Tips on Preparing to Defend Against Allegations of SBA Loan Fraud During the COVID-19 Crisis

Federal emergency relief legislation—including the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”)—has allocated more than $2 trillion to individuals, businesses, and other entities to help ease the financial uncertainty caused by the COVID-19 crisis. However, the resulting circumstances have been anything but predictable.

For example, many companies receiving loans administered and guaranteed by the Small Business Administration (“SBA”) under the Paycheck Protection Program (“PPP”) have subsequently faced allegations of fraud in the federal loan qualification process. This includes fraud in the initial application, receipt of loan proceeds, transfer of funds to personal or overseas bank accounts, and use of such funds for improper or unauthorized purposes. Federal authorities including the FBI, DOJ, IRS, U.S. Secret Service, and U.S. Attorney’s Office have issued numerous indictments to individuals and businesses for SBA loan fraud under the PPP, and the individuals and companies targeted in these efforts are facing substantial penalties. Treasury Secretary Steven Mnuchin told Fox Business that any individual or business that should not have received PPP loan proceeds may be held criminally accountable, and Attorney General William Barr directed all U.S. Attorneys, "to prioritize the investigation and prosecution of Coronavirus-related fraud schemes," in an effort to uncover weaknesses and promote fraud awareness.

According to Dr. Nick Oberheiden, founding attorney of Oberheiden P.C., a federal defense law firm headquartered in Dallas, Texas, “Widespread fraud under the PPP has forced federal authorities to aggressively target individuals and companies that improperly received loans under the program. This has resulted in heavy scrutiny of loan recipients, including many recipients that had no idea that they may have unintentionally violated the rules of the PPP.”

The SBA has announced its intention to audit all loans over $2 million while reserving the right to audit other loans, and has stated that it will operate under the assumption that loans under $2 million meet the good faith certification for eligibility. Nevertheless, many smaller PPP loan recipients are still likely to face government inquiries. As Dr. Oberheiden told the Los Angeles Times in July, however, not only is intent likely to be difficult to prove in these cases, but the federal government is also likely to overlook many possible instances of fraud as a result of lacking the resources required to effectively scrutinize the large volume of loans issued under the PPP.

In an interview with Fox Business in May, Dr. Oberheiden suggested that the SBA and other federal authorities may be more likely to focus on cases involving larger loans and clear efforts to defraud the federal government. This includes efforts such as creating limited liability companies solely for the purpose of obtaining PPP loans, using fictitious companies, obtaining a series of smaller SBA loans, and diverting or transferring PPP loan funds to foreign accounts beyond the jurisdictional reach of the United States government.

In response to the federal government’s concern about SBA loan fraud under the PPP, banks began freezing individuals’ loan accounts upon identifying suspicious activity or suspected fraud based on loan amounts, transfers, or other irregular activity. However, many company executives, small business owners, and other individuals are also likely to face allegations of making false statements to the SBA and other federal crimes based solely upon submitting false information in their PPP loan applications. Depending on the specific circumstances involved, individuals targeted in SBA loan fraud investigations during the COVID-19 crisis could face federal charges under statutes including:

• False Claims Act (31 U.S.C. §§ 3729 – 3733)
• False Statements to the Government (18 U.S.C. § 1001)
• Making False Statements to the SBA or an FDIC-Insured Bank—Loan or Credit Applications (18 U.S.C. § 1014)
• Bank Fraud (18 U.S.C. § 1344)
• Wire and Mail Fraud (18 U.S.C. § 1343)
• Aggravated Identity Theft (18 U.S.C. § 1028A)
• Tax Evasion (26 U.S.C. § 7201)
• Attempt (18 U.S.C. § 1349)
• Conspiracy to defraud the United States (18 U.S.C. § 371 and 18 U.S.C. § 1349)
• Making False, Fictitious or Fraudulent Claims (18 U.S.C. § 287)
• Misrepresentations to the SBA (15 U.S.C. § 645(d))

When targeted in an SBA audit or a federal criminal investigation, it is essential to respond with a comprehensive, cohesive, and proactive defense. This is true whether the audit or investigation is still ongoing, or a criminal complaint has been filed and an indictment is pending. The following are some tips for individuals and businesses that are facing allegations of federal fraud under the PPP and other SBA loan programs:

• Promptly engage a law firm experienced in dealing with SBA loan fraud cases and in defending its clients during and after FBI, DOJ, and IRS investigations.

• Gather all available documentation to substantiate and verify the accuracy of the information contained in your company’s PPP or other SBA loan application.
• Compile all documentation that demonstrates your company’s qualifications and eligibility for an SBA-guaranteed loan, including satisfaction of the “necessity” requirement for PPP loan eligibility (if applicable).
• Adopt and implement strong internal controls and compliance policies to demonstrate that your business is committed to complying with the requirements for SBA loan eligibility.
• Make sure any information disclosed to the SBA, in SEC filings, or in other public disclosures are accurate and can be substantiated by records your company has readily available on hand.
• Ensure that your company has an accurate accounting of its use of all SBA loan funds, including a complete transaction history. If funds were transferred to another account, be prepared to provide documentation as to why this was done.

The more documentation that can be provided (at the appropriate time based on the advice of legal counsel), and the more proactive a target can be in its defense, the greater the likelihood that an indictment can be avoided. With this in mind, as federal authorities continue their efforts to uncover and prosecute instances of fraud under the PPP and other SBA loan programs, individuals and businesses that received loans during the COVID-19 crisis must be thinking about what will be necessary to affirmatively demonstrate compliance with the applicable program requirements should it become necessary to do so.