The Justice Department has announced the first-ever False Claims Act settlement with a lender to resolve allegations related to processing a Paycheck Protection Program loan on behalf of an ineligible customer. This settlement occurred shortly after the Justice Department announced the creation of three new Strike Force teams to enhance its existing efforts to combat and prevent COVID-19 related fraud. This groundbreaking settlement and DOJ’s decision to create additional task forces signals that the government intends to intensify investigations into alleged COVID-19 related fraud.
The CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, provided emergency financial assistance through the Paycheck Protection Program (PPP) in the form of forgivable loans to businesses to cover payroll and other specified expenses. Lenders who originated PPP loans were entitled to receive a fixed fee from the Small Business Administration (SBA). That fee ranged from 1% to 5%, depending on the size of the loan.
From the outset, the government vowed to prevent recipients from fraudulently taking advantage of CARES Act programs. While initial investigations and prosecutions focused on individuals and companies that allegedly received fraudulent loans, the Justice Department has now broadened its scope to include lenders who distributed the funds.
First False Claims Act Settlement With a Lender
Prosperity Bank, with branches throughout Texas and Oklahoma, recently agreed to pay $18,673.50 to resolve claims that the bank improperly processed a PPP loan on behalf of an ineligible customer.
In May 2020, Prosperity Bank approved and processed a $213,400 PPP loan for Woodlands Pain Institute PLLC. However, a question on the PPP loan application asking whether the applicant was subject to an indictment, criminal information, arraignment or other means by which formal criminal charges were brought was answered incorrectly. The sole owner of Woodlands Pain Institute PLLC was facing criminal charges at the time the PPP loan application was submitted. However, when filling out the application, but he checked the box marked “no” for the relevant question.
The Justice Department asserted that Prosperity Bank employees knew at the time that the owner was facing criminal charges and was therefore ineligible to apply for the PPP loan. The bank processed the application anyway and approved the loan. Prosperity Bank earned a 5% processing fee of $10,670 for this loan
The settlement between the bank and the government is believed to be the nation’s first settlement with a PPP lender pursuant to the False Claims Act. The settlement amount reflects the bank’s efforts to cooperate with the government’s investigation.
New COVID-19 Fraud Strike Force Teams
Since the Attorney General established the COVID-19 Fraud Task Force in May 2021, the Justice Department has worked continuously with law enforcement partners to analyze an extraordinary amount of data from the Small Business Administration. That data has been the key to identifying and prosecuting individuals who allegedly stole pandemic relief funds. The Justice Department’s efforts to combat COVID-19 related fraud have proceeded on numerous fronts, including cases and investigations involving the Paycheck Protection Program, Economic Injury Disaster Loan program, unemployment insurance programs and COVID-19 health care fraud.
On Sept. 14, 2022, the Justice Department announced it had established three new Strike Force teams created to enhance its existing efforts to combat and prevent COVID-19 related fraud. Attorney General Merrick B. Garland stated that the “Strike Force teams will build on the Department’s historic enforcement efforts to deter, detect, and disrupt pandemic fraud wherever it occurs … The Department will continue to work relentlessly to combat pandemic fraud and hold accountable those who perpetrate it.” The new Strike Force teams will operate out of U.S. Attorney’s Offices in the Southern District of Florida, the District of Maryland, and a joint effort between the Central and Eastern Districts of California.
The new Strike Force teams will include fraud, cybercrime and money laundering expertise across multiple government agencies. They include prosecutors and agents from the Department of Labor Office of Inspector General, the Small Business Administration Office of Inspector General, the Department of Homeland Security Office of Inspector General, the FBI, the U.S. Secret Service, Homeland Security Investigations, Internal Revenue Service Criminal Investigations and the U.S. Postal Inspection Service, with assistance from the Pandemic Response Accountability Committee and the Special Inspector General for Pandemic Recovery.
What to Expect
The Justice Department has seized over $1.2 billion in COVID-19 relief funds that were allegedly received fraudulently since the start of the pandemic. The Justice Department has charged over 1,500 defendants with crimes in federal districts across the country for alleged COVID-19 related fraud. The Justice Department’s decision to widen its focus to include lenders signals that investigators and prosecutors are not limiting their efforts to recipients of pandemic relief funds. Lenders that originated PPP loans are not immune from scrutiny. Any lender that is concerned about potential PPP fraud exposure should consult counsel now and not wait to be contacted by law enforcement. Any financial institution that has already received a subpoena or any inquiry from a law enforcement agency should immediately consult with counsel who can assess the full potential for civil and criminal exposure prior to responding. Bank employees who believe they are mere witnesses may be exposing themselves and their employers to civil monetary civil penalties and even criminal charges.