Federal PPP Loan Fraud: COVID-19 Relief Fraud Defense.

The majority of the issues that will arise in PPP loan forgiveness cases will result in the loss of forgiveness rather than criminal charges. However, these issues can create exposure that requires a knowledgeable defense team to help federal prosecutors understand the difference between innocent mistakes and willful misconduct.

1. Did You Falsely Certify the Need for the Loan?

PPS borrowers had to certify that economic uncertainty made the PPP loan necessary. While the SBA announced a “necessity-certification safe harbor” for borrowers that, together with their affiliates, received PPP loans totaling less than two million dollars, it did not provide one for borrowers at or above that threshold. With this in mind, the first thing to do in federal investigations involving PPP loans is to figure out if a federal prosecutor will make the most of the opportunity presented by the “necessity-certification safe harbor.”

The government is able to recover funds from borrowers who used PPP loans for unallowable expenses by denying forgiveness. The government is going to be able to deny forgiveness for the portion of the funds that are not forgivable.

Again, here, the government is going to have to seek civil recovery by pursuing the borrower for the repayment of the funds. However, if it can prove the criminal fraud beyond a reasonable doubt at trial, then it will be able to seek criminal penalties.

3. Did You Falsely Certify Forgiveness?

Borrowers seeking forgiveness for their PPP loans had to submit truthful supporting information and documentation. If a borrower falsely certified forgiveness, this could potentially create exposure separate from inaccuracies made during the loan application process. Again, if the government can prove that the borrower knowingly committed criminal fraud beyond a reasonable doubt, then the government will have access to federal penalties as well.

Given this, if you’re concerned about your PPP loan, the first thing you need to do is reach out to Spodek Law Group You don’t want to make a mistake that could lead to federal charges, especially when criminal charges are not warranted. To talk with us about your PPP loan, contact us at 800-318-2111.

Which PPP records reveal knowing misstatements about eligibility, payroll, or loan use?

When federal prosecutors identify potential PPP loan fraud, they focus their investigations on the information contained in applications, payroll records, bank statements, and business records. These documents are compared against each other to determine whether there was a knowing misstatement.

1. Application Records

Applications themselves can trigger scrutiny. If an application overstates the number of employees, payroll costs, or the business’s eligibility to seek a PPP loan, this could be grounds for seeking criminal charges. If the application includes false information, the federal government could also seek civil recovery through the False Claims Act.

2. Payroll Records

Payroll records can be compared against application data to determine if the application’s payroll figures were overstated or understated. Similarly, understating payroll figures could still lead to criminal exposure if this was done to avoid receiving an “overpayment” and therefore trigger more scrutiny.

3. Personnel Records

Personnel records are another source of information that can expose borrowers to allegations of PPP fraud. For example, if a business owner misclassifies employees as independent contractors, this may create eligibility issues, which could lead to the charge of criminally making a false statement or making an unlawful application.

4. Business Records

These records can be used to determine the legitimacy of the loan application by verifying the number of PPP-eligible personnel listed in business records versus payroll records.

5. Identifying Information

When a PPP loan application includes identifying information that is different from the applicant’s information, it can create a high risk of fraud allegations. As the law states, “Under 18 U.S.C. § 1028A, aggravated identity theft occurs when, during and in relation to a qualifying felony, a person knowingly transfers, possesses, or uses, without lawful authority, another person’s means of identification.” This includes “aggravated identity theft” under 18 U.S.C. § 1028A, which adds a mandatory two-year sentence to other applicable punishments.

6. Application Dates

The dates that PPP loan applications are submitted can reveal patterns of what is commonly referred to as “loan stacking.” Loan stacking occurs when applicants submit loan applications to multiple lenders. This could result in charges for fraud, conspiracy, wire fraud, bank fraud, and more.

7. Interview Records

Interview records can also be a source of information in PPP loan fraud investigations. Knowingly and willfully making materially false statements to federal investigators during a federal fraud interview may support criminal charges under 18 U.S.C. § 1001.

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.

How do SBA review, civil recovery, and criminal investigation diverge after PPP forgiveness?

Under the PPP, borrowers seeking forgiveness had to certify that they met the requirements for loan forgiveness.

If the business suffered a decline in employment number or employee compensation by the time loan forgiveness was sought, then loan forgiveness could be reduced proportionally.

In a PPP loan fraud investigation, investigators may reach out to borrowers before prosecutors file formal criminal charges. This happens in various PPP loan-related investigations. A federal grand-jury target letter, which is another common development in PPP investigations, signals that federal prosecutors view the recipient as a potential subject of criminal charges.

2. Criminal PPP Loan Fraud

Criminal PPP loan fraud investigations involve multiple agencies. The U.S. Department of Justice (DOJ) works with the Federal Bureau of Investigation (FBI) and the U.S. Small Business Administration (SBA) to investigate PPP fraud claims. The Internal Revenue Service (IRS), Office of the Inspector General (OIG), and various other federal agencies may be involved as well. In these cases, PPP enforcement involves criminal investigators.

3. Civil PPP Loan Fraud

Civil PPP loan fraud investigations can also lead to criminal prosecution, but the focus is on civil recovery and other non-criminal enforcement measures. The DOJ may pursue a lawsuit under the False Claims Act, which gives the government a powerful means for seeking civil recovery for violations of federal rules and requirements. As a result, these cases may not involve criminal investigators and FBI agents.

4. PPP Loan Forgiveness

Under the Paycheck Protection Program, loan forgiveness was offered to borrowers who met various requirements. Some of the issues that create liability in PPP loan applications and requests for loan forgiveness are the same. However, some issue result in PPP forgiveness denial, while some result in civil recovery and some result in criminal prosecution.

5. PPP Applications

Along with issues related to forgiveness, PPP loan applications also create liability. With this in mind, federal PPP fraud investigations are broad in scope, and federal prosecutors may pursue all types of cases when it involves the illegal use of federal pandemic relief funds.

What federal charges can follow a PPP allegation, and which consequences are statutory maximums rather than automatic sentences?

There is no standalone federal criminal statute named PPP loan fraud. Instead, as a result, federal prosecutors pursue cases that fall under various PPP-related fraud statutes. These include:

1. Bank Fraud, 18 U.S.C. § 1344

Under 18 U.S.C. § 1344, bank fraud occurs when a person knowingly executes or attempts to execute a scheme to defraud a financial institution or to obtain its money or property by false or fraudulent pretenses, representations, or promises. Bank fraud has the following penalties:

• “shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”
• “A fine of not more than $1,000,000, or”
• “Both.”

2. Wire Fraud, 18 U.S.C. § 1343

Under 18 U.S.C. § 1343, wire fraud requires a scheme or artifice to defraud or obtain money or property by false or fraudulent pretenses, representations, or promises, together with an interstate or foreign transmission by wire, radio, or television communication for the purpose of executing the scheme. With respect to the Paycheck Protection Program, wire fraud is commonly charged alongside other fraud charges. For example, the use of computers, mobile phones, and social media may constitute wire fraud if used in interstate or foreign commerce to execute a scheme or artifice to defraud.

3. Making False Statements in a Loan Application, 18 U.S.C. § 1014

Under 18 U.S.C. § 1014, any person making a false statement in a loan application to a bank or other financial institution insured by the Federal Deposit Insurance Corporation (FDIC) can be convicted of federal criminal fraud. This statute is specifically designed for people who are trying to secure a loan by lying on their loan application.

4. The False Claims Act, 31 U.S.C. § 3729 et seq.

Under the False Claims Act, a person is liable for knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval. As a result, if you have allegedly knowingly and willfully lied on your PPP loan application, this can become a claim for civil recovery under the False Claims Act. Liability under this act includes treble damages.

5. Other Federal Fraud Charges

Other federal fraud charges and offenses that could lead to federal charges and consequences in connection with the Paycheck Protection Program include mail fraud (18 U.S.C. § 1341), conspiracy to defraud the United States (18 U.S.C. § 371), making false statements or representations to federal agents (18 U.S.C. § 1001), and other federal offenses including aggravated identity theft under 18 U.S.C. § 1028A.

Talk It Through With a Lawyer

Every case turns on its own facts. Todd Spodek is the managing partner of Spodek Law Group, a second generation firm his father opened in 1976, and the firm takes federal criminal and white collar matters nationwide. Call 888 348 8028 to talk it through.