Entrapment Defense in COVID Loan Fraud Cases

Entrapment Defense in COVID Loan Fraud Cases

You got the target letter. Your sitting their reading it for the third time, and your stomach is in knots. PPP fraud. EIDL fraud. Wire fraud. The words blur together but the threat is real—20 years in federal prison, they say. And the first thing that hits you is: I was TOLD to apply. The SBA website was begging businesses to get help. Your lender called you three times. That consultant you paid $5,000—he filled out the forms, told you what numbers to put, said everyone was doing it this way. How the hell is this your fault?

You start Googling at 2am when you can’t sleep. “Entrapment defense.” The word keeps comming up. You were pressured, right? The government wanted you to apply. They practicaly threw money at small buisnesses. Doesn’t that mean you were entrapped?

Here’s the thing. What your feeling right now—that sense of being set up, manipulated, pushed into something you wouldn’t of done otherwise—that’s real. But “entrapment” in the legal sense? That’s different then what you think it means. And understanding the diffrence might save you from wasting $50,000 on a defense strategy that won’t work.

What Entrapment Actually Means (And Why Your Story Doesn’t Match)

Lets start with what entrapment is, legally speaking. According to the Department of Justice, a valid entrapment defense has two related elements: (1) government inducement of the crime, and (2) your lack of predisposition to engage in criminal conduct. Both elements have to be present. Not one. Both.

The two tests of entrapment are subjective entrapment and objective entrapment. The federal goverment and majority of states use the subjective test, which focuses on weather you were predisposed to commit the crime. A handfull of states use the objective test, which looks at weather the governments conduct would of induced a normally law-abiding person to commit a crime.

Now here’s were your story probably breaks down. When you say “I was encouraged to apply for a PPP loan,” what your describing is encouragement—not inducement. There’s a massive legal diffrence.

Encouragement is: “Apply now! Funds are available! We’re here to help!” That’s what the SBA website said in March 2020. That’s what your bank’s email said. That’s what every business consultant was advertising. Encouragment is an oppurtunity.

Inducement is: A government agent repeatedly pressuring you to do something illegal AFTER you’ve said no. Inducement is threats. Inducement is a undercover FBI agent saying “If you don’t submit this loan application with inflated numbers, we’re going to investigate you for something else.” Inducement is persistent solicitation that overcomes your resistance.

See the diffrence? Unless a actual government agent (not your lender, not your consultant, not your accountant) was actively pressuring you to commit fraud—and you initially refused, and they kept pushing—you probly don’t have inducement.

And without inducement, their’s no entrapment.

The circumstances that negate entrapment include: simple opportunity to commit a crime (vs. pressure), your willingness to participate, lack of government coercion. If the government merely gave you an oppurtunity and you took it? That ain’t entrapment, no matter how much it feels like you were set up.

Ask yourself this question right now, and be honest: Did a government agent—not a private lender, not a consultant you hired—pressure you to do something you initialy refused to do? If the answer is no, your gonna need a different defense strategy.

The Private Actor Problem (Why Your Lender’s Advice Doesn’t Count)

This is where alot of people get tripped up, and its frustrating as hell because it feels so unfair.

Your lender told you what to put on the application. Your consultant filled out the forms and inflated the numbers. Your accountant said it was fine. They encouraged you, they guided you, they practicaly held your hand through the whole process. And now there gone—the consultant disapeared, the lender’s pointing fingers at you, and you’re holding the bag.

Here’s the legal problem: private actors are not government agents. Your bank is a private actor. The PPP consultant you found online is a private actor. Your CPA is a private actor. Even tho they were participating in a government program, there not agents of the government for entrapment purposes.

Entrapment requires government inducement. That means an actual agent of the government—FBI, IRS, SBA investigator, undercover agent. According to legal foundations on entrapment, there has to be an “agency relationship” between the government and the person doing the inducing. This almost never exists with private lenders.

Could a private actor be considered a government agent? In theory, yes—if the government was directing there actions, if they were working undercover for law enforcement, if there was a formal agreement. In practise? This is extraordinarily rare in PPP cases. Your likely not going to be able to prove your Bank of America loan officer was secretly working for the FBI to entrap you.

Let me paint you the scenario that’s playing out in 60% of COVID loan fraud cases right now.

You hired a “PPP specialist”—some consultant who charged you $3,000 to $10,000 to “help” with your application. They had a slick website, testimonials, promised they knew all the tricks to maximize your loan amount. They filled out your forms. They told you what to write. They inflated your payroll numbers, your employee count, your revenue. You trusted them—they were the experts, right?

Now your facing charges, and you try to contact the consultant. There either gone (website down, phone disconnected) or there cooperating with the DOJ. Thats right—the same consultant who told you what numbers to put is now testifying that YOU pushed THEM to commit fraud. There saying you were the criminal mastermind, and they were just following your instructions.

Does this make you furious? It should. Its betrayal. But here’s the brutal truth: even if the consultant WAS the one who committed fraud, even if they did everything wrong, even if you were genuinly following there advice in good faith—that’s not entrapment. Why? Because they weren’t government agents.

Your consultant’s fraud doesn’t create government inducement. It creates a fraud-upon-fraud problem. It creates a “reliance on professional advice” defense (which might actually work, more on that later). It creates grounds to sue the consultant for malpractise. But it doesn’t create entrapment.

The defense strategies that actually work in PPP fraud cases focus on lack of intent, good faith confusion, reliance on professionals—not entrapment. If you used a consultant, your lawyer should be documenting everything they did wrong. But they shouldn’t be arguing entrapment unless that consultant was literally an undercover federal agent (and trust me, you’d know if they were).

If you used a consultant or relied heavily on your lender’s guidence, assume there cooperating with prosecutors right now. Do NOT try to contact them. Do NOT try to “get your stories strait.” That’s obstruction of justice, and it’ll make everything worse. Instead, document everything you can remember about what they told you, what they did, what forms they filled out. This evidence might support a different defense—just not entrapment.

Your consultant is probly testifying against you right now—yes, the same one who told you what to write on the forms—because prosecutors offered them a deal. I’ve seen this happen again and again.

The Predisposition Trap (Why Your Background Destroys This Defense)

Even if you could prove government inducement—which, as we’ve discussed, is unlikley in most PPP cases—you’ve still got another massive hurdle: predisposition.

This is were alot of entrapment defenses completly fall apart, and its especially brutal for people who are actualy good at business.

Here’s what predisposition means legally: were you ready, willing, and able to commit this type of crime before the government got involved? Did you have the inclination? The background? The sophistication? If the answer is yes—or if prosecutors can make a jury beleive the answer is yes—your entrapment defense is dead.

Now here’s the paradox that makes people’s heads explode: the MORE qualified you were to run a buisness, the MORE financial experiance you have, the HARDER it is to prove lack of predisposition. Let me explain why.

Prosecutors prove predisposition by pointing to your background. Do you have an MBA? That shows sophistication. Do you run multiple LLCs? That shows you understand business structures and legal requirements. Have you applied for SBA loans before? That shows you knew the rules. Do you have a background in finance, accounting, or banking? That shows you should of known what you were doing was wrong.

The burden of proof for entrapment works like this: First, YOU (the defendant) have to prove the government induced you. If you can do that, then the burden shifts to the government to prove you were predisposed. And prosecutors have gotten very, very good at proving predisposition in PPP cases.

They’ll pull your buisness records. Your prior loan applications. Your tax returns. Your LinkedIn profile showing you’ve got a degree in accounting. Your resume showing you were a CFO somewere. Any prior interaction with the banking system were you demonstrated you understood loan requirements. All of this becomes evidence of predisposition.

But wait, it gets worse.

The government doesn’t have to prove you were predisposed to commit THIS EXACT crime. They just have to prove you were predisposed to commit crimes of THIS TYPE. That means any prior history of “rule-bending” can be used against you—even if its completly unrelated to PPP fraud.

Did you have a prior tax issue? Even if it was civil, not criminal? Predisposition. Did you default on a loan before? Predisposition. Did you have a prior dispute with a lender about wether you met eligibility criteria? Predisposition. Did you ever exagerate income on a mortgage application? (And be honest—alot of people did this in the 2000s.) Predisposition.

Hell, even your LACK of criminal history might not save you. Prosecutors will argue: “Your a sophisticated businessperson who KNEW what you were doing was wrong. You weren’t confused. You weren’t naive. You made a calculated decision to commit fraud, and the fact that you haven’t been caught before doesn’t mean you weren’t predisposed.”

Let me give you two scenarios. Person A: High school diploma, first-time business owner, no financial background, running a small landscaping company with 3 employees. Person B: MBA from a good school, owned 3 different LLCs over the past 10 years, prior experiance as a VP of Finance at a corporation, running a consulting business.

Who has a better chance at arguing lack of predisposition? Person A, hands down. Person B’s sophistication—the exact same sophistication that made them sucessful in buisness—becomes evidence that they KNEW what they were doing was fraud. They can’t claim confusion when they’ve got an MBA and 15 years of financial experiance.

This is what I mean by the predisposition trap. The government is using data analytics and AI in 2025 to identify targets for PPP fraud prosecutions. And you know who there targeting? People with sophisticated backgrounds. Why? Because its easier to prove predisposition.

If you have multiple businesses, prior SBA loans, advanced degrees in finance or buisness, or experiance in banking or accounting—do NOT lead with an entrapment defense. Your lawyer will look at your background and immediatly know: the government’s gonna bury you on predisposition. Instead, you need to focus on defenses like good faith confusion about eligibility rules, reliance on professional advice, lack of specific intent to defraud.

Before you even mention the word “entrapment” to your attorney, you need to audit your entire financial and buisness history. Sit down and make a list: every business you’ve owned, every loan you’ve applied for, every tax return that might have issues, every financial dispute you’ve had, every degree you’ve earned, every job title you’ve held that involved finance or accounting. Because prosecutors are gonna pull all of this. And if there’s ANY evidence of prior rule-bending, prior sophistication, prior understanding of loan requirements—your entrapment defense just got infinitely harder.

Wait, so being GOOD at buisness makes this defense NOT work? That can’t be right. (But it is. Welcome to federal criminal law.)

The Forgiveness Timeline That Kills Your Defense

This is were alot of defendants realize there case is even worse then they thought.

And I’m not gonna sugarcoat this: if your charges involve forgiveness fraud, your entrapment defense is basically dead on arrival. Let me explain why the timeline destroys you.

Most people think PPP fraud cases are about the initial application—what you submitted in March or April 2020 when the pandemic was brand new, everything was chaos, the guidance was unclear, businesses were failing left and right, and everyone was in panic mode. And look, if your ONLY alleged fraud was the initial application, you might have a sliver of an argument about confusion, desperation, unclear guidance. (Not entrapment, but maybe good faith error.)

But here’s the problem: most PPP fraud charges in 2025 aren’t just about the application. There about the forgiveness application you submitted months or even years later. And that timeline kills any argument that you were confused, panicked, or pressured in the moment.

Think about the timeline. You applied for the loan in April 2020—peak pandemic chaos, buisnesses closing, everyone desperate. Okay. You got the money. You spent it (or didn’t). Then, 8 to 24 months later, you applied for loan forgiveness. By that point, it was late 2021 or 2022. The pandemic was winding down. SBA had issued clear guidence on forgiveness requirements. You had TIME. You could of hired a lawyer. You could of consulted an accountant. You could of reviewed the rules carefully.

Instead, you submitted a forgiveness application that repeated the same false statements from your original application. Or worse—you created NEW false documents to support forgiveness. Fake payroll records. Fabricated 1099s. Doctored bank statements. All submitted 12, 18, 24 months after the initial application.

What does that timeline tell prosecutors? It tells them you had opportunity to correct any mistakes. It tells them this wasn’t a heat-of-the-moment panic decision. It tells them you made a deliberate, calculated choice to continue the fraud—or even to escalate it.

And that timeline absolutly destroys any entrapment argument. Why? Because entrapment is about being induced to do something in the moment, under pressure, that you wouldn’t otherwise do. But if you had 12-24 months to think about it, consult professionals, review the rules, and correct mistakes—and you DIDN’T—that proves predisposition. That proves you weren’t entrapped; you were a willing participant.

The prosecutors argument goes like this: “Your Honor, the defendant claims they were confused and pressured during the pandemic. Fine. Let’s say that’s true in April 2020. But in September 2022, when they applied for forgiveness, there was no confusion. No pressure. No chaos. The SBA had published detailed guidence. The defendant had access to lawyers and accountants. They had months to review there application and correct any errors. Instead, they doubled down. They submitted false forgiveness documents. They created fake payroll records. That’s not entrapment. That’s deliberate fraud.”

And you know what? There right.

If you submitted false documents for forgiveness, especially if you created new false evidence months after the initial loan, you can’t claim you were swept up in the panic of March 2020. The panic was over. You had time. You made choices.

I’ve seen this pattern again and again: Defendant who genuinly WAS confused in April 2020 when they applied—they didn’t understand how to calculate employees, they weren’t sure if independent contractors counted, they made good-faith errors. Then, 18 months later, instead of hiring a lawyer to help with forgiveness, they just… repeated the same errors. Or worse, they realized the errors but figured “well, I already got the money, might as well go for forgiveness.”

That second decision—the decision to apply for forgiveness with false info—that’s were the case becomes indefensible. Because at that point, you KNEW or should of known. You had resources. You had time. And you chose to proceed anyway.

According to common defenses for COVID loan fraud, timing matters enormously. The further removed you are from the initial pandemic chaos, the harder it is to argue confusion or good faith error. And if your forgiveness application came in 2022 or later? Your basicaly admitting you had time to figure out the rules and chose not to.

Let me be real with you for a second. The government is escalating there crackdown on PPP fraud in 2025, and there using the forgiveness timeline as there smoking gun. The DOJ’s theory is: even if we can’t prove fraud on the application (because of pandemic confusion), we can DEFINATELY prove fraud on forgiveness (because you had no excuse by then).

If your charges include forgiveness fraud, abandon the entrapment argument completely. Your lawyer should be focusing on: lack of specific intent (you genuinely thought you were eligible), reliance on the loan servicer’s guidence (if they told you how to apply for forgiveness), insufficent evidence (prosecutors can’t prove the documents are false), or statue of limitations (if your forgiveness was early and there running out of time).

This can’t be happening—I got the loan in good faith—well, maybe not COMPLETE good faith but I wasn’t trying to—

My lawyer costs more then the loan amount, my family doesn’t know I’m under investigation, I haven’t slept in 8 months, and now your telling me my best defense doesn’t even work?

The consultant TOLD me to apply for forgiveness the same way—doesn’t that matter?—oh god, he’s cooperating with prosecutors, isn’t he? He cut a deal and now he’s saying I pressured him, when HE was the one who—

If I had just hired a lawyer before applying for forgiveness, if I had just… but I couldn’t afford one back then, I’d already spent the loan money on the buisness and payroll and rent and… and everyone said it was automatic, everyone said just submit the same info…

Look, I get it. This is the worst possible situation. Your staring at federal charges, your family’s future is on the line, you’ve got a lawyer who’s charging $500/hour, and every answer you get makes things seem worse. But here’s were we are: if you applied for forgiveness with false info months or years after the initial application, the entrapment defense isn’t gonna save you. You need a different strategy.

What Might Actually Work Instead (Alternative Defense Strategies)

Okay. We’ve spent alot of time talking about why entrapment won’t work. I know that’s disapointing—maybe even devastating—because you probably came to this article hoping for an answer, and instead I’ve been basicaly saying “that won’t work, that won’t work, that won’t work.” But here’s the thing: understanding what WON’T work is just as important as knowing what WILL. Because if you waste time and money chasing an entrapment defense that’s doomed from the start, you miss the chance to build a defense that might actualy succeed.

So let’s talk about what might work instead. These aren’t guarantees—nothing in criminal defense is guaranteed except that its gonna be expensive and stressful—but these are the defense strategies that actually have a track record in PPP fraud cases.

Good Faith Confusion About Eligibility Rules. This is probably the strongest defense for alot of defendants, especially those who applied early in the pandemic. The argument: the PPP rules were unclear, guidance was contradictory, everything was moving fast, and you genuinly misunderstood the requirements. You didn’t intend to commit fraud; you made an honest mistake about wether you were eligible, how to calculate employees, what expenses counted, etc.

This defense works best if: (1) you applied early (March-May 2020) when guidance was still evolving; (2) you can show contemporanous evidence of confusion (emails to your accountant asking questions, calls to the SBA, attempts to understand the rules); (3) the errors on your application are plausable mistakes, not obvious fabrications; (4) you have a track record of running a legitimate buisness.

It works less well if: you applied later when rules were clear, you created fake documents (not just errors in calculation), you have no evidence of trying to understand the rules, or you’ve got a sophisticated financial background that makes “confusion” hard to beleive.

Reliance on Professional Advice. If you hired an accountant, attorney, or consultant (who was actually qualified, not just some internet scammer) and relied on there advice in good faith, that can be a defense. The argument: you weren’t trying to commit fraud; you were following the guidence of someone you reasonably believed was an expert.

This defense works best if: (1) you hired a real professional (CPA, tax attorney) not a “PPP specialist” you found on Instagram; (2) you can document what advice they gave you; (3) you disclosed all relevant facts to them; (4) you had no reason to know there advice was wrong.

It works less well if: the professional was obviously shady, you withheld information from them, you “consultant-shopped” untill you found someone who’d help you commit fraud, or the advice was so obviously wrong that no reasonable person would of relied on it.

Insufficient Evidence / Government Can’t Prove Intent. Remember, in federal fraud cases, the government has to prove you had specific intent to defraud. That’s a high bar. Your lawyer’s job is to poke holes in there case—show that the evidence is ambiguous, that there are innocent explanations for what you did, that the government’s relying on circumstantial evidence that doesn’t prove intent.

This defense works best if: there’s no smoking gun (no emails saying “let’s commit fraud”), the documents are ambiguous, you can offer alternative explanations for your actions, and the government’s case relies on inferences rather then direct evidence.

Statue of Limitations. Here’s something alot of people don’t realize: we’re in late 2025 now. The statue of limitations for most federal fraud charges is 5 years. If you applied for a PPP loan in April 2020, the statute runs out in April 2025. If you haven’t been indicted by then—and if you haven’t done anything to extend the statute (like applying for forgiveness later)—you might be in the clear.

This is creating a “statute of limitations stampede” were prosecutors are rushing cases to trial before the clock runs out. And when prosecutors rush, they make mistakes. There skipping steps in the investigation. There relying on weaker evidence. There offering better plea deals then they would of in 2022.

If your case is being charged in late 2024 or 2025, and it involves an early loan application, your lawyer should immediatly look at statute of limitations issues. Has it run? Is the government trying to extend it based on subsequent conduct? Did they file charges in time? This could be your way out.

Cooperation and Plea Negotiation. I hate to say this, because I know its not what you want to here, but in alot of PPP fraud cases, the best outcome is a plea deal. If the evidence against you is strong—if you did create false documents, if you did inflate numbers, if you did lie on the application—fighting at trial might just result in a harsher sentence when you loose.

But here’s the thing: the government wants cooperation. If you can provide information about other people (your consultant, other businesses in your industry who committed fraud, lenders who were facilitating fraud), you might be able to negotiate a deal were you plead to lesser charges, get a reduced sentence, maybe even avoid prison time.

According to possible defenses for fraud charges, understanding the strength of the governments case and being realistic about your options is crucial. If you’ve got a weak case, don’t let pride or anger drive you to trial. Sometimes the smart move is to negotiate the best possible plea.

So what should you actualy tell your lawyer when you meet with them? Here’s what to focus on:

1. Document your confusion. Find any emails, texts, or records showing you were trying to understand the PPP rules. Questions you asked your accountant. Calls to the SBA. Anything that shows you were trying to comply.

2. Identify professionals you relied on. Did you consult with a CPA? Tax attorney? Anyone who gave you advice? (Not the consultant who disappeared—actual licensed professionals.) Get documentation of what they told you.

3. Explain your buisness operations. Show that you run a legitimate buisness. Produce tax returns, payroll records, bank statements proving your buisness was real and operating.

4. Distinguish errors from fabrications. If you made mathematical errors or misunderstood how to calculate employees, that’s diffrent from creating fake payroll records. Be honest with your lawyer about what happened.

5. Understand the timeline. When did you apply? When did you seek forgiveness? What was happening in your life and buisness at those times? The timeline matters.

6. Assess cooperation value. Do you have information that would be valuable to prosecutors? About consultants, lenders, other businesses? Your lawyer needs to know this to potentially negotiate.

The government didn’t entrap you in the legal sense. But that doesn’t mean you don’t have defenses. It just means you need to fight the REAL battle, not the one you wish you had. Your lawyer should be gathering evidence of contemporanous confusion, reliance on professionals, pattern of honest buisness operations, mathematical errors vs. fabricated documents, and cooperation value you can offer. Focus there.

Your sitting in your lawyers office next week. Don’t walk in saying “I was entrapped.” Walk in saying “I was confused about the rules, here’s the evidence of my confusion, here’s the professional I consulted, here’s my buisness records, and I need you to help me figure out the best strategy.” That’s the conversation that might actualy save you.