How PPP Loan Fraud Cases Get Made.

SBA forgiveness is not an eligibility determination. As long as the SBA’s Office of Inspector General finds evidence to support criminal charges, and as long as the investigation does not uncover evidence that establishes one of the “safe harbor” defenses that would make criminal prosecution unjustifiable, the OIG can still refer your case to the DOJ. As a result, your case does not close with forgiveness of the loan.

A good faith belief in eligibility is a complete defense to criminal fraud charges under all applicable federal statutes. SBA’s Office of Forgiveness is not an eligibility determination body, and forgiveness does not mean that a loan was properly obtained or that the loan recipient is not subject to criminal prosecution.

In federal fraud cases, the statutory maximum rarely predicts the actual sentence served. Instead, the Federal Sentencing Guidelines’ loss table drives the sentencing range in the vast majority of criminal cases.

The Internal Revenue Service’s Criminal Investigation Division, the FBI, and the U.S. Postal Inspection Service are all federal agencies that handle PPP fraud matters. The U.S. Department of Justice (DOJ) launched its COVID-19 Fraud Enforcement Task Force in May 2021, and the DOJ additionally established regional COVID-19 fraud strike force teams in Maryland, Florida, California, Colorado, and New Jersey.

SBA’s Office of Inspector General contains two separate divisions: one for auditing and one for criminal investigations. Internal auditors refer cases to the OIG’s criminal investigators when appropriate. In PPP matters that involve allegations of underwriting failure on the part of lenders, the OIG’s criminal division often joins its investigations with the Inspectors General at the Federal Deposit Insurance Corporation (FDIC) and the U.S. Department of the Treasury.

Can SBA investigate my PPP loan after forgiveness?

Yes, the SBA can review any PPP loan at any time, regardless of the loan’s size or whether it was forgiven. If you have any concerns about your PPP loan, we recommend taking steps to protect yourself before the SBA or the DOJ opens an investigation.

The Forgiveness Certification

When borrowers applied for loan forgiveness, they were required to sign a forgiveness certification. Under the SBA's PPP loan forgiveness rules and SBA Form 3508, the certification requires a PPP borrower to affirm the following:

• The borrower was eligible for its PPP loan at the time of origination,
• The borrower used the loan proceeds as intended by the PPP,
• The borrower made no loan modifications that would affect its eligibility or the size of its loan, and
• The borrower has the documentation to prove its eligibility and use of loan proceeds.

While the certification is based on the same underlying facts that the SBA required at the application stage, certifying these facts to the SBA is a separate statement and can carry independent criminal and civil exposure. If the certification is fraudulent, the borrower may be subject to criminal charges under 18 U.S.C. 1001 and other federal statutes, and civil charges under the False Claims Act.

Record Retention Requirements

Borrowers must also keep all records related to their PPP loan for six years after the loan is forgiven or repaid. According to 13 CFR 120.524(c) and SBA's PPP loan review interim final rule, this retention period applies to documentation of any expenses for which a borrower is requesting loan forgiveness. The regulations are not clear on the retention period for documentation related to PPP loan origination.

Repayment of Forgiven Loans

Repaying the principal and interest on a forgiven PPP loan does not necessarily extinguish criminal liability for fraud. The SBA will consider voluntary repayment of a forgiven PPP loan during the loan review process, but, as a result of the certification statement requirements explained above, voluntary repayment does not eliminate exposure to criminal prosecution if the borrower’s original application was fraudulent.

Forfeiture of the Income Tax Exclusion

The Internal Revenue Code grants a safe harbor for forgiven PPP loan proceeds. However, the law also makes clear that borrowers who certify fraudulent forgiveness applications must forfeit their safe harbor protection. If a borrower’s loan is audited and deemed fraudulent, the IRS can seek deficiency taxes, civil penalties, and interest.

Borrowers Under $2 Million and the Economic Necessity Certification

Under the Small Business Act, lenders were required to ensure that their borrowers certified they were in need of PPP assistance prior to the loan’s approval. While certifying economic necessity was a requirement for all PPP loans, borrowers that, together with their affiliates, received PPP loans with an original principal amount of less than $2 million were deemed under SBA FAQ 46 to have made the economic-necessity certification in good faith. Borrowers who falsified this certification could still face liability, but the statutory requirements differ.

Appeals for Final Loan Review Decisions

Borrowers can appeal final loan review decisions made by the SBA. With this said, any appeal must be filed with the SBA’s Office of Hearings and Appeals within 30 calendar days of the SBA’s final review decision. Under 13 CFR part 134, subpart L, appeals must be filed with OHA through its online Case Portal.

What must prosecutors prove in a PPP fraud case?

Wire Fraud

Wire fraud is the most commonly charged offense. To prove wire fraud under 18 U.S.C. 1343, prosecutors must show that the defendant:

• Participated in a scheme to defraud
• Intended to defraud
• Misrepresented a material fact in furtherance of the scheme
• Used interstate wires in the execution of the scheme

In Neder v. United States, the Supreme Court ruled that materiality is a critical element of federal fraud offenses, and thus must be proven by prosecutors in all relevant cases.

In a 2023 case concerning wire fraud, Ciminelli v. United States, 598 U.S. 306 (2023), the Supreme Court eliminated the “right-to-control” theory of federal wire fraud. This is a new defense to the charge that the DOJ’s federal prosecutors never wanted to emerge, so you should be sure to have an experienced defense lawyer on your case.

Additionally, in Kelly v. United States, the Supreme Court ruled that the “object” of any criminal fraud scheme must be “money or property.” The Supreme Court in Kelly rejected the government’s theory that fraud could encompass the pursuit of information or other intangible interests.

How Does the Government Prove Intent?

In PPP fraud cases, proving intent beyond a reasonable doubt is the hardest job for the government. For the government to overcome a successful fraud defense, prosecutors must show more than simply that a defendant’s PPP loan application contained false information. Prosecutors must show, to a jury, that this is evidence that the applicant had intent to defraud the government. Prosecutors may seek to establish intent in PPP cases by citing:

• Altered tax forms,
• Fabricated payroll records,
• Bank records that contradict reported PPP application figures,
• Application figures that do not match the borrower’s Quarterly Form 941 filings,
• Misleading narratives,
• Inconsistencies between different forms of documentation, or,
• Evidence of prior loan fraud or other crimes.

Along with many other forms of documentation, the government considers the Quarterly Form 941 payroll tax filing to be an important source of evidence. In PPP fraud cases, prosecutors will often compare the figures on the quarterly Form 941 filing against the figures provided on a borrower’s PPP application to show fraudulent misrepresentations.

Bank Fraud

Banks that participated in the Paycheck Protection Program provided PPP loans to borrowers that were funded by the SBA and guaranteed by the federal government. When banks identify potential fraud (or are identified as underperforming during the SBA’s loan review), this provides the basis for bank fraud charges under 18 U.S.C. 1344. As specified in section 1102 of the CARES Act, PPP loans were originated and funded by participating private lenders and guaranteed 100 percent by the SBA. For this reason, these loans do not include the elements for bank fraud in the same way that Paycheck Protection Program Protection (PPP) loans do.

Economic Injury Disaster Loan (EIDL) Fraud

The U.S. Small Business Administration (SBA) provides relief directly to borrowers through the Economic Injury Disaster Loan (EIDL) program. The lack of intermediate funding source (such as the private bank in PPP loans) means that most EIDL fraud cases do not present a basis for federal prosecutors to bring charges under the bank fraud statute. However, EIDL fraud cases do carry the risk of wire fraud and other charges.

Todd Spodek and the attorneys at Spodek Law Group handle federal cases of this kind from New York, Brooklyn, Queens and Los Angeles.

What can investigators demand during a PPP fraud investigation?

Suspicious Activity Reports

PPP loan investigations are often opened after banks submit suspicious activity reports to the Financial Crimes Enforcement Network (FinCEN). In many cases, this happens long after the loan has been granted, and for whom the loan proceeds have already been spent. Even if the bank is the source of the loan’s certification, the bank serves the role of a private enforcement agent for the SBA and can be compelled to assist the government.

False Statements to Federal Agents

If you are approached by a federal agent, anything you say to that agent is at risk of being used in court. This includes lies told in an attempt to mislead the agent or distract them from any supposed fraud commitment. Lying to a federal agent is a separate crime in and of itself, and, under 18 U.S.C. § 1001, making a knowingly false or fraudulent statement to a federal agent carries a statutory maximum of five years of federal prison time and a fine of up to $250,000.

Civil Investigative Demands

Under 31 U.S.C. § 3733, the DOJ can issue a civil investigative demand (CID) requiring a person or organization to produce records in support of the agency’s civil investigative action. CIDs are comparable to subpoenas, and the subpoena power allows the agency to compel testimony through sworn oral testimony, as well as the records and statements themselves. CIDs are issued by the DOJ’s COVID-19 Fraud Enforcement Task Force and other agencies as well.

5th Amendment Privileges

Individuals, but not corporations, have Fifth Amendment protections against self-incrimination, which protect a person against compelled self-incrimination when he or she is under investigation. However, the Fifth Amendment privilege against self-incrimination does not extend to corporations, even though corporations retain other constitutional protections. When companies fail to maintain their Fifth Amendment privilege, their records can be used by prosecutors in federal court. Individual sole proprietors who serve as the custodians of their company’s records can invoke the act-of-production privilege on the grounds that the government is forcing the disclosure of their private documents.

The Target, the Subject, and the Witness

Under the Justice Manual, these refer to three different types of government inquiry targets. A “target” is an individual or corporation that the government believes has committed a crime. A “subject” is an individual or company that the government believes is implicated in the commission of a crime, but which is less likely to have played the role of the main suspect. A “witness” is someone that the government has determined to have knowledge about potential criminal conduct, but who was not involved in the crime. The government rarely informs you about your status as a target, subject, or witness unless this status is crucial for the government’s investigative success.

Destruction of Evidence

Destruction of the subpoenaed records is separately chargeable as obstruction of justice, and it carries a separate criminal penalty under 18 U.S.C. § 1519. This is true regardless of the underlying fraud charges. This statute carries a statutory maximum of 20 years in prison and prohibits destroying, altering, or concealing any record with intent to impede, obstruct, or influence a federal criminal investigation.

COVID-19 Fraud Strike Force Civil Investigative Demands (CIDs)

The DOJ’s COVID-19 Fraud Strike Force may issue CIDs under 31 U.S.C. § 3733 before filing a formal civil action under the False Claims Act (FCA). A CID differs from a subpoena because it has broader authority to demand certain records and sworn oral testimony. Additionally, the Justice Manual imposes strict time limits on an agency’s ability to issue a CID during the investigative process.

How much prison time does PPP loan fraud carry?

Statutory Maximums

The statutory maximum sentences for most major fraud offenses are the same, regardless of the alleged fraud’s magnitude, that is:

• Bank fraud: 30 years,
• False statements on SBA loan applications: 30 years,
• Wire fraud: 20 years, but up to 30 years when the fraud is perpetrated against a financial institution,
• Mail fraud: 20 years,
• Conspiracy to commit any of these crimes: the same statutory maximum as the underlying offense under 18 U.S.C. § 1349 (20 or 30 years), or 5 years under the general conspiracy statute, 18 U.S.C. § 371.

While these statutory maximums are helpful for understanding the underlying offenses’ severity, they offer very little information about the likely length of a defendant’s sentence.

The Loss Table

The actual sentence that judges impose will be much more influenced by the Federal Sentencing Guidelines. With respect to offenses involving economic loss, the guidelines allow for an increase in the defendant’s offense level, and, therefore, sentence, based on the amount of the loss involved.

In fraud cases, as set forth in Federal Sentencing Guideline §2B1.1, the offense level increases by two levels if the loss is more than $6,500, and it continues to increase in steps as the loss grows. For instance, if the loss is more than $1.5 million, sixteen offense levels are added. While the specific figures may change over time, prosecutors typically use a range based on the financial impact (i.e., “loss”) of the offense.

Calculating the Sentence

The Federal Sentencing Guidelines are calculated by applying the defendant’s base offense level, then adding or subtracting from this level based on the specifics of the fraud scheme (aggravating or mitigating circumstances) and then applying a formula that calculates the appropriate sentence based on a sentencing table.

If we use a hypothetical scenario where a borrower falsifies information and takes $2 million in loan proceeds from the SBA, the borrower’s base offense level would be 7. The addition of a $2 million loss would add sixteen offense levels to the calculation, for an offense level of 23. If the defendant accepts responsibility at any point in the process, this subtracts from the calculation by three levels, making the total offense level 20. A total offense level of 20 results in a sentencing range of roughly 33 to 41 months of prison time. If the defendant’s offense level is slightly higher than 20, the sentence will likely be closer to 41 months, and potentially longer if the defendant’s offense level is significantly higher than 20.

Aggravating and Mitigating Circumstances

Besides the loss amount, the sentencing guidelines allow judges to apply aggravating and mitigating factors when calculating a defendant’s sentence. When prosecuting PPP fraud cases, the government often asks for a two-level increase under Guideline §2B1.1(b)(22) when a fraud scheme is carried out during a federally declared emergency. On the other hand, mitigating factors could include the defendant’s role in the organization (i.e., “minor participant”), a defendant’s lack of a criminal history, or a defendant’s cooperation with the government.

Aggravated Identity Theft

In some PPP fraud cases, federal prosecutors are also able to charge defendants with aggregated identity theft. Under 18 U.S.C. § 1028A, aggravated identity theft carries a mandatory two-year prison sentence and is imposed consecutively to the defendant’s sentence for other crimes.

Until recently, it was interpreted to mean that an individual’s use of another person’s PII (Personally Identifiable Information) without that person’s consent is enough to establish aggravated identity theft. However, in the case of Dubin v. United States, the Supreme Court limited the statute to cases where the victim’s PII was used in a way that makes it more likely that the victim’s identity would be stolen in a separate fraud scheme.

No Parole in Federal Prisons

The federal prison system does not have parole. While credit for good behavior is available, it typically only reduces a defendant’s sentence by fifteen percent. As a result, a sentence of 33 to 41 months might be reduced to roughly 28 to 35 months of confinement in a federal correctional facility.

Can a PPP investigation create civil liability too?

The short answer is yes. In fact, civil liability is likely.

While criminal investigations can lead to civil liability, in many cases, they are separate. Even if the evidence is not enough to meet the “beyond a reasonable doubt” standard required for criminal convictions, evidence in a PPP investigation is likely to be enough to meet the “preponderance” standard required for civil liability under the False Claims Act (FCA).

The False Claims Act (FCA)

The FCA is the primary statute that federal investigators rely upon when pursuing civil liability. Under the FCA, the government (and private individuals acting as “qui tam” whistleblowers) can pursue civil damages when “any person knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the federal government.

With respect to scienter (the defendant’s knowledge and intent) in FCA cases, the Supreme Court recently held in Schutte v. Superfund Homes (2023) that an individual who misrepresents an aspect of his or her conduct in order to comply with an applicable statute or regulation may still incur civil liability under the FCA if he or she has an honest but incorrect belief regarding that fact.

As the Supreme Court held in Escobar, the materiality of an FCA-related misrepresentation must be judged with a higher standard than is required under other fraud statutes. This means that even if a defendant falsifies information to receive PPP funding from the SBA, technical noncompliance will not be sufficient to trigger civil liability in some cases.

Reverse False Claims

In some cases, PPP borrowers can face liability for the wrongful retention of forgiven funds. Under 31 U.S.C. § 3729(a)(1)(G), a PPP borrower that wrongfully retains funds and then requests that the loan be forgiven, the loan shall be treated as a reverse false claim. A reverse false claim can trigger liability for double the loan proceeds plus civil penalties, with a maximum penalty of $13,000 per incident.

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

FIRREA allows the government to pursue civil penalties for “various types of fraud and criminal misconduct” under 12 U.S.C. § 6801. While similar to the FCA, FIRREA has a much broader scope, and it has a longer (ten-year) statute of limitations. FIRREA also requires only a preponderance of the evidence to trigger liability, although the statute allows the court to impose a higher standard if it sees fit.

When facing FCA liability, a borrower’s best hope to lower the amount it owes will be to show that it qualifies for an “affirmative” defense. This involves self-disclosure or cooperation. The amount of damages under the FCA is determined by a multiplier, and if a borrower cooperates with the investigation, a multiplier as low as 1.5 may be applicable.

Public Disclosures of PPP Borrowers

In 2020, the U.S. District Court for the Southern District of New York ordered the SBA to publish names, addresses, and loan amounts of PPP loan recipients. Due to this ruling, some individuals and companies have hired algorithm-driven whistleblowers that mine public records for PPP information. These whistleblowers have the ability to file qui tam cases under the FCA without specific insider information, based on discrepancies they find on the public database. As a result, borrowers may need to be on high alert for FCA exposure.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.