The DOJ is Continuing to Target PPP Recipients for Fraud
The federal Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a total of $934 billion in funding to companies impacted by the COVID-19 pandemic. As of September 2020, Congress had already identified billions of dollars in suspect loans issued under the PPP; and, in the months since, the U.S. Department of Justice (DOJ) has continued to pursue fraud investigations targeting PPP loan recipients across the country.
These investigations have varied widely in both their scope and the specific allegations targeted. The DOJ has pursued charges against large companies that received multi-million-dollar PPP loans, and it has pursued charges against individuals accused of obtaining six-figure PPP loans to finance lavish personal expenses. However, all of the DOJ’s PPP fraud investigations to date have shared a common thread: The agency has moved quickly in seeking to file charges, and it has shown little sympathy for those accused of unlawfully taking advantage of the PPP.
The DOJ is Hiring Trial Attorneys to Prosecute PPP Loan Fraud Cases
As further evidence of the DOJ’s continued focus on PPP loan fraud, the agency recently published a vacancy posting for Trial Attorneys who will be devoted to prosecuting cases under the CARES Act, including fraud under the PPP. The Trial Attorneys will join the DOJ’s Market Integrity and Major Frauds (MIMF) Unit, and the vacancy posting has an expected minimum commitment of two years.
The Trial Attorneys in the MIMF Unit prosecute cases involving, “government procurement fraud, bank fraud, mortgage fraud, and . . . disaster-relief related fraud targeting SBA programs,” among other white-collar offenses.
Those hired pursuant to the DOJ’s vacancy posting will focus specifically on, “investigating, prosecuting, and deterring fraud in the Small Business Administration's (SBA) COVID-19 disaster relief programs, including the Economic Injury Disaster Loan (EIDL) program and Paycheck Protection Program (PPP).”
Recent Examples of DOJ PPP Fraud Cases
When the first round of funding under the PPP opened in April 2020, the response was overwhelming. The original allocation of $349 billion was depleted in just 13 days. With limited oversight and limited eligibility criteria, the program was a prime target for fraud. Banks issued billions of dollars in fraudulently-obtained SBA-backed loans, and the DOJ and the U.S. Department of the Treasury quickly realized that they would need to take an aggressive approach to preventing fraudulent forgiveness requests and recovering as many fraudulent-obtained loans as possible.
While the U.S. Department of the Treasury focused on auditing all PPP loans of $2 million or greater (it would also spot check smaller PPP loans), the DOJ did not choose to limit its focus in this way. Instead, the DOJ undertook to prosecute any and all cases of apparent PPP loan fraud.
Although the PPP was intended as a short-term relief program and many businesses have already exhausted their SBA-backed funds, the DOJ is continuing to target loan recipients suspected of fraud. As some of its recent cases show, the DOJ is targeting individuals as well as businesses, and it is targeting loans well below the Treasury’s $2 million audit threshold:
Former Mayoral Candidate Charged with Obtaining Fraudulent $323,000 PPP Loan – In March 2021, the DOJ charged a former mayoral candidate in Georgia with fraudulently obtaining in excess of $323,000 under the PPP. According to the DOJ, the former candidate submitted a fraudulent loan application, including fictitious tax records, on behalf of a nonprofit in which she claimed the organization was paying 54 employees. However, the DOJ alleges that the nonprofit in fact had not paid any wages in the prior year, and it further alleges that the former candidate used the PPP funds to pay for a swimming pool and cover other personal expenses.
Tax Preparer Charged with Submitting 118 Fraudulent PPP Loan Applications – Also in March 2021, the DOJ filed charges against a South Florida tax preparer who is accused of submitting approximately 118 fraudulent PPP loan applications, “on behalf of himself and his accomplices.” According to the DOJ, the tax preparer falsified applicants’ income and expenses and submitted fraudulent tax forms. The fraudulent applications resulted in a total of $975,582 in SBA-backed funds being loaned under the PPP.
23-Year-Old Charged with Submitting Fraudulent PPP Loan Applications – In February 2021, the DOJ filed charges against a 23-year-old New York resident who is accused of submitting multiple fraudulent PPP loan applications on behalf of a single company. In addition to making false statements about the company’s employees and payroll, the defendant also allegedly submitted falsified federal tax documents and payroll records to three different PPP lenders.
Six Charged, Five Plead Guilty in PPP Loan Fraud Scheme – In January 2021, the DOJ filed charges against six individuals who are accused of submitting fraudulent PPP loan applications that resulted in a total of approximately $3 million being disbursed under the PPP. The charges followed the guilty pleas of five other individuals involved in the alleged scam. According to the DOJ, one of the defendants allegedly helped the others submit fraudulent PPP loans in exchange for receiving a percentage of the loan proceeds. The alleged scam involved submitting false information about the applicants’ businesses as well as fraudulent tax returns that were identical for each of the defendants’ companies.
Man Charged with Obtaining Nearly $2 Million Through Multiple Fraudulent PPP Loan Applications – Also in January 2021, the DOJ charged a Nevada man with submitting multiple fraudulent loan applications to multiple PPP lenders. According to the DOJ, the man, “obtained nearly $2 million in Paycheck Protection Program (PPP) loans from seven different lenders by, among other things, submitting multiple loan applications in the names of three different businesses while falsely claiming to have numerous employees earning wages.”
The charges pending in these cases include bank fraud, mail fraud, wire fraud, money laundering, and making false statements to financial institutions, among others. If convicted, the defendants could face several years in prison and hundreds of thousands of dollars in criminal fines—as well as responsibility for repaying the fraudulently-obtained PPP loans.
Notably, while the DOJ is pursuing criminal charges in the substantial majority of its PPP loan fraud cases (including those discussed above), civil charges are a possibility as well. Earlier this year, the DOJ announced the first civil settlement of a PPP loan fraud case. The case involved charges against a company and its CEO that obtained a $350,000 PPP loan after submitting false information to multiple PPP lenders. According to the DOJ, the company returned the returned funds in response to demands from the government, and the company’s CEO admitted to making fraudulent statements in violation of the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).
What Do PPP Loan Recipients Need to Know?
Given the DOJ’s efforts to target PPP loan recipients as well as the substantial risks of criminal prosecution in these cases, what do PPP loan recipients need to know?
1. PPP Fraud Can Be Intentional or Unintentional
The DOJ is prosecuting PPP loan recipients who are accused of both intentionally and unintentionally committing fraud under the PPP. While demonstrating lack of intent may be enough to prevent criminal prosecution in some cases, unintentional fraud is still a civil offense under the False Claims Act, FIRREA, and other federal statutes.
2. PPP Loan Forgiveness Requires Certification of Compliance
In order to avoid repaying their loans, PPP recipients must certify to compliance with the terms of the program. Submitting a fraudulent PPP loan forgiveness certification can lead to prosecution even for recipients that validly obtained their PPP loans.
3. The DOJ is Targeting All Types of PPP Loan Recipients
The DOJ is targeting individuals and businesses in PPP loan fraud investigations, and it is targeting those who received loans of all sizes.
4. PPP Loan Fraud Investigations Can Have Various Outcomes
PPP loan fraud investigations can have outcomes ranging from no liability to prosecution for multiple federal criminal offenses. Civil settlement is a possibility in some cases as well. If faced with a DOJ investigation alleging PPP fraud, business owners and other individuals must carefully assess their risk and build a defense that is tailored to the specific circumstances and allegations at hand.
5. Immediate Action is Required When Facing a DOJ Investigation
When facing a DOJ investigation, immediate defensive action is necessary. Individuals and companies targeted in PPP loan fraud investigations should engage federal defense counsel promptly, and they should work with their counsel to build sound defense strategies. In many cases, it will be possible to avoid facing charges with a proactive approach—although this could prove challenging if the DOJ has already obtained clear evidence of intentional PPP loan fraud.