Paycheck Protection Program (PPP) Loan Prosecutions, Defenses, and Penalties

Businesses across the United States have received billions of dollars in aid through the Paycheck Protection Program (PPP). The Program is a  part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, legislation passed by Congress to address the economic impact of the Covid-19 pandemic.

These loans provide eligible small businesses with loans to cover payroll, rent, utilities, and other expenses. If certain qualifications are met, the loans will be forgiven, meaning PPP loans are essentially grants to eligible small businesses.

There is, however, cause for concern. Businesses who receive a PPP loan may come under investigation – and potentially prosecution – for lying on the PPP loan application or for spending the PPP funds on an unapproved expense.  In this post we discuss the statutes used to prosecute such fraud, investigations, defenses, and potential penalties.

What is PPP Fraud?

There is no statute or regulation specifically prohibiting PPP fraud. Rather, individuals suspected of PPP fraud can face a variety of charges. Possible charges will depend on the individual factual situation. The most likely charges for fraudulent PPP loan activity, however, are bank fraud or wire fraud.

The bank fraud statute criminalizes fraud against financial institutions. To convict for bank fraud, prosecutors need only to show that the an individual had a plan or scheme to obtain money, securities, or credit from a financial institution.

To obtain a conviction for wire fraud – under statute 18 U.S.C. § 1343 – prosecutors must prove that the individual used electronic communications for the purpose of committing fraud. Electronic communications is an umbrella term, encompassing email, phone calls, and other internet usage. To show that fraud was committed, prosecutors must show that there was a plan to cheat someone, that false statements were made, and that the individual did so with an intent to deceive.

PPP loan recipients could also potentially be prosecuted for conspiring to defraud the United States, money laundering, embezzlement and lying to investigators. Here are some examples of charges brought for suspected PPP loan fraud:

• Two individuals from Utah were charged with conspiracy, wire fraud, money laundering, removing property and removing property to prevent seizure after misrepresenting their eligibility for PPP loans, and then spending the loan on unapproved business expenses.
• A Massachusetts man was charged with wire fraud after misrepresenting the number of employees his business’s had and the business’s total payroll in order to obtain a larger PPP loan.
• A Texas man was charged with wire fraud, making false statements, and money laundering after lying about the number of employees he had, and then spending the PPP loan on personal expenses.

An experienced attorney will help you better understand what charges you could face for PPP fraud based on your specific circumstances.

What Could Subject Me to PPP Fraud Investigation and Prosecution?

There are several acts in relation to PPP loans that could bring you under investigation or prosecution:

• Submitting false supporting documentation in your PPP loan application
• Applying for a larger PPP loan than your business is eligible for
• Allocating PPP funds for an unapproved purpose
• Applying for PPP loan forgiveness when ineligible
• Lying to PPP auditors

Defenses

Some defenses are always available in every criminal case (such as insufficient evidence) and fraud cases are no exception in this. There are, however, some strong defenses specifically applicable to fraud.

The first is a “good-faith” defense. Fraud offenses require that the accused individual had a plan to commit fraud, or that the “knowingly” committed fraud. Thus, if you received a larger PPP loan than you were eligible for because of a genuine error or miscalculation, you probably would not be guilty of fraud.

Another defense specifically applicable to fraud is “materiality.” In any fraud, prosecutors must prove that the alleged fraud was “material.” “Material” means that prosecutors must show that the fraudulent conduct would affect the decision making of a reasonable person. Thus, if you inflate your payroll by a few hundred dollars, that is unlikely to be “material” to the total eligibility of a PPP loan, because a few hundred dollars is a very small part of a PPP loan.

There are many more defenses available, some of which are dependent on specific facts and circumstances. If you are under investigation or have been charged, an experienced attorney will be able to identify and employ potential defenses.

PPP Fraud Investigations

Around the time the original deadline to apply for PPP loans expired, FBI leadership stated publicly that they had over 400 open PPP fraud investigations.  With over hundreds of billions distributed through the PPP program, this is likely to be an active area of investigation for some time to come.

If you are involved in a PPP investigation, or think you might be, contact counsel right away.  It is always preferable to hire counsel long before criminal charges are filed.  You may be able to avoid being charged, or negotiate a much more favorable resolution.

If you receive a subpoena or are otherwise contacted by law enforcement, retain counsel before making any statements.

If you received a PPP loan and made errors in the application process that you fear may subject you to prosecution, please speak with one of our attorneys.  We can review your loan materials and advise on whether there is exposure to criminal investigation.

Experienced Fraud Attorneys

If you are under investigation or have been charged with a crime in relation to a PPP loan, contact an experienced attorney before speaking with anyone else. The earlier in a case a defense attorney comes in, the more help they will be able to provide. The stakes can be high – some fraud charges carry penalties of up to 30 years in prison and/or a fine of $1 million.

The attorneys at Burnham & Gorokhov can offer you a free consultation to discuss you case. We have represented numerous individuals in connection to fraud cases – including PPP fraud. To schedule a free phone consultation, please call 202-386-6920, or complete our online contact form.