What Happens When Your Lender Reports Your PPP Loan to Authorities??

PPP loan forgiveness does not end loan exposure. A lender referral that triggers scrutiny is not proof of fraud, and it does not mean that charges are inevitable. However, forgiveness does not preclude further inquiry by federal authorities.

1. Can PPP Loans That Were Fully Forgiven Still Be Subject to Investigation?

Yes. Federal authorities, including the Small Business Administration’s (SBA) Office of Inspector General (OIG), the Department of Justice’s National Fraud Enforcement Division, the Task Force to Eliminate Fraud, and various U.S. Attorneys’ Offices, can continue to investigate PPP loan applications that were fully forgiven. PPP forgiveness does not stop federal authorities from pursuing an investigation into allegations of fraud during the application process or subsequent fraud in the use of loan proceeds.

2. Does a Lender Referral to the SBA Prove PPP Fraud?

No. A lender referral does not itself establish fraud or guarantee that federal prosecutors will bring criminal charges. Federal prosecutors have limited resources and they must make informed decisions based on a variety of factors to determine whether to prosecute. This means not every referral will lead to a criminal case, and even if prosecutors target certain loan applicants, they may not bring charges if the evidence is insufficient.

3. Does Forgiveness Preclude a Repayment Demand?

For PPP loan applicants, receiving a forgiveness letter is only the first step toward loan relief. If a loan was forgiven based on false information in the application or certification process, or if the proceeds were not spent in compliance with PPP regulations, then forgiveness can be revoked and repayment demanded.

4. Does Forgiveness Preclude Criminal Prosecution?

PPP loan forgiveness neither proves the absence of fraud nor does it bar federal authorities from pursuing criminal prosecution if they establish sufficient evidence. Federal prosecutors may still target loan applicants who have received forgiveness letters.

5. When Should a PPP Loan Applicant Seek Defense Representation?

PPP loan applicants who have received forgiveness letters but are facing federal scrutiny need to understand their risks and promptly seek advice. The fact that their loan was forgiven can be a double-edged sword in some cases. Spodek Law Group assists lenders, government agencies, loan applicants, and others with all aspects of the federal pandemic relief programs. We help you understand your exposure and work to avoid the risk of repayment demands, investigations, and prosecutions.

What Can a Lender Referral Trigger Inside a Federal PPP Investigation?

The FBI plays a major role in some PPP fraud cases, conducting investigations alongside the SBA’s Office of Inspector General (OIG) and the Internal Revenue Service’s Criminal Investigation (CI) division. DOJ prosecutors then review the findings to determine whether further action is warranted.

1. Will the DOJ Seek Federal Criminal Charges After the Investigation?

After federal investigators present their findings, DOJ prosecutors decide whether to seek criminal charges under federal law. Prosecutors have discretion not only on whom to target but also on how they pursue their investigation. While prosecutors may target all likely suspects, they may not have resources for the time it takes to pursue all criminal charges.

2. Will the DOJ Issue a Target Letter?

When federal prosecutors issue a target letter, it indicates that substantial evidence connects you or your company to wrongdoing. Typically, federal prosecutors issue target letters to business owners who are suspected of intentionally causing financial loss to the program through misrepresentations, falsification of information, use of loan proceeds for non-qualifying purposes, or fraudulent attempts to secure loan forgiveness.

3. Will the DOJ Review Your Business Records and Bank Statements?

Investigators from the FBI, SBA-OIG, and other agencies will conduct a review of your business records and financial statements if your lender refers you in a PPP investigation. They may seek to obtain records by issuing a subpoena or through voluntary means. In some cases, investigators may present a grand jury subpoena to compel the bank, payroll provider, vendor, or other third party to turn over records without your consent.

4. What Type of Documents Will the Government Seek in a PPP Fraud Case?

If you are in the government’s crosshairs, you can expect federal authorities to focus on gathering documentation and analyzing information such as:

• Bank and wire transfer records
• Payroll records
• Tax returns
• Communications related to your loan application, loan proceeds, and loan forgiveness application

Which PPP Allegations Make a Borrower’s Intent the Central Issue?

1. When Does Spending PPP Loan Proceeds on Personal Pursuits Constitute Fraud?

Knowingly spending PPP loan proceeds on prohibited and non-qualifying purposes can support allegations of fraud and further scrutiny. The SBA’s OIG and the Department of Justice’s National Fraud Enforcement Division prioritizes targeting and prosecuting business owners accused of spending pandemic funds on personal investments, such as real estate, luxury cars, boat trips, and personal jewelry. If this allegation is backed by evidence, federal prosecutors may be able to convince a jury that a borrower or loan applicant intentionally defrauded the federal government, regardless of any prior loan forgiveness.

2. Does False Information Affect Every Step of the PPP Loan Process?

Yes, providing false information during any step of the loan process can lead to allegations of fraud and subsequent scrutiny. The PPP loan application process requires certifying information multiple times, during the application process, before receiving the loan funds, during the period of spending, and when certifying for forgiveness. Once federal authorities establish evidence that a loan applicant provided false or misleading information, they will focus their investigation on determining the applicant’s intent, and they will seek to identify evidence that suggests the loan applicant has the specific intent to defraud.

3. Are Falsified Payroll Records and Tax Returns Common Allegations in PPP Fraud Cases?

Falsified payroll records and tax returns are two of the most common allegations in PPP fraud cases. PPP loan applicants certify their eligibility to receive loan funds based on their existing payroll obligations. Because the eligibility criteria are relatively straightforward, PPP loan applicants have the ability to easily falsify their payroll records and tax returns to meet these requirements. This makes them primary targets for federal prosecutors and makes these issues critical to any case.

4. Does Certifying for Forgiveness Create Exposure Separate from the Original Application?

Yes, certifying for PPP loan forgiveness can create separate exposure from the original application process. Because loan forgiveness certification requires a borrower to certify compliance with various requirements, federal prosecutors can rely on evidence of fraud committed during certification to seek criminal charges. Even if a loan applicant does not have issues with the loan application itself, certifying for forgiveness with knowledge that they do not qualify for forgiveness can still subject a loan applicant to criminal prosecution.

5. Does Returning the Loan Funds to the SBA End Prosecution?

Returning the funds to the SBA is not enough to eliminate a loan applicant’s criminal liability. While repayment may make it more difficult to prove a financial or material loss, federal prosecutors can still prosecute loan applicants for whom there is evidence that they used the PPP program to commit a crime.

6. Do Good-Faith Calculation Errors Constitute Criminal Fraud?

In their determination of whether to refer a loan to the SBA’s OIG, lenders distinguish between good-faith calculation errors and applicants who provide knowingly fabricated or falsified information on their applications and other required certifications. A mistake is not a crime, and a loan applicant should not face criminal liability or the threat of criminal prosecution for a good-faith calculation error. However, if an applicant knowingly provides false information to qualify for the loan, that is criminal fraud.

“I am a straight shooter,” Todd Spodek says of his own practice. “I tell clients exactly where their case stands.”

What Criminal Charges and Civil Remedies Can Follow a PPP Referral?

1. Bank Fraud (18 U.S.C. §1344)

18 U.S.C. §1344 prohibits executing, attempting to execute, or conspiring to execute “Whoever knowingly executes, or attempts to execute, a scheme or artifice-(1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises-shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.” When a lender sends a loan application to the SBA-OIG or DOJ for investigation and prosecution, it can subject the loan applicant to a long-term bank fraud inquiry. If bank-fraud allegations are proven in court, a conviction under 18 U.S.C. §1344 can carry up to thirty years of imprisonment, a fine of up to $1 million, or both.

2. Wire Fraud (18 U.S.C. §1343)

While bank fraud and wire fraud can overlap, each is charged independently in PPP fraud cases. 18 U.S.C. §1343 prohibits “Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.” A conviction under 18 U.S.C. §1343 ordinarily carries up to twenty years of imprisonment, but the statute provides a higher maximum when the violation affects a financial institution or involves certain disaster-relief benefits; fines may also apply.

3. False Statements to Federal Agents (18 U.S.C. §1001)

Making a false statement to an FBI agent or other federal agent during a PPP fraud investigation can create separate criminal exposure under 18 U.S.C. §1001. Even if the federal government cannot prove you intended to commit a crime, you can still face charges if it can prove that you knowingly and willfully made a materially false statement.

4. The False Claims Act (31 U.S.C. §3729 et seq.)

In addition to facing criminal charges, loan applicants who face a lender referral in a PPP fraud investigation may face civil liability under the False Claims Act. Under the Act, the government can seek civil recovery for damages three times the amount of the actual financial loss. Additionally, under the Act’s qui tam provisions, private citizens can file lawsuits in the government’s name, with a share of the recovery going to the private whistleblower.

When Does a PPP Loan Investigation Actually End?

While a lot depends on the specifics of your case, there is no fixed nationwide deadline that marks the end of every PPP loan investigation. Factors that can impact the length of time your investigation takes could include:

• The amount of evidence federal authorities have uncovered
• The specific allegations at issue
• The agencies involved in the investigation
• Whether DOJ prosecutors believe the evidence is sufficient to bring criminal charges
• DOJ’s charging decisions

2. Is There a National Count of All Active PPP Fraud Investigations?

The supplied sources do not provide a reliable nationwide count of all active investigations. One source identifies 80,000 suspicious loans, but it does not identify its methodology, explain what “suspicious” means in this context, or mention how many of these loans led to prosecutions. Another source reports that almost 772,500 unique PPP recipients did not match any National Directory of New Hires wage data. These mismatches alone do not establish 772,500 investigations.

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 888 348 8028 to speak with our team.