What is PPP Loan Fraud?

The federal Paycheck Protection Program (PPP) is a loan program created by the Coronavirus Aid, Relief and Economic Security (CARES) Act with the intention of providing emergency financial assistance to Americans who have suffered significant economic losses stemming from the COVID-19 health crisis. There are some individuals and business owners in the United States who will try to exploit COVID-19 and commit fraud for their own personal gain. However, innocent individuals may also find themselves being targeted by the federal government for PPP loan fraud based on an honest mistake they made on their loan application or because of a misunderstanding with regard to how the PPP funds could be used. If you have any questions about PPP loan compliance or if you think you might be the target of a PPP loan fraud investigation or audit, don’t wait to retain the services of a knowledgeable federal PPP fraud attorney. Our PPP attorneys have what it takes to stand up against the federal government and protect your rights.

Understanding Fraud Charges

Nearly five million Paycheck Protection Program loans were approved as July 22, 2020, totaling more than $518 billion in PPP funds. Most of these loan applications were made in good faith by businesses with a legitimate need for financial assistance during the coronavirus pandemic. However, flaws in the structure, terms and administration of the PPP loan program, introduced at the height of the COVID-19 crisis, created an opportunity for fraud, and it appears that individuals and companies may have taken advantage of these flaws in an attempt to fraudulently obtain PPP funds. Fraud is a white-collar crime characterized by the use of intentional deception to secure unfair or unlawful gain. The term “intentional” is important here, because it means, legally, you can’t commit fraud if you do so unintentionally.

Some people may have intentionally defrauded the Paycheck Protection Program by illegally obtaining PPP funds. Others may have done so by mistake. For instance, you may have accidentally misclassified some of your employees as independent contractors, which meant that you fell below the 500-employee threshold and qualified for a PPP loan. Or you may have certified that you met the PPP loan eligibility criteria and used the funds for authorized business expenses in order to have the loan forgiven, without realizing that some of your expenses were not authorized. In either case, you didn’t intentionally commit fraud. However, the line between intent and accident is blurry and you could still face serious consequences for PPP loan fraud even if you didn’t knowingly commit the crime.

What Constitutes PPP Loan Fraud?

The Paycheck Protection Program was created to slow rising rates of unemployment and minimize the economic losses resulting from the coronavirus pandemic and the subsequent shutdown measures, by encouraging small businesses to keep their operations running and their workforce employed. The program’s primary objective was to provide forgivable, federally backed loans to small businesses with a legitimate financial need to help with payroll costs and eligible business expenses, such as mortgage interest payments, utilities, and rent and lease payments. The following are some examples of actions on which the federal government may base claims of PPP loan fraud.

Fraudulently Obtaining PPP Funds

In order to obtain funds through the Paycheck Protection Program, business owners must make certain certifications about their need for PPP funds, their eligibility for assistance, and how the funds will be used, which is where things can get tricky. The following are some examples of mistakes that could result in a PPP fraud federal indictment:

• Obtaining PPP loans from multiple lenders
• Misrepresenting information on a PPP loan application to claim eligibility. This includes:
  • Misrepresenting payroll costs
  • Misrepresenting the number of employees
  • Misclassifying employees as independent contractors

Fraudulent Misuse of PPP Funds

There are significant restrictions on the use of federal PPP funds. Businesses that obtained funds through the Paycheck Protection Program are only permitted to use those funds to cover four specific types of business expenses:

• Payroll costs, including employee benefits,
• Interest on mortgage obligations,
• Rent or lease payments, and
• Utilities costs.

Furthermore, at least 60% of the funds must be used for payroll costs, while the other 40% can be used for eligible business expenses. PPP funds cannot be used for any other expenses.

Fraudulent Certification for Loan Forgiveness

PPP loans can be 100% forgiven if the funds were used to retain employees and make eligible mortgage interest, rent and utility payments. In order to be approved for loan forgiveness, businesses must show that they met the eligibility criteria for the Paycheck Protection Program and used the PPP funds for authorized business expenses. If you certify that this information is true in order to have the loan forgiven and it turns out that the information is false, you could be charged with PPP loan fraud.

Are Cases of PPP Loan Fraud Being Investigated?

Yes. In fact, almost immediately after the Paycheck Protection Program was introduced and the Small Business Administration began accepting applications for PPP loans, the FBI and other federal law enforcement agencies were on the lookout for fraudulent PPP loan claims. The Justice Department has promised to aggressively pursue criminal charges against anyone using or attempting to use the coronavirus pandemic as an opportunity to commit fraud, and since May, the Justice Department has charged more than a dozen individuals accused of defrauding the PPP loan program. The first two individuals to face criminal charges for PPP loan fraud were two businessmen from Rhode Island who applied for a combined half a million dollars in forgivable loans from the Paycheck Protection Program. The businessmen were charged with bank fraud, conspiracy to commit bank fraud, aggravated identity theft and conspiracy to make false statements to influence the SBA.

If it seems like these PPP loan fraud investigations are happening unusually quickly, that’s because they are. White-collar crimes like fraud typically involve lengthy investigations, requiring investigators to pore over financial records and follow various leads. So, it comes as a great surprise that the first 15 PPP loan fraud cases were investigated and charged within weeks of the initial PPP funds being distributed in April and May. In a May 5 press release announcing the first of many criminal charges, the Justice Department said that the PPP loan fraud arrests should serve as a warning to other applicants tempted to defraud the Paycheck Protection Program or misuse PPP loan funds. “This is a critical time for our nation’s small businesses. It is well known that fraudsters prey upon those in vulnerable positions,” said SBA Inspector General Hannibal Ware in the press release. “As this result shows, SBA-OIG and its law enforcement partners are actively working together to root out fraud in SBA’s programs and bring those responsible to justice.

What Kind of Fraud Crimes are Being Charged?

There are a number of different criminal offenses that can be charged in a federal PPP loan fraud case, depending on the circumstances surrounding the alleged fraudulent act. Most of the PPP fraud cases that have already been charged in the United States involve the following:

• Wire fraud (a violation of 18 U.S.C. § 1343),
• Bank fraud (a violation of 18 U.S.C § 1344),
• Making false statements to a financial institution (a violation of 18 U.S.C. § 1014), and/or
• Conspiracy to make false statements to the Small Business Administration (a violation of 18 U.S.C § 371).

Other federal crimes that may be charged in connection to PPP loan fraud include:

• Computer fraud (a violation of 18 U.S.C. § 1030),
• Identification fraud/identity theft (a violation of 18 U.S.C. § 1028),
• Tax evasion (a violation of 26 U.S.C. § 7201), and/or
• Making false statements to federal agents (a violation of 18 U.S.C. § 1001).

Each of these fraud crimes is a felony offense carrying a potential punishment of up to 30 years in prison, substantial fines and criminal forfeiture, among other penalties. The federal government has taken an aggressive stance against PPP loan fraud and your company could be targeted in a PPP loan fraud audit or investigation. If you find yourself in this position, the best thing you can do to protect yourself and your business is to consult a reputable PPP defense attorney with experience handing federal fraud cases. The consequences of a federal PPP loan fraud charge are severe so don’t wait to call.

Skilled Legal Representation from a PPP Attorney

Cases of PPP loan fraud are being investigated by a number of federal agencies, including the FBI, the IRS, the Small Business Administration, the Federal Reserve, the Federal Housing Finance Administration and the Federal Deposit Insurance Corporation, as well as state and local law enforcement agencies. With billions of dollars at stake, the federal government is sending a clear message with recent arrests and federal criminal complaints that PPP loan fraud will not be tolerated and that fraudulent activity in connection with the Paycheck Protection Program will be investigated, charged and prosecuted to the fullest extent of the law. At least 15 individuals have already been charged with PPP loan fraud and other PPP loan applicants are sure to be investigated and charged in the coming weeks and months. If you have received a subpoena or inquiry from any law enforcement agency regarding your PPP application or loan, you are in need of immediate legal assistance. A skilled PPP attorney can assess the extent of your criminal exposure and determine the best path forward based on your specific situation.