How Federal Prosecutors Build PPP Fraud Cases.

How do PPP fraud investigations typically begin? There are several ways these investigations can be triggered. As a result, the first step of any effective criminal defense is to figure out the origin of the case and how much information the government has uncovered.

Regardless of how an investigation begins, prosecutors and investigators will follow a records-driven process. This process involves:

Comprehensive Application Review

Investigators will review the PPP loan application, certification, and all other documents involved in the loan. They use these documents as the basis for an extensive inquiry, which often focuses on comparing the application and its supporting information with other available records. This comparison can include payroll, tax, banking, employment, and other pertinent records.

Issuing Investigative Subpoenas

In addition to reviewing internal records, federal authorities will often issue investigative subpoenas to various third parties. This can include:

• Banks and other financial institutions
• Payroll companies and third-party payment processors
• Other record-holding entities, such as vendors and business partners

Analyzing Digital Communications

In PPP cases, the application itself is often the evidence. When it contains inconsistencies, discrepancies, or other red flags, investigators will look for digital evidence to support allegations of intent and knowledge. This can include emails, texts, social media interactions, and other forms of electronic communications.

Interviewing Cooperating Witnesses

Prosecutors and investigators also rely on eyewitness testimony. Cooperating witnesses can be pivotal in PPP fraud investigations, providing insight into:

• The preparation and submission of the application
• Knowledge of the application’s content and accuracy
• Financial arrangements and relationships that involve the PPP funds

Conducting Forensic Financial Analysis

If PPP funds have been commingled with other funds, investigators will need to conduct a forensic reconstruction of the company’s financial records. This process involves isolating the PPP funds and tracking their usage, which requires meticulously piecing together bank statements and other financial records to identify individual transactions.

Connecting Evidence to Statutory Elements

After gathering and analyzing the evidence, investigators and prosecutors will connect their findings to the specific elements of the alleged federal offenses. This connects the evidence to the PPP fraud cases under the federal wire fraud and bank fraud statutes, specifically showing evidence of intent, but not actual loss.

Which legal theories can turn a PPP error into a federal charge?

Qualifying for Two Loans

There is some confusion surrounding how many PPP loans are available to a single business entity, with some claiming that businesses were only allowed to apply for a single loan. However, under certain conditions, qualifying businesses could apply for and receive two PPP loans, and this provides a powerful defense in various PPP fraud investigations.

Burden of Proof

Regardless of whether a business is applying for one loan or two, the government must prove that the defendant is guilty beyond a reasonable doubt in order to obtain a criminal conviction. The government’s burden of proof is particularly stringent in PPP fraud cases, and, while it may be clear that the government’s application and reimbursement rules were not followed to the letter, this does not necessarily mean that the business owners or other defendants are guilty of any criminal act.

Instead, the government must show that the violations in question were criminal, rather than result from a good-faith mistake, a misunderstanding of the complex and changing rules, or a misapplication of the program’s rules and requirements.

Wire Fraud, Bank Fraud, and False Statements

Most federal PPP cases involve the following three charges (or theories of liability):

• Wire fraud under 18 U.S.C. § 1343. Under this statute, a wire transmission in interstate or foreign commerce must be made as part of a scheme to defraud or obtain money or property by false or fraudulent pretenses.
• Bank fraud under 18 U.S.C. § 1344 covers schemes to defraud a financial institution or to obtain money or property in its custody or control by false or fraudulent pretenses, representations, or promises.
• False statements under 18 U.S.C. § 1014. Section 1014 criminalizes knowingly making a false statement or report, or willfully overvaluing property or security, for the purpose of influencing in any way the action of a covered financial institution or other listed entity.

Knowledge, Intent, and Mistake

While some statutory violations are considered strict liability, federal prosecutors will generally need to prove that a defendant acted knowingly or with the specific intent to commit a crime in order to successfully pursue PPP fraud charges. As a result, showing that a business owner acted in good faith, made an honest mistake, or relied on the advice of professionals can be a viable defense against criminal charges.

PPP Fund Usage

A significant portion of PPP fraud investigations and criminal PPP fraud charges focus on what a business did with its PPP loan funds. However, it is critical to note that not all PPP loans were subject to the same rules and not all PPP loans required specific uses for the funds. For example, a widely cited “sixty percent payroll rule” governed loan forgiveness rather than loan use, and this is a distinction that the federal government often overlooks when pursuing PPP fraud charges.

Forgiveness Requirements

While not all PPP loans have the same rules and requirements, receiving PPP loan forgiveness does require evidence of appropriate use. Businesses that apply for loan forgiveness must show that they used the loan proceeds for appropriate purposes and, in most cases, a certain percentage of those funds must have gone to payroll costs. This is a key area of PPP fraud investigations as the federal government works to prove that lenders approved and forgave fraudulent loans and that borrowers obtained forgiveness through unlawful or fraudulent means.

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Who can investigate, and what happens before a PPP case is charged?

DOJ COVID-19 Fraud Enforcement Task Force

The DOJ formed its COVID-19 Fraud Enforcement Task Force on May 17, 2021, and this task force plays a central role in investigating and prosecuting pandemic-related fraud. This task force is designed to address various forms of fraud that affect the federal government’s response to the pandemic, and this includes fraud in the various relief programs that have been enacted during the emergency.

DOJ Criminal Division Fraud Section

The DOJ Criminal Division Fraud Section works closely with the DOJ’s COVID-19 Fraud Enforcement Task Force to assist U.S. Attorneys’ Offices in handling pandemic-fraud cases, including those involving PPP violations.

Federal prosecutors and agents in the DOJ’s COVID-19 Fraud Enforcement Task Force and Fraud Section work to investigate and punish pandemic-related fraud, including cases involving PPP and other benefits and subsidies.

U.S. Attorneys’ Offices and Assistant U.S. Attorneys

The U.S. Attorneys’ Offices across the country are the primary prosecuting entities in federal cases involving the PPP, and they work with federal investigative agencies that collect evidence and information to build those cases.

Assistant U.S. Attorneys (AUSAs) investigate pandemic fraud at the federal level, and they frequently rely on information and evidence provided by federal law enforcement agents and other sources to seek indictments.

The Federal Bureau of Investigation (FBI)

The FBI is a federal investigative agency that works with other agencies to investigate federal fraud cases.

The U.S. Small Business Administration (SBA) Office of Inspector General (OIG)

The SBA OIG is another critical agency involved in PPP investigations. As the SBA’s independent oversight office, the SBA OIG has access to data and records relevant to investigating fraud involving companies, lenders, and individuals.

Internal Revenue Service Criminal Investigation (IRS CI)

IRS CI is a federal law enforcement agency that investigates various forms of tax fraud, and this includes fraud in both public and private contracts and the government’s use of pandemic relief funds.

Other Entities

The Department of the Treasury, the U.S. Postal Inspection Service, and other government-affiliated entities also play a significant role in federal PPP fraud investigations and prosecutions.

How can prosecutors calculate PPP loss across criminal and civil proceedings?

False Claims Act

The False Claims Act is a key statute for civil PPP fraud cases, and it generally imposes liability for knowingly presenting a false or fraudulent claim for payment or approval, knowingly making or using a materially false record or statement in support of such a claim, and certain other specified acts.

Under the False Claims Act, federal agencies can seek treble damages and civil penalties, and this can lead to substantial financial liability for businesses, owners, lenders, and executives.

Fraud Loss Calculations under U.S.S.G. § 2B1.1

In criminal PPP fraud cases, calculations of fraud loss pursuant to the United States Sentencing Guidelines § 2B1.1 can be pivotal. § 2B1.1 applies to offenses involving theft, embezzlement, fraud, forgery, and related property offenses and dictates the sentencing advisory range for a variety of offenses including federal loan fraud, and the amount of fraud loss is a key factor in determining the sentence for a defendant who is found to be guilty in a federal criminal case.

Legitimate Expenditures

Any legitimate expenditures can reduce the amount of loss, and PPP fraud defendants will want to challenge the government’s claim of fraud loss wherever possible. Even in cases where a loan application is false, expenditures that are legitimate and permitted under the rules and requirements of the PPP can significantly reduce the amount of actual or intended fraud loss.

Concurrent Proceedings

Criminal and civil PPP proceedings can occur as the result of the same underlying conduct, and it is important for the target of a PPP fraud case to avoid having information disclosed in a civil case that can potentially trigger a criminal prosecution.

The result of a successful civil fraud case can be a substantial financial penalty, and a civil judgment can be used as the basis for further government action, including initiating a criminal prosecution in some cases.

Restitution, Forfeiture, Fines, and Supervised Release

A conviction for criminal PPP fraud can have substantial consequences, and this can include restitution, forfeiture, fines, and supervised release (or probation). To defend against these penalties, defendants do not need to prove their innocence; the government must prove every element of the charged offense beyond a reasonable doubt.

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.