Five Developments Identified in Criminal and Civil Enforcement of PPP Loans

Recently, the Beverly Hills Bar Association in California sponsored a panel presentation on “PPP Enforcement Trends,” whose panelists included a high-level prosecutor from the United States Attorney’s Office and other leading white-collar defense lawyers in Los Angeles. This presentation identified key developments related to Paycheck Protection Program (PPP) loan enforcement.

Five of these developments include the following:

1. The creation of the “PPP Loan Fraud Coordinator” position at most U.S. Attorney’s Offices to prosecute PPP loan fraud cases.
2. The use of data analytics in PPP loan cases to identify and source the most egregious cases.
3. The use of criminal charges with mandatory minimum sentences to punish and deter criminal conduct in PPP loan cases.
4. The emergence of stiff civil financial penalties for PPP loan-related FIRREA and False Claims Act civil cases.
5. Extra scrutiny and possible criminal enforcement actions related to PPP loan forgiveness applications.

PPP Loan Fraud Coordinator Position Created to Prosecute Cases

Even though the PPP began less than one year ago, the United States Department of Justice already has prosecuted approximately 200 defendants for alleged fraudulent conduct. The number of prosecutions has almost doubled since the beginning of 2021, and it will continue to increase dramatically. One reason for this exponential increase in prosecutions is because almost every U.S. Attorney’s Office has created the position of “PPP Loan Fraud Coordinator” to focus on identifying and prosecuting alleged violations of the law.

These prosecutions generally fall into one of two categories. The first category consists of cases involving relatively discrete criminal conduct, such as a person who received a PPP loan under false pretenses. The second category of cases concerns organized crime-ring operations, involving multiple individuals who engage in coordinated and sophisticated efforts to carry out a fraudulent scheme, which can entail the submission of multiple loan filings. PPP loan prosecutions will only become more prevalent across both of these categories. For example, last month, the Justice Department announced charges against an individual for allegedly submitting multiple fraudulent PPP loan applications to at least three financial institutions, and just recently two individuals pled guilty to charges of wire fraud and false statements stemming from PPP loan applications in which the individuals falsely claimed to be farmers.

Data Analytics Used to Identify and Source the Most Egregious Cases

Prosecutors are now using data analytics to mine for cases to pursue. This technique involves analyses of documentary evidence, including loan, tax, financial institution, and other documents and data. Prosecutors are also using data analytics after receiving a referral to determine the extent of the fraud in order to determine whether to devote resources to a particular investigation. For example, a financial institution might suggest that a loan is fraudulent, and prosecutors will then use data analytics to determine if the scope of the wrongdoing is even more extensive in an effort to identify additional cases impacting multiple banks and other financial institutions. For example, just a few months ago the Justice Department announced the indictment of four individuals for their alleged involvement in a scheme to submit at least 35 fraudulent loan applications seeking in excess of $5.6 million in COVID-19 relief. This month, the Justice Department announced a superseding indictment in the same case with four additional defendants, involving over 150 fraudulent loan applications seeking at least $21.9 million in COVID-19 relief.

Tough Criminal Charges Will Be Used to Punish and Deter Fraudulent Conduct

Due to the rapid rollout of the Paycheck Protection Program in response to COVID-19, the government has initiated a “pay and chase” strategy. The government provided the PPP funds with little initial oversight upfront (the “pay”) but now will aggressively pursue criminal charges for any alleged fraudulent conduct (the “chase”). Most notable among these tough criminal charges is aggravated identify theft (18 U.S.C. § 1028A(a)(1)), commonly referred to as the “hammer” by prosecutors because it entails heightened consequences for a defendant. Specifically, it carries a mandatory term of imprisonment of two years, in addition to the punishment for any other underlying felonies that were committed in connection with the identity theft. Prosecutors can be expected to threaten to utilize this aggravated identity theft charge (see example here) to induce quick plea agreements from defendants whenever the facts of a case allow for it.

Other charges that prosecutors commonly have brought in PPP loan criminal cases include false statements / concealment (18 U.S.C. § 1001), false statements in a loan application (18 U.S.C. § 1014), wire fraud (18 U.S.C. § 1343), bank fraud (18 U.S.C. § 1344), and related Title 26 tax charges.

Stiff Civil Penalties for PPP Loan-Related FIRREA and False Claims Act Civil Cases are Emerging

PPP loan enforcement is not limited to criminal prosecutions. Civil enforcement actions are another tool at the government’s disposal to address wrongdoing. The government can use the False Claims Act, 31 U.S.C. § 3729 et. seq., and the Financial Institutions, Reforms, Recovery, and Enforcement Act’s (FIRREA) civil penalty statute, 12 U.S.C. § 1833a, to pursue civil enforcement actions. The case of SlideBelts, Inc., discussed here, is an example. Thus, even if the government cannot meet its high burden of proving guilt “beyond a reasonable doubt” in a criminal case, it can utilize civil enforcement and its lower “preponderance of the evidence” standard. These civil penalties could include $11,000 to $22,000 in penalties for each false statement in a PPP loan application, in addition to treble damages (i.e., a $10 million PPP loan could lead to $30 million in damages plus penalties). And the government can be expected to utilize these stringent civil enforcement penalties and damages at every opportunity where the heightened criminal standard cannot be met.

Extra Scrutiny for PPP Loan Forgiveness Application and Fraud Enforcement is Next

Currently, the focus of PPP loan enforcement actions has been on the initial loan applications. Specifically, the government has investigated statements made by loan applicants in order to obtain the PPP loans up front. However, as maturity dates approach on PPP loans, borrowers will begin to apply for forgiveness. As a result, one can expect to see a shift in the level of scrutiny in the examination of those applications and follow-on enforcement efforts. In this next phase, one area of focus will be whether the PPP loan borrower used the PPP funds as required or for an unauthorized purpose instead. Of course, there are other areas of concerns as well, such as whether the borrower met the initial requirements. In other words, anyone filing for forgiveness of a loan should anticipate a deeper examination of the forgiveness application than the original loan application.

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