While there has been a lot of controversy in the media surrounding the Paycheck Protection Program (PPP), there is no question that the program has served as an invaluable lifeline to many small and medium-sized businesses during the COVID-19 pandemic. For eligible businesses, not only does the PPP provided access to capital at a time when it is desperately needed, but it also affords the opportunity for businesses to have their repayment obligations forgiven entirely provided that they comply with the basic terms and conditions of the program.
Unfortunately, when the U.S. Small Business Administration (SBA) launched the PPP following the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the limited safeguards and extraordinarily high volume of applications meant that many ineligible companies received loans—in many cases in the millions of dollars. This led to widespread scrutiny of the PPP, and it triggered a wave of fraud investigations by the U.S. Department of Justice (DOJ). In tandem, the U.S. Department of Treasury announced that the SBA would be auditing all recipients of PPP loans of $2 million or greater (and some recipients of smaller loans as well), and these efforts have resulted in numerous businesses and business owners being charged with PPP loan fraud.
With the DOJ continuing to investigate and the SBA continuing to audit PPP loan recipients, the risk of facing prosecution for PPP loan fraud remains relatively high. While companies that have fully complied with the terms of the PPP should not have reason for concern, the high level of scrutiny means that all PPP loan recipients must be prepared to substantiate compliance in order to avoid allegations of fraud.
The DOJ is Pursuing a Broad Range of Charges in PPP Loan Fraud Cases
The Paycheck Protection Program was established under the CARES Act, and the CARES Act does not contain provisions for civil or criminal enforcement (instead, it simply provides that companies that do not satisfy the criteria for loan forgiveness will be required to repay their loans with an interest rate of one percent). As a result, in pursuing cases for PPP loan fraud, the DOJ is relying on pre-existing federal statutes.
For example, to date, the DOJ has filed criminal complaints in PPP loan fraud cases containing charges that include:
- Aggravated Identity Theft (18 U.S.C. § 1028A)
- Attempt (18 U.S.C. § 1349)
- Bank Fraud (18 U.S.C. § 1344)
- Conspiracy (18 U.S.C. § 371 and 18 U.S.C. § 1349)
- Making False Statements to the Small Business Administration (SBA) (18 U.S.C. § 1014)
- Making False Statements to an FDIC-Insured Bank (18 U.S.C. § 1014)
- Making False Statements to Federal Agents (18 U.S.C. § 1001)
- Tax Evasion (26 U.S.C. § 7201)
- Wire Fraud (18 U.S.C. § 1343)
This is consistent with the DOJ’s approach to combatting fraud targeting other types of federal government programs. Title 18 of the U.S. Code offers numerous ways for federal prosecutors to pursue charges—including charges that are not specific to any one type of fraudulent act or one specific federal program. The federal bank fraud and wire fraud statutes, in particular, are extremely broad, and they allow for criminal prosecution under a broad range of factual situations. The DOJ is using the federal conspiracy and attempt statutes to prosecute individuals and businesses suspected of fraudulently applying for PPP loans (even if they did not receive federally-backed funds under the program), and 18 U.S.C. § 1001 allows prosecutors to pursue charges against individuals who make false statements to federal agents or SBA auditors during a PPP loan fraud audit or investigation.
In addition to Title 18, the federal tax evasion statute, 26 U.S.C. § 7201, allows for prosecution of companies that have fraudulently obtained or fraudulently used PPP loan funds as well. In many of these cases, the DOJ is working with the Internal Revenue Service’s Criminal Investigation division (IRS-CI) to build cases for prosecution.
The Penalties for These Charges are Substantial
“Companies and individuals accused of fraudulently obtaining PPP loans, or even submitting fraudulent applications for PPP loans, can face substantial penalties. The DOJ is pursuing charges for bank fraud, wire fraud, and other crimes in these cases, and these charges carry substantial fines and long-term imprisonment.” - Dr. Nick Oberheiden of Oberheiden P.C.
Given that the DOJ is prosecuting PPP loan fraud under these pre-existing criminal statutes, the penalties that are on the table in PPP loan fraud cases are substantial. For example, the federal bank fraud and wire fraud statutes both carry maximum penalties of a $1 million fine and 30 years of federal imprisonment. In cases involving allegations of PPP loan application fraud, charges under 18 U.S.C. § 1014 and 18 U.S.C. § 1349 can also carry a $1 million fine and 30 years behind bars. The other Sections of Title 18 listed above carry lesser penalties, but the maximum sentences still include substantial fines and years or decades of incarceration. In criminal tax evasion cases under 26 U.S.C. § 7201, possible penalties include a $100,000 fine (for individuals) or a $500,000 fine (for businesses) and up to five years of imprisonment.
Another Possibility: Civil or Criminal Prosecution Under the False Claims Act
Another possibility for companies accused of PPP loan fraud is prosecution under the False Claims Act (FCA). The False Claims Act is unique from the statutes listed above in that it includes provisions for both civil and criminal enforcement. The DOJ routinely pursues civil and criminal cases under the False Claims Act in matters involving fraud targeting other government benefit programs (i.e. Medicare and Medicaid), and it has signaled that it intends to use the False Claims Act to prosecute PPP loan fraud in appropriate cases as well.
Under the civil enforcement provisions of the False Claims Act, potential penalties include treble damages and fines of up to $23,331 per false claim. Individuals and companies can also face liability for the government’s costs and legal fees as well as exclusion from participation in federal benefit programs. In criminal cases under the FCA, defendants can face fines and prison time which can range widely depending on the scope of the allegations involved. This, of course, is in addition to repayment of the amount fraudulently obtained under the Paycheck Protection Program.
Due to the potential for civil prosecution under the False Claims Act, when seeking to avoid prosecution and sentencing for PPP loan fraud, business owners and other loan applicants must be careful to avoid relying too heavily on the defense of lack of intent. While lack of intent is a defense to criminal culpability, it is not a defense to civil liability under the FCA. In general, when facing allegations of PPP loan fraud, individuals and businesses must approach their situation cautiously, and they must execute carefully-tailored defense strategies based upon the specific facts and circumstances at hand.