How to Prove You Didn't Intend to Commit PPP Fraud.

Criminal prosecutors have an affirmative duty to prove every element of their charged offenses beyond a reasonable doubt. If you are facing charges related to PPP funds, this may include the affirmative duty to prove your intentional use of false or misleading information to induce a financial institution to lend you PPP funds. Here, too, evidence of contemporaneous records can play a key role.

At Spodek Law Group, we defend borrowers in criminal fraud cases, including cases involving allegations of wire fraud, bank fraud, and the making of false statements. To prove wire fraud, prosecutors must show a scheme to defraud, intent to defraud, and intentional use of false or misleading information and deceptive conduct. Similarly, the government must prove criminal bank fraud and making false statements. In civil cases, the government may seek penalties that include restitution, fines, and statutory damages.

Spending PPP funds without authorization does not establish criminal fraud or deceptive intent on its own. While it may assist prosecutors in proving a fraud case under certain circumstances, the government has the affirmative burden of proof. Evidence of contemporaneous records can be critical here as well. The same applies to borrowers’ accounting errors that lead to the forgiveness or retention of PPP funds improperly, they do not establish criminal fraud on their own either. Instead, prosecutors must show that such errors are the result of intentional criminal fraud, deceptive intent, and attempts to improperly retain funds.

While it is not possible to rule out criminal liability at this stage without more information, we handle PPP fraud cases involving borrowers whom the government deemed made fraudulent mistakes.

Finally, evidence from professional advisers can be helpful. Professional advisers can attest to their clients’ good-faith efforts to avoid fraud. This type of evidence may not automatically establish a borrower’s innocence, but it can serve as powerful supporting evidence, particularly when corroborated by a client’s contemporaneous records.

Who Controlled the PPP Information, and What Records Can Separate a Borrower’s Knowledge from a Preparer’s Error?

As the federal government continues to investigate alleged PPP fraud, borrowers must take steps to understand what evidence exists and how that evidence will impact their investigations and potential civil or criminal allegations. This includes both evidence of the borrower’s liability as well as evidence of the borrower’s innocence. At Spodek Law Group, we work with borrowers and their family members to quickly assess their situations, assess their risks, and develop defense and litigation strategies based on a thorough understanding of both sides.

Who Controlled the Application Process?

If a third-party preparer submitted information on the borrower’s behalf, then this information may not represent the borrower’s knowledge or intent. Third-party preparers such as accountants, bookkeepers, and lawyers are frequently used to prepare and submit applications, and, in many cases, they independently execute the process. In these cases, the borrower does not necessarily control the application, and the borrower’s lack of awareness may not render the borrower liable.

What Records Did the Borrower Maintain, and How Did the Borrower Prepare His or Her Application?

While it is possible that the information contained in a borrower’s tax filing or payroll records was inaccurate, this does not render the borrower liable unless there was intent to deceive. On the other hand, inconsistencies in a borrower’s records are often a key component of the government’s fraud evidence. Evidence of the borrower’s knowledge of such inaccuracies is critical to proving intent and liability.

However, if the borrower has evidence that demonstrates a lack of intent to deceive, it may still be possible to avoid liability. As a result, borrowers in PPP fraud investigations need to quickly develop and document strategies to preserve evidence of their lack of fraudulent intent while working to prove that no fraud occurred.

Did the Borrower Use the PPP Funds for Ineligible Business Expenses or Personal Expenditures?

Bank records can provide valuable evidence of the borrower’s use of PPP funds. The government will closely review these records to determine whether PPP funds were routed to ineligible business expenses or personal expenditures. Evidence of how the borrower spent PPP funds is关键 to proving fraudulent intent, and the government has extensive experience tracing PPP proceeds.

Why Can a Forgiven PPP Loan Remain Exposed to Criminal, Civil, or SBA Review?

Under the Paycheck Protection Program (PPP) created by the CARES Act, eligible borrowers could get forgiving PPP loans if they: (i) used their loan proceeds to cover their authorized payroll and other PPP-eligible business expenses, and, (ii) did not receive PPP funds from another lender (i.e., did not engage in loan duplication).

While, for many eligible borrowers, submitting a PPP forgiveness application was the only option for fully forgiving their loans, this certification of eligibility opens the door for additional scrutiny. Not only can the SBA or its funding partners revoke loan forgiveness based on their discovery of fraud, misuse, or other violations, but they may impose civil, criminal, and administrative penalties for these acts as well. Consequently, even if you had a reasonable expectation that your PPP loan was forgivable, it is essential to respond to any queries and questions from your lender. While it is important to make sure you adequately protect your business, it will not necessarily help to ignore or downplay your lender’s concerns.

Is Loan Forgiveness “Immunity” for PPP Loans Under $2 Million?

While SBA generally did not require borrowers with PPP loans of $2 million or less to complete a loan-necessity questionnaire, a borrower’s forgiveness status did not automatically insulate it from government scrutiny. If you have PPP loan forgiveness, it could also mean the SBA or its funding partners are less likely to investigate. In either case, the SBA and other government officials can still conduct their own reviews and inquiries, and this is something that business owners and their owners and executives must prepare for.

From a PPP forgiveness perspective, a single SBA review can quickly lead to allegations of fraud, and, if the evidence justifies it, referral to the DOJ for civil or criminal enforcement.

For lenders’ and government officials’ purposes, for a loan to be forgiven, the borrower must certify the following (along with other disclosures):

• The borrower’s necessity for the PPP loan
• The borrower’s use of only PPP-eligible expenses for PPP loan proceeds
• The borrower’s non-receipt of PPP funds from more than one lender
• The accuracy of the documentation and other certifications supporting the borrower’s loan forgiveness eligibility
• No improper use of PPP loan funds (e.g., for lobbying activities, stock trading, etc.)

What Should a Borrower Do When a PPP Subpoena or Target Letter Arrives Before Charges are Filed?

Does the Fact that It’s Been X Years Mean I Am in the Clear?

A PPP loan is a financial transaction subject to federal oversight and potentially multiple federal statutes. Depending on the specific offense alleged, federal law provides either a five-year or a ten-year statute of limitations. Specifically, federal law provides a ten-year statute of limitations for fraud involving covered PPP loans, while many other federal fraud offenses and false statements to a federal agency generally have a five-year limitations period, subject to offense-specific exceptions. Additionally, the applicable limitations period could be further extended for individuals who live outside of the United States or who are otherwise not within the voluntary jurisdiction of the relevant court. In many cases, the limitations period for filing charges will depend on whether the government intends to pursue fraud charges or charges under the federal statute prohibiting the misappropriation of federal funds.

Do Target Letters or Subpoenas Mean I Am Getting Charged?

The federal government also has the ability to issue grand-jury subpoenas, target letters, or both. If you receive a target letter or subpoena, this is often a precursor to a formal criminal complaint. While it does not necessarily mean the government has already filed charges, it is not something that you should ignore. The fact that you have been targeted indicates that the government possesses evidence that it believes will support criminal or civil charges; and, as a result, you must take steps immediately to protect yourself.

Are Voluntary Interviews Optional or Risk-Free?

Federal investigators and prosecutors will also conduct interviews, often referred to as “voluntary interviews,” with potential defendants, witnesses, and others who may have information. Whether you receive a target letter, a subpoena, or a request to participate in a voluntary interview, it is imperative that you take this seriously and execute a well-thought-out strategy. Statements made during federal interviews can become evidence at trial, so even a casual or “off the record” comment could have serious implications. In this context, it is extremely important to be cautious about what you share with federal investigators. Ideally, you will want to be prepared to let your records and supporting documentation do the talking for you.

Can I Wait Until I Am Charged or Questioned to Prepare My Defense?

Finally, while you may not have heard from the federal government yet, this does not mean you are not under investigation. While the government’s use of target letters and voluntary interviews are a precursor to criminal charges, the government may not always pursue this path. Instead, federal investigators and prosecutors may seek records directly from borrowers and their third parties (banks, accountants, and other providers). This means that even without a target letter, you may not have time to locate documentation before the government files charges.

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.