Federal EIDL Fraud Charges: SBA Loan Fraud Defense.

Yes, but not automatically. COVID-era Economic Injury Disaster Loan (EIDL) advances were designed to assist businesses during the pandemic. While many EIDL advances were forgivable, fully forgiveable EIDL advances (such as those for businesses with employee pay) generally were not. Many businesses struggle to repay their EIDL advances, and the U.S. Small Business Administration (SBA) has the power to collect on these advances when they are not paid back. However, repayment troubles by themselves do not equal fraud. And while SBA advances for eligible loans did not have repayment requirements, these loans still had to follow the program rules.

Does an Inaccurate Application Establish Fraud Liability?

No. An inaccurate application does not immediately establish fraud liability. In addition to the accuracy of the application, the government would need to prove that the applicant was knowingly trying to defraud the SBA, and that the inaccuracies were material. This can be a difficult standard to meet.

What Are the Elements of EIDL Fraud Liability?

What are the Requirements of SBA EIDL Loan Eligibility?

The SBA EIDL Loan program was open to certain businesses and other entities during the pandemic. The requirements generally varied based on the type of EIDL advance being applied for. Generally, these requirements included:

• The EIDL loan was used to cover pandemic-related business economic injury.
• The EIDL advance was taken by a business or entity that was eligible for a loan.

Are All EIDL Advances Forgivable?

No. Certain EIDL advances are forgivable, but for the most part, they are not. However, qualifying Paycheck Protection Program (PPP) loans are forgivable. Some EIDL advances were disbursed without repayment obligations, but many had repayment requirements that were later clarified by the SBA.

What Can the SBA Do for EIDL Loan or Loan Fraud?

The SBA can pursue civil remedies and refer suspected criminal violations for investigation and prosecution. The SBA has the power to take back SBA funds through civil lawsuits, but it also has the power to refer individuals and companies for prosecution for federal crimes.

How Can SBA-OIG Investigators Connect EIDL Application Data to Spending?

The investigation of an EIDL loan application is just the beginning of a potential fraud investigation. Often, investigation into a single application or multiple applications for EIDL funds from a single individual or business owner is just the first step. The investigation then focuses on the use of the EIDL funds, which requires a deeper dive into the borrower’s bank records and other relevant financial and tax records.

The process of identifying potential fraud generally begins with the SBA and OIG conducting audits of EIDL applications received. This triggers suspicion if an applicant provides false information such as (i) false revenue or employee numbers, (ii) false business details, or (iii) false ownership information. While some of the concerns are less obvious than others, they nonetheless raise flags, and the government may decide to open a criminal investigation.

Many reported EIDL fraud schemes involve applicants who submitted multiple applications to the SBA with different lenders, through different portals, or under different identities, including stolen identities. The use of data analytics tools is a core part of the government’s approach to identifying these fraud schemes. With these tools, investigators can find patterns of behavior, identify duplicate applications, and identify suspicious loan transactions involving multiple recipients.

Once the government establishes a case, federal agents will seek to gather more information. In addition to using data analytics, the government may open a criminal case and then use the grand jury process to subpoena business owners’ bank and payroll records, or the government may use search warrants to obtain the same records. An audit by the SBA can also provide the government with the information it needs to start a criminal case. The government examines not only the application data but also the recipient’s subsequent use of the EIDL loan proceeds. The government will investigate recipients’ bank and employer records, as well as other sources of information. Federal agents may be able to gather sufficient evidence to make a criminal referral through either a search warrant, audit, grand jury subpoena, or other investigative tool. In some cases, by the time the target of the investigation is made aware of the case, the government has already completed its investigation and developed its case.

One thing worth knowing before you speak to anyone in custody: those calls are recorded, and prosecutors listen to them. Spodek Law Group tells every client family the same thing.

Which Federal Charges Require Proof of Deception, Conversion, or Identity Misuse?

There are a number of different federal statutes that apply to SBA EIDL fraud and PPP loan fraud allegations. For most of these statutes, deception is a necessary element of the government’s case. For others, the government must show that a recipient fraudulently acquired the funds and converted the funds to an impermissible use. Additionally, for others, the government must prove that a recipient used a false identity to apply for and obtain a loan or advance. Examples of federal charges that fall into the category of fraud are:

• Wire Fraud (18 U.S.C. § 1343). These charges have a maximum twenty-year federal prison sentence, and they are very commonly used in pandemic-era fraud cases. Wire fraud involves executing a scheme to obtain money or other property under pretenses or false representations through the interstate use of mail or wires (such as the internet).
• Bank Fraud (18 U.S.C. § 1344). These charges have a maximum thirty-year federal prison sentence. They target fraud that targets the federal government or a federally insured financial institution. If the recipient fraudulently applied for and received a loan through a private bank, this may be the specific charge they are facing.

How Does Conversion of Funds or Theft of Identity Lead to Prosecution?

Converting the EIDL advances to an impermissible use or using a false identity are common elements of pandemic-era fraud cases, as well. These actions may be evidence of fraudulent intent, but they do not necessarily prove that the applicant had that intent from the beginning. This can be extremely difficult to defend against, as it demonstrates the criminal nature of the recipient’s actions even in the absence of direct evidence.

This includes:

• The recipient’s use of fraud to acquire the proceeds.
• The recipient’s fraudulent conversion of the loan’s intended purpose.
• The recipient’s unlawful use of the loan’s proceeds.
• The recipient’s use of a third party’s identity in relation to the loan.

Even in cases where applicants do not intentionally use a false identity or make a false application, the government will often use all available investigative tools to prove the recipient’s fraud intent. For example, if a recipient receives a PPP loan but subsequently uses the funds for purchases such as cars, vacations, and other impermissible purposes, the government will target this as evidence of intent to defraud.

When Do Repayment, Cooperation, or Bankruptcy Change the Consequences of Facing Civil or Criminal EIDL Fraud Charges?

The consequences of facing civil or criminal EIDL fraud charges are substantial. For civil fraud cases, the primary federal statute is the False Claims Act (FCA). The FCA provides for treble damages, and it applies when an applicant knowingly makes a fraudulent claim for payment from the government. Many pandemic-relief cases are strictly civil and target restitution; however, civil prosecution under the FCA is still serious. When the government pursues the recipient under the FCA, that civil action does not itself carry a risk of federal prison.

For criminal cases, penalties may include restitution, forfeiture, and monetary fines. In some cases, the SBA and DOJ may pursue both civil and criminal charges. For most fraud cases, the amount involved may result in a conviction for attempted or committed fraud, and the recipient of a PPP loan may have a high degree of fault. But even if the recipient’s application contained inaccuracies and the government is able to seek criminal penalties, partial legitimate use of EIDL or PPP funds may still remain relevant for civil or criminal liability, the amount of loss, the amount of a sentence, and the calculation of a good-faith defense.

A business owner can also face fraud charges for the application that was made by his or her company. For example, when an applicant files jointly with his or her spouse, both may face consequences for their involvement in fraud.

In some cases, applicants who received EIDL funds in bad faith have gone to the SBA to voluntarily repay the loan in the hope that they will not face consequences. Repayment may be a sign of cooperation with the government. This sign of cooperation can matter when it comes to the possibility of criminal or civil charges. However, repayment can also be seen as an admission of guilt, and this doesn’t necessarily make avoiding liability a reality.

Speak With Counsel Before You Answer Anything

If agents have contacted you, the order matters: counsel first, answers second. Spodek Law Group has been practicing since 1976 and defends federal matters nationwide, coast to coast, from offices in New York, Brooklyn, Queens and Los Angeles. Call 888 348 8028.