Used PPP Funds for Unapproved Expenses: Am I in Trouble??

* Reiterate the risk of creating unnecessary civil or criminal exposure by providing inaccurate or incomplete information.

Writing the Content

Am I already facing criminal trouble because PPP funds paid for unapproved expenses?

The phrase “criminal trouble” is a common concern for business owners who believe their PPP spending fell short of the program’s strict mandates. However, it is vital to distinguish between unauthorized spending, ineligibility, forgiveness denial, civil liability, and criminal fraud. While related, these terms describe five very different issues with very different definitions, and implications.

Unauthorized Spending and Criminal Fraud

If you have already spent your business’s PPP funds for an unauthorized purpose, this does not necessarily mean you are at risk of criminal prosecution. Unauthorized spending alone is not sufficient to establish criminal fraud; Criminal liability requires proof beyond a reasonable doubt of every element of the charged offense, including any intent element required by that offense. Because of the difference between administrative errors and criminal conduct, unauthorized spending that results in loan ineligibility does not automatically trigger criminal charges.

Forgiveness Denial and Criminal Fraud

Similarly, a denial of forgiveness by the SBA or your bank does not inherently mean you are facing criminal charges. The loan forgiveness process is a procedural determination regarding whether the loan proceeds were used for eligible business expenses. While a denial has significant civil consequences, it does not automatically prove criminal culpability.

Unauthorized Spending and Forgiveness Eligibility

Although unauthorized spending will not, on its own, establish criminal fraud, unauthorized spending will make the corresponding loan proceeds ineligible for forgiveness. This can create civil liability for business owners, as the denied amount will become due.

Unauthorized Spending and the PPP First Draw Forgiveness Requirements

For example, with the PPP First Draw program, achieving 100% loan forgiveness required that at least 60% of the PPP loan proceeds be used for payroll costs. To be eligible for forgiveness under the First Draw program, a business must calculate how much it spent on eligible payroll expenses, and then determine what percentage of the loan proceeds those expenses represented. If unauthorized spending reduces the amount spent on payroll costs below 60 percent, the business will not qualify for 100% loan forgiveness.

What can unauthorized PPP spending do to forgiveness and the loan balance?

Unauthorized spending will reduce the amount of PPP loan proceeds that qualify for forgiveness, which can lead to a loan balance that is due and payable. Under the First Draw PPP loan program, for a business to qualify for 100% forgiveness it had to:

• Use PPP loan proceeds during a “covered period” of 8 to 24 weeks following disbursement;
• Use at least 60% of the PPP loan proceeds for “payroll costs”;
• Maintain the required number of full-time-equivalent employees during the applicable covered period, subject to statutory and regulatory exemptions;
• Avoid reducing an eligible employee’s salary or wages by more than 25% during the applicable covered period, subject to statutory and regulatory exemptions; and
• Use PPP proceeds for “covered expenditures.” As established above, unauthorized spending could make an amount in excess of the PPP loan proceeds ineligible for forgiveness. As we have discussed, spending at least 60% of the PPP loan proceeds on payroll costs was a requirement for 100% loan forgiveness under the First Draw PPP loan program, and thus spending PPP loan proceeds for unauthorized business expenses could negatively affect a business’s ability to meet this requirement. Covered PPP loan expenses included payroll costs, rent, utilities, mortgage interest, and other eligible costs. Covered payroll costs included salary, wages, and other forms of compensation. With that in mind, using PPP loan proceeds for expenses such as vehicle repairs, landscaping services, security systems, and other unapproved costs would not count toward a business’s payroll percentage.

Repayment of PPP Loans When PPP Loan Forgiveness Is Denied

If your PPP loan is not forgiven, either in whole or in part, the loan balance must be repaid. As outlined above, if a business does not meet the program’s numerous requirements, it will not qualify for forgiveness. PPP loan forgiveness is an administrative determination made by a financial institution or by the SBA. Because the PPP First Draw program was a loan forgiveness program, a denial of forgiveness results in repayment obligations, which may have civil liability implications.

Deadline and Collection Procedures for PPP Loan Repayment

At Spodek Law Group, we represent businesses that are facing scrutiny and federal prosecution for PPP loan fraud and related allegations. We are thoroughly experienced in PPP loan matters, and we are familiar with the repayment obligations that result from denial of forgiveness. While we can discuss your business’s specific repayment obligations, including deadlines and collection procedures, in detail with you, the research provided in this article does not establish these deadlines or the procedures that the SBA or other federal authorities will use to collect unpaid balances.

Why can a forgiven PPP loan still face a federal fraud investigation?

Even if a PPP loan has been forgiven by the SBA or the business’s bank, this does not automatically shield the business or the business owner from federal investigation. In fact, many businesses that obtained forgiveness for their PPP loans are still facing scrutiny from the federal government.

The Forgiveness Certification and the Application

Why does this happen? Because the certifications that were submitted to seek forgiveness are subject to the same standards as the loan application itself. While the loan application required certifying that the request was made in good faith and contained a true and complete account of all financial information, the certification for PPP loan forgiveness required a business to certify that its use of the PPP loan proceeds was for covered business expenditures and that it complied with the certification requirements.

Investigation Eligibility

Because these were both certifications subject to federal scrutiny, any business that had a PPP loan forgiven still risks facing investigation for fraud. This means that federal authorities can investigate both successfully funded applications and unsuccessful attempts to obtain a PPP loan.

Agencies Involved in PPP Fraud Investigations

Various federal agencies are responsible for investigating the use of PPP loan funds.

• Federal Bureau of Investigation (FBI)
• U.S. Small Business Administration (SBA) Office of Inspector General (OIG)
• Internal Revenue Service (IRS) Criminal Investigation (IRS CI)
• U.S. Department of Justice (DOJ)

How PPP Fraud Investigations Work

When facing a federal fraud investigation, it is important to be as compliant as possible without compromising yourself or your business. This requires a strategic approach that ensures you respond as required while also guarding against unnecessary civil or criminal exposure. Federal investigators will typically review a business’s PPP loan application, bank records, and documentation of how PPP funds were spent.

Consequences of Altering or Destroying Evidence

Regardless of whether your PPP loan was forgiven or you are facing a PPP fraud investigation, it is imperative that you do not alter or destroy any records that may be subject to review. When federal investigators scrutinize the use of PPP loan funds, they can often detect efforts to alter or destroy evidence, and they may charge businesses and business owners with obstruction of justice when these efforts are made.

Which federal charges can follow intentional PPP deception?

Planning the Content

Bank Fraud Under 18 U.S.C. Section 1344

• Explain the core of this offense: knowingly executing or attempting to execute a fraudulent scheme.
• Emphasize “knowingly.” Wire Fraud Under 18 U.S.C. Section 1343
• Discuss the scope of wire fraud: using an interstate electronic communication (e.g., email) to execute or advance a fraudulent scheme.
• Emphasize the “knowingly” aspect again. False Statements Under 18 U.S.C. Section 1014
• Specifically address loan applications for federal guarantees or insurance.
• Highlight “knowingly” making false statements about the applicant’s financial condition. Attempt and Conspiracy Under 18 U.S.C. Section 1349
• Explain how this section applies attempts and conspiracies to the penalties of bank fraud, wire fraud, and similar offenses.
• Note this adds another layer of potential liability. Additional Charges Involving Stolen or Altered Identification
• Mention the added penalties for using others' identifiers in fraudulent schemes.
• Specifically mention the mandatory minimum consecutive sentencing. Criminal Intent and the Burden of Proof
• Clarify the critical difference between civil and criminal liability.
• Discuss “knowingly” and “specific intent.”
• State the burden of proof (“beyond a reasonable doubt”) for criminal cases versus the lower burden for civil cases.

Writing the Content

Which federal charges can follow intentional PPP deception?

When federal authorities find evidence of a PPP loan fraud attempt, they may seek an indictment for one of several different federal criminal offenses. When deciding what charges to pursue, they will evaluate the evidence in order to determine whether the business owner knowingly made false representations and whether the business owner intentionally used fraudulent schemes to obtain loan proceeds. The specific charges that can follow intentional PPP loan deception include:

• Bank fraud under 18 U.S.C. Section 1344
• Wire fraud under 18 U.S.C. Section 1343
• False statements under 18 U.S.C. Section 1014
• Attempt and conspiracy to commit bank fraud or other federal offenses under 18 U.S.C. Section 1349

Bank Fraud Under 18 U.S.C. Section 1344

This is a common federal charge that federal prosecutors pursue when a person knowingly executes or attempts to execute a scheme to defraud a financial institution or to obtain its property by false pretenses. While executing or attempting a fraudulent scheme is a critical aspect of the statute, establishing a person’s intent with respect to their actions is also critical, and the element that prosecutors must substantiate before presenting their case to a jury.

Wire Fraud Under 18 U.S.C. Section 1343

Wire fraud is another common charge that prosecutors pursue when they can establish evidence that a person knowingly executes a fraudulent scheme using an interstate electronic communication. While the scope of federal communication is extremely broad, this statute often apply when the perpetrator uses email, telephone calls, or other internet-based tools, or otherwise transmits information electronically, and the other party is out-of-state.

False Statements Under 18 U.S.C. Section 1014

This statute specifically prohibits knowingly making false statements, concealment of material information, and false representations in loan applications for federal assistance or insurance. When it comes to PPP loan fraud investigations, this statute often apply when the perpetrator knowingly misrepresents their income, employee number, and financial condition or financial ability to repay a loan in order to make their business appear eligible for forgiveness of the loan that the business wants to obtain.

Attempt and Conspiracy Under 18 U.S.C. Section 1349

This statute allows prosecutors to apply the penalties of bank fraud and wire fraud to the penalties of attempts and conspiracies as well. Along with obtaining loan proceeds through fraud, this statute also applies when a person intentionally helps someone else use fraud to obtain PPP loan proceeds.

Charges Involving Use of Stolen or Altered Identification

Using another person’s identification or other means of identification can lead to an additional two-year mandatory consecutive sentencing penalty. Aggravated identity theft is a separate criminal offense imposed in addition to the punishment for the qualifying felony.

Criminal Intent and the Burden of Proof

As indicated above, in each of these criminal cases, federal prosecutors must establish that a person is criminally responsible. However, while civil liability for unauthorized spending can be established when there is evidence that a business owner knowingly engaged in a fraudulent scheme and that this person intentionally falsified their loan application or certification to obtain PPP loan proceeds, criminal fraud requires a higher burden of proof. Because criminal fraud is a serious offense and carries substantial penalties, prosecutors must prove each required element, including any required mens rea, beyond a reasonable doubtidence beyond a reasonable doubt.

Get Advice on Your Situation

If you want someone to look at the specifics of your case, Spodek Law Group handles federal criminal defense nationwide from New York and Los Angeles. The firm has been practicing since 1976 and its motto is simple: we owe loyalty to only you. Call 888 348 8028.