First-Time Offender: Will I Go to Prison for PPP Fraud??

If you have never been in legal trouble before, your first instinct might be to assume you will not have to serve time in prison if convicted of PPP fraud. Unfortunately, this is not true in every case. Below are answers to some of the most-asked questions regarding sentencing risks for first-time PPP defendants.

Q: If I plea guilty, can I avoid prison?

Pleading guilty to a criminal charge is not a guarantee that you will avoid incarceration. Following a guilty plea, your case will be handled by a sentencing judge who will hold a sentencing hearing. At this hearing, the judge will use the sentencing guidelines as a starting point, but may also look at mitigating factors (e.g. you have no prior criminal record) and aggravating factors (e.g. you took advantage of another individual or entity).

Q: What are the odds in a trial?

First-time defendants can also avoid prison time in a trial. In these cases, the prosecution must prove fraudulent intent to secure a conviction. Unlike in civil proceedings, where a defendant’s “intent” is measured on a preponderance of the evidence standard, in criminal proceedings the burden is to prove intent “beyond a reasonable doubt.” Many federal defendants use this to their advantage to secure an acquittal or more favorable plea deal.

Q: How does “loss amount” affect sentencing?

The loss amount is a key component of sentencing calculations for fraud. In addition to calculating the loss amount, the court will determine the defendant’s “criminal-history category.” Criminal-history category I is the lowest federal sentencing-history category, and it applies to defendants with no prior convictions or with prior convictions for minor offenses. The loss amount and criminal-history category are then used to determine the suggested sentencing range.

Q: What scenarios might lead to prison time?

Even if you fall into criminal-history category I, prison time can still be on the table. Several specific scenarios involving PPP fraud carry a high risk of incarceration:

• Applying for millions of dollars in PPP relief funds
• Filing multiple loan applications
• Using forged or fabricated bank records and other documents
• Using pandemic relief funds for personal enrichment

How does PPP conduct become a federal fraud charge?

How Does PPP Conduct Lead to Criminal Charges?

The conduct that can form the basis of federal criminal charges falls into two categories: application fraud and misuse of funds. If you obtain funds through fraudulent means, the government may charge you with application fraud. If you use government relief funds for purposes that are not permitted under the CARES Act, you can be charged with misuse of government funds. Here are some examples:

• False Payroll Data: Applicants for forgivable loans must certify the amount of payroll expense they need to meet payroll obligations. Using false payroll numbers can be a prime target for a federal fraud prosecution.
• Misuse of Funds for Personal Use: Using PPP relief funds for a “down payment on a house,” “new car,” “vacation,” “clothing,” “medical expenses,” and other forms of personal use or non-business-related expenses is another key scenario that will likely result in fraud charges and incarceration.
• Loan Stacking: Loan stacking refers to applicants who apply for multiple loans through different lenders for the same financial assistance program, like PPP, even though they are ineligible for all except one. In some cases, this can also refer to multiple PPP applications.
• Other Application Issues: This includes, but is not limited to, forging the names and signatures of lenders or owners on loan applications, lying about a business or its owners’ size, and other types of intentional fraud.

The biggest factor in determining whether you will be charged with a crime for taking PPP loans is whether you “knowingly” provided false information to secure funding or knowingly used funds you received for prohibited purposes.

If the federal government chooses to prosecute, it will use all available resources to uncover the details of your PPP application. Federal investigators and prosecutors are skilled at investigating these matters and they may also have other agencies’ help. These investigators have access to:

• Your PPP loan application (and any amendments made after the initial filing)
• Your tax, payroll, bank, and financial records
• Your business’s financial records (or the records of your company’s financial advisor, accountant, and other professionals)
• Your social media profiles

The government will use all these sources of information to build its case against you. If you were charged with any other white-collar offenses like bank fraud or wire fraud, the same standard will apply in these cases. With this in mind, these are the basic components of a federal fraud charge:

• Fraudulent intent: The first and most important element of a federal fraud charge is to show that you have “fraudulent intent.”
• Interstate use of wire communication, or other means: In cases of wire fraud, it is necessary to show “interstate use of wire communication.”
• Use of a financial institution: With bank fraud, it must be shown that you intended to defraud a “financial institution” or obtain by means of false or fraudulent pretenses, representations, or promises, any money, funds, credits, assets, securities, or other property owned by a financial institution.

Spodek Law Group takes federal matters nationwide, coast to coast, and runs a fully online client portal so a case can be handled from anywhere.

What Numbers Actually Drive a First-Time PPP Sentence?

For first-time defendants, what determines their sentencing are the figures used to calculate their “offense level.” In federal cases, calculations begin with the advisory United States Sentencing Guidelines (USSG), and the USSG’s primary framework for criminal fraud loss calculations is § 2B1.1.

This framework uses several key components to arrive at the suggested sentencing range. These are, in order:

• Base Offense Level
• Financial Loss (Loss amount, intended loss, and restitution)
• Specific Offense Characteristics (e.g. a third party got involved)
• Sentencing-Enhancements (e.g. obstruction of justice, sophisticated means, and organized criminal activity)

The single most important factor for federal prosecutors and defense lawyers is whether the defendant’s actions have an effect on the financial loss amount. As a result, some of the numbers that have an effect on your sentence are:

Q: Do the funds I obtained through PPP loan proceeds count as the amount of loss?

Not necessarily. For purposes of the federal guidelines, obtaining funds by means of fraud may not equal the Guidelines’ calculated loss amount. This is because the calculation of a defendant’s exposure under the USSG is complicated. Even in cases where a defendant obtained funds through a PPP loan, restitution can be credited towards the loss amount. The restitution amount may vary based on payments made, but restitution generally does not alter the Guidelines loss calculation.

Q: Does making restitution impact the sentencing?

Restitution can impact a defendant’s sentencing. If the defendant is able to make restitution, that payment may affect the restitution order and may be considered as a mitigating sentencing factor, but it generally will not reduce the Guidelines loss calculation. However, restitution may also be viewed as a “restitutive measure” or a form of remediation. Again, this will also be factored into the sentencing range in certain cases. Restitution is a key mitigating factor in white-collar cases, and it should play a role in your defense strategy.

It is important to distinguish restitution, forfeiture, and the financial loss for the purposes of the federal sentencing calculations. Restitution is payment to victims for the purposes of loss remediation. Forfeiture is the transfer of property from the defendant to the government to repay debt to society. Neither restitution nor forfeiture automatically changes the calculated Guidelines loss of an individual defendant in a federal criminal case.

Q: What other factors can impact a first-time PPP sentence?

While the loss amount is the primary factor in sentencing, it is not the only one. Many other factors can affect a first-time PPP defendant’s sentence, including:

• Obstruction of Justice
• Leadership Role
• Sophisticated Means
• The number of victims
• Forgiveness of loans
• Restitutive efforts
• Criminal history or no criminal history
• A business entity cannot serve prison time. However, if you are the owner of a business entity that received PPP relief funds, you may be personally liable. Therefore, as a first-time offender, you must focus on trying to decrease the financial amounts calculated as a part of your financial exposure in federal court.

When Is My PPP Scrutiny Criminal, Civil, or Time-Barred?

Regarding the questions that frequently come up for first-time PPP defendants regarding when an audit or investigation becomes criminal, here are the common facts:

A common question for many individuals and business owners regarding their federal investigation is whether the Department of Justice is involved. However, this has never been true for investigations conducted by the Office of Inspector General (OIG) or other agencies of the federal government. In cases of PPP fraud, the Department of Justice (DOJ) is the government’s primary enforcement arm. With this in mind, you may face a DOJ investigation and civil recovery effort as well.

In many cases, an SBA’s inquiry or audit will remain purely administrative. The federal government typically keeps a business owner’s right to seek relief funding in reserves while a concurrent criminal investigation progresses. For this reason, the fact that you are under a government investigation does not necessarily mean that you will face charges.

PPP fraud is a hybrid offense. To that effect, a defendant can face charges for criminal misconduct as well as civil liability. Even while a criminal investigation or prosecution is pending, the government could also file a civil suit under the False Claims Act. However, many cases can see these efforts proceeding at once. Once again, having PPP fraud alleged against you does not automatically mean that you will face criminal charges.

Defendants in PPP fraud cases can face False Claims Act liability, which creates civil liability, while separate criminal statutes may support criminal prosecution. Once the evidence in these cases is sufficient, federal prosecutors can seek treble damages and civil penalties. The False Claims Act permits treble damages, civil penalties, and recovery of the costs of the civil action. Therefore, while an individual can face significant penalties in these cases, he or she will not face imprisonment.

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.