The U.S. Department of Justice took several victory laps this month, touting long prison sentences it has secured for COVID-19 related fraud. These prison terms send a clear message to any individual or business that benefited from government aid that they should not only expect enhanced scrutiny, but if the government is able to prove that fraud occurred, face the prospect of serious time behind bars if convicted.
The CARES Act
The CARES Act (Coronavirus Aid, Relief and Economic Security Act), enacted in March 2020 and later reauthorized to create a second draw lending program, was designed to provide emergency financial assistance to those suffering economic losses and future economic uncertainty as a consequence of the COVID-19 pandemic. It included a total of $2.8 trillion in economic aid for individuals and businesses and provided access through the Small Business Administration (SBA) to forgivable loans to cover payroll and other specified expenses through the Paycheck Protection Program (PPP). It also provided government assistance through the Economic Injury Disaster Loan (EIDL) program and Unemployment Insurance (UI) program. However, the CARES Act also provided an opportunity for people to take advantage of the government assistance, and all signs are pointing to one of the most expansive white-collar criminal investigations in U.S. history as the government’s vast investigative resources continue to aggressively prosecute fraud and abuse in these programs.
COVID-19 Related Investigations and Prosecutions
Immediately after the CARES Act’s passage, the Justice Department began to investigate and prosecute pandemic-related fraud. Over the past year, the Justice Department has charged more than 600 defendants with crimes involving COVID-19 related fraud. The rapidity with which it investigated and brought charges in the PPP cases was highly unusual. Typical white-collar crime investigations can take months or years to determine what potential crimes occurred and who was responsible. In stark contrast, the initial PPP cases were investigated and charged within a few weeks after the first loans funded back in the Spring of 2020.
The Justice Department has publicly stated that the first PPP-related investigations and prosecutions occurred with lightning speed to deter others from engaging in similar conduct. Each of the initial cases was announced by a strongly worded press release. With more than $800 billion in public money at stake in the PPP alone, the federal government wanted to ensure that borrowers who were tempted to misuse the money were fully aware of the very real criminal penalties they would face if caught engaging in fraud and abuse. Along with aggressively prosecuting these cases, the Justice Department has sought equally aggressive sentences for those that have been convicted or pled guilty of PPP related crimes, presumably to reinforce its message to the public that this behavior will not be tolerated.
COVID-19 Related Sentencings
Here are a few examples of the many federal sentences that have been handed down in recent weeks for COVID-19 related crimes:
- Donald Trosin, who was alleged to have participated in a scheme to defraud the United States of PPP and EIDL funds, and to have conspired to launder over $1.3 million in fraud proceeds, was sentenced to 40 months in federal prison. Trosin pleaded guilty to one count of Major Fraud Against the United States and one count of Money Laundering Conspiracy. More than 20 applications were submitted to the Small Business Administration (SBA) in the names of Trosin and another person. The applications falsely represented that Trosin had 120 employees on his payroll and over $5 million in payroll expenses, when Trosin did not operate any business. Trosin also admitted that he transferred or attempted to transfer the proceeds from the scheme to other individuals in other states and countries, including China.
- Stephen Smith was sentenced to 36 months in prison after pleading guilty to fraudulently seeking more than $600,000 in PPP loans on behalf of three companies. Smith caused fraudulent loan applications to be submitted that made numerous false and misleading statements about the companies’ respective payroll expenses. Smith then directed his co-conspirators to send him portions of the PPP funds within days of receiving them and used the proceeds for personal expenses.
- Andrew Tezna, a Senior Executive Service employee of the National Aeronautics and Space Administration (NASA), was sentenced to 18 months in prison after pleading guilty to submitting fraudulent applications for over $350,000 in COVID-19 economic relief loans and benefits. Tezna used others’ identities to carry out a scheme in which he fraudulently submitted three loan applications totaling $272,284 to two financial institutions. Tezna also submitted two EIDL applications to the SBA totaling $69,500. In support of the fraudulent loan applications, Tezna submitted fabricated IRS tax returns and fraudulently claimed nonexistent payroll expenses. Tezna then used the funds to pay off a personal loan for a residential pool, a personal loan for a minivan, personally incurred credit card debt, a down payment on a new car and a dog breeder.
- Darrell Baker was sentenced to 24 months in federal prison after pleading guilty to charges of bank fraud and money laundering arising from a $590,000 COVID-19 fraud scheme. Baker applied for and obtained a PPP loan on behalf of a purported business that he owned. Baker submitted paperwork with his loan application representing that his company had 68 employees and paid wages, tips and other compensation in 2019 totaling $2.8 million. All of these representations were false.
The speed at which COVID-19 related fraud has been investigated and prosecuted, followed by the recent heavy sentences handed down by federal judges, demonstrates that the government is willing to spend significant resources on rooting out alleged COVID-19 related crimes. Businesses’ and individuals’ approach to attempting to correct government aid-related mistakes is extremely important and can mean the difference between having to simply pay funds back and fending off a criminal investigation. Any individual or business owner who is concerned about compliance with the CARES Act or about potential exposure to COVID-19 related fraud allegations should immediately consult counsel and not wait to be contacted by law enforcement. Those who have already received a subpoena or inquiry from any law enforcement agency should immediately consult with counsel to assess the full potential for civil and criminal exposure before responding.