Self-Employed PPP Fraud: Common Issues and Defenses.

P.P.P. Loans for self-employed borrowers require thorough analysis of the borrower’s business activity, payroll calculations, certification, and loan use. For a self-employed borrower, an ineligible loan application or use of funds to qualify as ineligible does not, on its own, establish criminal fraud. With this in mind, a government-initiated case targeting a self-employed PPP borrower usually falls into one of three categories:

• (i) Application Misrepresentations. The U.S. Department of Justice (DOJ) may claim that a self-employed PPP borrower made material misrepresentations in their certification or in their SBA loan application. While knowingly making material misrepresentations is criminal under 18 U.S.C. § 1014, the federal government will not necessarily establish criminal liability if the loan’s use of funds would not have affected eligibility.
• (ii) Misuse of Funds. For self-employed borrowers, misuse of P.P.P. Funds can also lead to federal fraud charges. However, for a misuse of P.P.P. Funds to lead to criminal fraud charges, the government must demonstrate that the borrower knowingly or recklessly used funds in a manner inconsistent with the purpose of the P.P.P. Program.
• (iii) Forgiveness Certifications. Finally, for self-employed PPP borrowers, the DOJ may target certifications made in order to receive loan forgiveness. In these cases, federal prosecutors must establish the elements of the particular offense charged, which may include proof that the borrower knowingly submitted a false forgiveness application or certification.

In self-employed PPP fraud cases, the federal government must prove that the targeted individual knowingly made misrepresentations. In other words, the federal government will have to prove that the borrower knowingly made a false statement for the purpose of influencing a covered lender or the SBA in the relevant loan application or related submission. For this reason, any allegations of fraudulent misrepresentations should be scrutinized, as they may turn out to be the result of a good-faith error. Furthermore, if the government will be unable to prove knowledge, it may also not be able to prove the existence of fraudulent intent.

How did self-employed borrowers calculate and document PPP amounts?

When applying for a PPP loan, self-employed borrowers generally had to provide their payroll, tax, and business information. When investigating alleged PPP fraud, federal investigators analyze these documents, among others, and compare them to the information submitted on the borrower’s loan application. Some examples of records that may be subject to review include:

• Payroll records for the two years prior to applying for a PPP loan
• Business and individual tax returns for the two years prior to applying for a PPP loan
• Tax and payroll records from payroll providers and other third parties
• Bank records of loan proceeds coming in and loan payments going out
• Business and personal emails and text messages, if pertinent
• Applications, certifications, and loan-closing documents

Application Misrepresentations

For self-employed PPP borrowers, fraud cases often center on allegations of application misrepresentations. For example, the DOJ has brought charges against self-employed borrowers for allegedly inflating payroll expenses and business losses. In these cases, allegedly inflated payroll and business losses made it appear as though the loan amount the borrower applied for was warranted, when the loan amount allegedly exceeded the borrower’s actual eligibility. Specifically, if a self-employed PPP borrower inflated their payroll, it could improperly increase the maximum available PPP loan amount, potentially leading to fraud charges for overstating the borrower’s eligibility and loan need.

Misuse of Funds

Use of the PPP loan proceeds can have implications as well. Generally, P.P.P. Funds were limited to payroll and other business-related expenses. Some examples of eligible expenses for self-employed borrowers included, but were not limited to:

• Payroll expenses, including employee benefits and other compensation;
• business mortgage interest, rent, utilities, and other designated operating expenses;
• Repayment of government-backed loans was not an eligible PPP expense;
• Costs necessary to maintain business operations; and,
• Costs necessary to safeguard business assets and payroll.

Which PPP allegations are treated as different forms of misconduct?

The authorities have pursued various types of fraudulent PPP loan applications. The following examples illustrate some of the different forms of alleged misconduct targeted by federal prosecutors in PPP fraud cases involving self-employed applicants.

Claiming Nonexistent Businesses and Employees

In many cases, allegations of fraud center on self-employed individuals claiming to own businesses that do not exist or to have employees that they do not actually employ. For example, in June 2021, federal prosecutors announced criminal charges against three individuals in an alleged fraud scheme that involved filing multiple loan applications claiming to represent companies with no employees. To support their claims for larger loan amounts, the individuals allegedly submitted fabricated tax returns and payroll documentation to lenders. While this behavior is clearly fraudulent, federal prosecutors have also targeted self-employed borrowers whose loan applications contained only inaccuracies or errors. Inaccurate PPP loan applications do not automatically establish fraud, and the federal government will need to establish the borrower’s knowledge and intent to justify a criminal fraud conviction.

Applying for Multiple Loans

Another form of alleged misconduct is applying for P.P.P. Loans through multiple lenders. In June 2021, federal prosecutors filed charges against ten individuals for allegedly operating a “PPP loan application mill” that targeted lenders across the country. In this case, the fraud allegations centered on the individuals’ efforts to maximize their P.P.P. Loan intake by repeatedly filing applications for various entities. Some of these entities were allegedly dormant corporations, nonprofits, and shell companies that neither had employees nor maintained business operations.

Coordinated Applications and Identity Theft

Finally, some prosecutors’ cases have involved allegations of coordinated fraudulent applications. These often involve the use of a variety of methods to misappropriate funds, including using the identities of others. The DOJ has taken a hardline approach in these cases, with several high-profile arrests and prosecutions. For example, the U.S. Attorney’s Office for the Middle District of Louisiana recently pursued an alleged scheme that involved filing multiple PPP applications using different company names and a variety of forged or fabricated documents.

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When does agent contact become a PPP case with criminal or civil exposure?

Federal authorities, including the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), the Small Business Administration (SBA), the Internal Revenue Service (IRS), and the various OIGs’ offices, have targeted numerous PPP fraud allegations. While the PPP program may have closed in 2021, investigations can, and will, continue.

If you received a contact from a federal agent, an attorney, or a DOJ representative asking, “Are you familiar with deceptions under the P.P.P. Or O-P.P. Programs?” then there is a good chance it means the federal government is investigating you for a PPP-related offense. While not every contact leads to an indictment, you should assume that the authorities have you in their sights.

If you received a subpoena, encountered agents at your home or office, or witnessed a federal raid, these events can also signal that you have become the target of a federal investigation. While these events, by themselves, will not prove any particular offense (or prove that you even committed a federal offense), there is always the possibility that the government has found evidence against you.

As a result, PPP fraud allegations can have criminal, civil, and administrative consequences. To determine when and why an investigation is likely to lead to criminal or civil exposure, it will be necessary to carefully analyze the specific allegations in question. With this in mind, if you have received agent contact or are concerned about the potential for exposure related to your PPP loan, it is important to retain experienced defense counsel as soon as possible. We encourage you to contact us today to discuss your next steps in confidence.

What criminal penalties can follow a self-employed PPP fraud conviction?

In most self-employed PPP fraud cases, federal prosecutors will pursue charges under multiple federal fraud statutes, among others. The following are a few examples of criminal charges that federal authorities have increasingly used in fraud cases targeting P.P.P. Borrowers:

• (i) Wire Fraud. Under 18 U.S.C. § 1343, defendants convicted of wire fraud may face up to 20 years’ federal imprisonment per count, or up to 30 years if the offense affects a financial institution. To secure a conviction for wire fraud, the government must prove that the defendant knowingly and intentionally participated in a scheme to defraud and that an interstate wire communication was used or caused to be used in furtherance of the scheme. Federal prosecutors often add multiple counts of wire fraud in PPP cases involving individuals who are accused of sending false statements to lenders via email or online loan applications.
• (ii) Bank Fraud. PPP-related investigations can also involve allegations of bank fraud, which can be prosecuted under 18 U.S.C. § 1344. Under 18 U.S.C. § 1344, federal prosecutors must establish that the defendant executed, or attempted to execute, a scheme or artifice to defraud a financial institution, or to obtain its money, funds, credits, assets, securities, or other property by false or fraudulent pretenses, representations, or promises. A conviction for bank fraud carries a statutory maximum of 30 years’ federal imprisonment.
• (iii) False Statements to Financial Institutions. Under 18 U.S.C. § 1014, defendants charged with making false statements to financial institutions in the loan application process may face up to 30 years’ federal imprisonment. The federal government has routinely used 18 U.S.C. § 1014 to prosecute PPP fraud, although criminal liability under this provision does not automatically follow from an inaccurate statement or use of funds; the government must prove that the defendant knowingly made a false statement for the purpose of influencing a covered lender or the SBA. As we have discussed above, in most fraud cases, the federal government must establish that the targeted individual knowingly and willfully made a material misrepresentation, and this standard should be thoroughly scrutinized.

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