.

In some cases, an SBA audit is the first step toward uncovering suspected PPP loan fraud. In the majority of cases, the SBA’s Office of Inspector General will forward any findings to federal law enforcement agencies to determine whether the case warrants further investigation. Even if an SBA audit does not lead to an immediate referral, information obtained during the audit process can later become part of a federal PPP loan fraud investigation, as well as potential civil or criminal proceedings. Along with responding to inquiries from federal investigators, avoiding self-incriminating conduct, and asserting constitutional protections, all are critical steps to protecting yourself or your business.

Contact a Federal Criminal Defense Attorney

Nothing here is legal advice, and the details of your case matter. Todd Spodek and Spodek Law Group take federal criminal and white collar cases nationwide, from offices in New York, Brooklyn, Queens and Los Angeles. You can reach the firm at 888 348 8028.