Good Faith Defense in PPP Fraud Cases: Does It Work??

Good-faith compliance is one of the most commonly presented defenses in PPP fraud investigations and criminal prosecutions. Defendants argue that they acted in good faith when applying for, receiving, or spending their loan funds, and then use this as evidence against fraudulent intent. To support this argument, defendants also point to their reliance on advice from professional advisors and conflicting guidance from the federal government. These factual issues are often important for the following reasons:

The Issues of Professional Advice and Pandemic Guidance Create Factual Disputes

The factual issues are often important because they force a jury to make a decision, rather than the prosecution being able to secure an easy guilty verdict. If a defendant did not have a clear understanding of the PPP rules and relied on someone else’s advice, this creates significant hurdles for the government’s case.

The Burden of Proof and Establishing Criminal Intent

The burden of proof in federal criminal cases is also very high. The government has to prove each element of the offense beyond a reasonable doubt. In PPP cases, the burden of proof is particularly high because the government has to prove not only the fact that the defendant wrongfully obtained funds, but also that the defendant did so with the the intent required by the charged offense, such as intent to defraud.

Receiving Funds Improperly and Having Inaccurate Records do Not Alone Establish Fraudulent Intent

Furthermore, receiving funds improperly does not alone establish fraudulent criminal intent. With the pandemic providing unprecedented circumstances and the government creating loans with little experience in such a program, mistakes were made on both sides of the application. Similarly, having financial records that are wrong may undermine evidence of fraud. An honest calculation error may not support the government’s burden of proof to show a defendant knowingly deceived lenders and banks, and as a result, it should not necessarily lead to criminal charges.

Which PPP conduct turns a program mistake into a federal fraud theory?

PPP loans were not meant to be a windfall for businesses that were not impacted by the COVID-19 pandemic. Instead, the program was designed to avoid bankruptcies and job losses. As a result, applicants had to represent that pandemic conditions, such as the enforcement of shelter-in-place orders, the employee quarantine requirement, the general decline in business travel, and the reduced accessibility for face-to-face transactions, made the loan necessary.

PPP funds could be used for payroll expenses (including benefits), mortgage interest, rent, health care premiums, and utilities. While payroll was the primary purpose, there were other allowable business expenses as well. PPP funds must be used for eligible business expenses to be eligible for loan forgiveness. However, use of PPP loan proceeds for personal expenses or other ineligible expenditures can lead to loan forgiveness denial, which can turn an investigation into a fraud case.

Moreover, any fraudulent application or attempt to illegally utilize the PPP has the potential to lead to criminal prosecution for a wide range of federal fraud charges. These charges may include the falsification of payroll records, tax returns, employee counts, business identification numbers, or other business information. They may also include the issuance of fraudulent statements regarding the source of business revenue or the application’s intended use of funds.

Federal law enforcement authorities also investigate applications submitted on behalf of nonexistent businesses, businesses newly formed to pursue the loan program, and businesses which they suspect are attempting to obtain fraudulently obtained funds.

In a PPP fraud investigation, all information submitted by an applicant will be reviewed by federal authorities. This includes all financial records, bank records, and other relevant documents. Any misrepresentation made to a lender or bank may be scrutinized, and these inquiries can lead to criminal charges. If you need to address an inquiry or are facing federal charges for PPP fraud, federal criminal defense lawyers at Spodek Law Group can discuss with you what this means for your case.

How Do SBA Loan Reviews Differ From PPP Fraud Investigations?

SBA Office of Inspector General reviews can lead to federal investigations for fraud and other crimes. When the SBA OIG comes across suspicious applications or documentation, it can forward this information to a federal law enforcement agency (or agencies), including the Office of a U.S. Attorney, that can then use this information to initiate an investigation into suspected PPP fraud. Similarly, when the IRS’s Criminal Investigation Division looks at an applicant’s financial records, it may find that information that could support fraud charges, and the IRS’s Criminal Investigation Division can also forward a matter to U.S. Attorneys, who can then open an investigation into suspected PPP fraud.

Agencies Involved in PPP Fraud Investigations and Prosecutions

Within the DOJ, the PRAC Fraud Task Force and DOJ’s Fraud Section coordinates investigations and prosecutions for fraud involving federal COVID-19 relief funds. As a result, U.S. Attorneys’ Offices have their local offices working with federal law enforcement authorities. This includes:

• Investigating alleged fraudulent use of PPP funds,
• Preparing criminal charges for PPP fraud,
• and
• Prosecuting defendants in PPP fraud cases before federal judges.

Does a Good-Faith Defense Make Sense in PPP Cases?

If an SBA loan review reveals information that warrants further inquiry, federal investigators can subsequently utilize information that was uncovered during the SBA audit to support their criminal inquiry. If you are under investigation or are facing charges for PPP fraud, a good-faith defense could make sense, and an experienced federal criminal defense lawyer at Spodek Law Group will work closely with you to help you determine if your circumstances warrant presenting one. If a good-faith defense makes sense for you, your lawyer can work to help you establish your defense based on the available evidence.

Spodek Law Group is a second generation New York firm. Todd Spodek practices out of the firm his father opened in 1976.

What do PPP fraud statutes and Guidelines actually expose you to?

Bank Fraud (18 U.S.C. § 1344)

The bank fraud statute, 18 U.S.C. § 1344, contains the following language in part:

With intent to defraud a financial institution, or to obtain money or property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises, or by forgeries, the issuance of a check偽, the issuance of a fraudulent or otherwise-untrue bank draft or securities, the execution of a scheme to defraud, or any attempt to execute such a scheme,....

Bank fraud is a serious crime that carries up to 30 years of federal imprisonment and a fine of up to $1 million.

Mail Fraud (18 U.S.C. § 1341)

§ 1341, covers the use of the mail to carry out “ a scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” Although use of the U.S. Mail is less common than use of the Internet, if it is a part of the offense, the statute may apply.

Wire Fraud (18 U.S.C. § 1343)

The wire fraud statute, 18 U.S.C. § 1343, reads, “ Whoever, intending to defraud, or for obtaining any money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, course, or markings {containing or representing} any fraudulent pretenses, representations, or promises... ”

Although the statute speaks of interstate or foreign commerce, an interstate wire transmission will establish federal jurisdiction. An interstate electronic communication used in furtherance of the fraud will trigger the wire fraud statute in a case of attempted or successful fraud. General criminal penalties for wire fraud include up to 20 years of federal imprisonment and criminal fines.

What Can Follow a PPP Case Besides a Prison Term?

In addition to bank fraud, prosecutors may charge mail fraud as well, for violating 18 U.S.C. § 1341.

Under 18 U.S.C. § 1349, attempts and conspiracies to commit one of the aforementioned offenses carry the same penalties as committing the underlying offense. If a defendant was involved in a conspiracy to defraud the government through a PPP application or use of PPP loan proceeds, he or she may still face the penalty for the underlying offense under 18 U.S.C. § 1349.

The U.S. Department of Justice may charge aggravated identity theft in a PPP case when the evidence shows that, during and in relation to an enumerated felony, the defendant knowingly transferred, possessed, or used, without lawful authority, another person’s means of identification. If convicted under this federal offense, a defendant must serve an additional two years for a non-terrorism offense, after serving the sentenced prison term for his or her underlying offense. There is no possibility for a concurrent sentence or for the defendant to serve this portion of the prison sentence under house arrest or probation.

In addition to criminal prosecutions, government prosecutors also enforce the False Claims Act. While the False Claims Act is a civil statute, qualifying misconduct can still result in civil penalties and treble damages for funds obtained from the federal government through PPP loans. The False Claims Act also allows the government to recover damages for losses resulting from theft of government funds.

Courts may also order restitution of any fraudulently obtained PPP loan funds or for PPP funds used improperly. Restitution is meant to reimburse a lender or bank for its financial losses.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 888 348 8028.