PPP Loan Fraud: The High Risk of Criminal Charges and Penalties

The Department of Justice, in collaboration with other federal agencies like the IRS and FBI, has launched several investigations into potential fraud associated with the Paycheck Protection Program (PPP). The U.S. Small Business Administration (SBA) has also announced that borrowers who received $2 million or more in PPP funds will automatically be audited. Borrowers who received smaller loans may also be audited to prevent abuse of the program. As a small business owner who received a PPP loan, you may be at risk of facing an SBA audit or federal investigation that could result in criminal charges. The penalties for PPP loan fraud are severe, so it’s crucial to seek legal guidance. Contact the PPP fraud attorneys at Federal Criminal Defense Pro today for a free initial consultation.

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) is a $670 billion federal loan program that was created by the SBA in March 2020, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP was intended to provide business owners affected by the COVID-19 pandemic with the capital to pay their employees’ salaries and support ongoing business operations. A significant feature of the program is that loans could be forgiven entirely if the recipients maintained their workforce, kept employees’ salary levels, and used the funds for payroll costs and eligible expenses. The loan amount is based on the number of employees and average payroll costs, with at least 60% of the loan being allocated for payroll, and the other 40% can be used for interest on mortgages, rent, and utilities.

Why PPP Loan Recipients are at Risk

When business owners applied for and obtained PPP funds to cover payroll and other expenses during COVID-19, they couldn’t have anticipated how vulnerable the loan program would be to fraudulent schemes, how robust the federal government’s oversight of the program would become, and how difficult it would be to ensure compliance to have the loan forgiven. The rules and regulations governing the Paycheck Protection Program appear to be constantly evolving, and business owners may be unsure about eligibility and loan forgiveness. With the DOJ investigating allegations of PPP loan fraud and the SBA auditing PPP loan recipients, the risk of facing criminal prosecution for PPP fraud is significant.

What Constitutes PPP Loan Fraud?

The launch of the Paycheck Protection Program in March was chaotic, with small business owners rushing to obtain PPP funds before the funds ran out, and lenders struggling to keep up with the loan applications. As of mid-July, the PPP had guaranteed 4.9 million forgivable loans totaling $521 billion. Unfortunately, widespread confusion surrounding the program resulted in some businesses receiving funds they weren’t entitled to, while others who believed they were eligible are now uncertain about the loan program’s terms and conditions, specifically the strict criteria that make the loans forgivable. As the federal government strives to identify abuses of the Paycheck Protection Program, many PPP loan applicants and recipients are apprehensive about facing an audit or investigation or being charged with a crime. The following are examples of actions that could result in criminal prosecution for PPP loan fraud:

• Underestimating the number of employees or misclassifying employees as independent contractors to qualify as a small business
• Making bad-faith certifications on a PPP loan application
• Inflating payroll costs to obtain a higher loan amount
• Obtaining PPP funds from multiple lenders
• Using PPP funds for unauthorized purposes (e.g., personal expenses)
• Firing or failing to rehire employees or cutting employee salaries despite receiving PPP funds
• Making bad-faith certifications on an application for PPP loan forgiveness
• Misrepresenting or concealing information during a PPP audit or fraud investigation

PPP Fraud Crimes and Penalties

The CARES Act doesn’t contain provisions for criminal enforcement of the Paycheck Protection Program. Instead, the Act states that PPP loan recipients who fail to satisfy the employee retention and qualified expenses criteria for loan forgiveness must repay the loans at an interest rate of 1%. As a result, the DOJ has had to rely on pre-existing federal statutes to pursue charges for PPP loan fraud. The DOJ may pursue the following federal crimes against individuals suspected of committing PPP fraud and the associated criminal penalties:

• Bank fraud (18 U.S.C § 1344) – A maximum sentence of 30 years in prison and/or up to $1,000,000 in fines
• Wire fraud (18 U.S.C. § 1343) – A fine and/or a maximum term of imprisonment of 20 years (or 30 years, plus a maximum fine of $1,000,000, if the violation affects a financial institution or involves any benefit associated with a presidentially declared major disaster or emergency)
• Mail fraud (18 U.S.C. § 1341) – A fine and/or a maximum prison sentence of 20 years (or 30 years, plus a maximum fine of $1,000,000, if the violation affects a financial institution or involves any benefit associated with a presidentially declared major disaster or emergency)
• Making false statements to the SBA or a financial institution (18 U.S.C. § 1014) – A term of imprisonment of up to 30 years, a fine of up to $1,000,000, or both
• Aggravated identity theft (18 U.S.C. § 1028A) – A two-year term of imprisonment, to be served in addition to the penalty for the underlying felony offense
• Attempt and conspiracy (18 U.S.C. § 1349) – Any attempt or conspiracy to commit a fraud offense is punishable by the same penalties as the actual fraud offense
• Making false statements to federal agents (18 U.S.C. § 1001) – A fine and/or a maximum sentence of five years in prison
• Conspiracy to defraud the government (18 USC § 371) – A fine and/or a term of imprisonment of up to five years
• Tax evasion (26 U.S.C. § 7201) – A fine of up to $100,000 (for an individual) or $500,000 (for a business), a term of imprisonment of up to five years, or both

The most serious penalties are associated with crimes like bank fraud, mail fraud, and wire fraud. Simply making a false statement to the SBA or a financial institution can lead to a prison term of up to 30 years, a fine of up to $1,000,000, or both. The other federal crimes listed above carry lesser penalties, but the maximum sentences that can be imposed for these crimes still include substantial fines and years spent in federal prison. The same is true for any offense charged under the federal attempt and conspiracy statute. Even if you don’t receive PPP funds, you could still face the same criminal penalties upon conviction if you are accused of attempting or conspiring to defraud the Paycheck Protection Program.

Over the past several months, federal investigators and prosecutors have escalated their efforts to combat PPP loan fraud. More than a dozen individuals in 11 states have been arrested and charged with fraud crimes or the attempt to commit fraud crimes like bank fraud, wire fraud, and making false statements to a financial institution since May, and the DOJ has issued a press release announcing the charges in each case. The government’s criminal prosecution of PPP loan fraud appears to be primarily focused on three types of allegations:

• Applicants making false or misleading

Statements on PPP loan applications to fraudulently obtain PPP funds

• Loan recipients using PPP funds for unauthorized purposes
• Loan recipients making false or misleading statements on PPP loan forgiveness applications to fraudulently qualify for loan forgiveness

If you have been accused of making false statements on a PPP loan application, misusing PPP funds, fraudulently applying for PPP loan forgiveness, or any other alleged abuse of the Paycheck Protection Program, you could be at risk of facing federal indictment and criminal prosecution.

How Our PPP Loan Fraud Attorneys Can Help

If you are a small business owner who applied for or received a PPP loan, you may be at risk for a federal investigation or audit, which could lead to criminal charges. The penalties associated with PPP loan fraud are severe, so don’t hesitate to seek legal guidance. Our PPP fraud attorneys at Spodek Law can help you navigate the complex legal landscape surrounding the Paycheck Protection Program and protect your rights and interests.

We understand that the rules and regulations governing the Paycheck Protection Program can be confusing, and the ongoing effort to identify potential abuses of the federal loan program can be intimidating. Our experienced attorneys can provide the legal guidance you need to understand your rights and obligations under the Paycheck Protection Program, and can help you develop a sound legal strategy to respond to an SBA audit or a federal investigation.