Criminal Liability for PPP Loan Fraud

Dr. Nick Oberheiden is a nationally recognized expert on PPP loan laws
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When most small business owners and company executives applied for Paycheck Protection Program (PPP) loans, they had no idea they were potentially exposing themselves to criminal liability. But, the DOJ has already filed multiple criminal complaints for PPP loan fraud, and more are on the way.

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the CARES Act is not a penal statute. In fact, in many respects it is the opposite. Enacted in the midst of the COVID-19 pandemic, the CARES Act was designed to provide financial security to individuals and businesses that were struggling due to the pandemic’s economic impacts, and the PPP was the centerpiece of the statute’s relief package for businesses.

However, with the PPP’s limited eligibility requirements and – at the time – limited oversight, the program was highly susceptible to fraud. In fact, so many individuals and businesses filed fraudulent applications (and fraudulently received PPP loans) that the U.S. Small Business Administration (SBA) established a grace period during which individuals and businesses could return fraudulently obtained funds without penalty. Now that this period has expired, the SBA Office of Inspector General (SBA-OIG), the U.S. Department of Justice (DOJ), and other federal agencies are actively pursuing investigations to uncover PPP loan fraud, and many of these investigations are resulting in criminal charges.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

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Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Gamal Abdel-Hafiz
Gamal Abdel-Hafiz

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

What is PPP Loan Fraud?

In order to determine whether an individual or company may be at risk for criminal liability, it is first necessary to understand what constitutes PPP loan fraud. At the federal level, “fraud” is a general term that can encompass both civil and criminal offenses; and, in the context of government programs such as the PPP, it refers to obtaining benefits under the program despite not being eligible to do so. With this in mind, some examples of acts that are being prosecuted as PPP loan fraud include:

  • Obtaining multiple PPP loans from multiple SBA 7(a) lenders (a practice known as “loan stacking,” which is prohibited under the terms of the PPP).
  • Misrepresenting a company’s payroll or misclassifying employees in order to establish PPP eligibility (i.e. to fall below the 500-employee threshold).
  • Misrepresenting a company’s eligibility under the SBA’s employee-based size standards for particular industries.
  • Misrepresenting a company’s payroll costs in order to obtain additional PPP loan funds (PPP loans are capped at two months of the company’s average monthly payroll costs from the last year plus an additional 25 percent, subject to a maximum loan amount of $10 million).
  • Falsely certifying that, “[c]urrent economic uncertainty makes the loan necessary to support your [company’s] ongoing operations.”
  • Using PPP loan funds for ineligible business purposes (i.e. anything other than payroll costs, interest or rent payments, insurance, and utilities) or for an illegal purpose (i.e. to fund a fraudulent business).
  • Falsely certifying that a company has fully complied with the terms of the PPP and that the company is therefore entitled to loan forgiveness.

Basically, any act undertaken in furtherance of efforts to either (i) obtain a PPP loan despite being ineligible, (ii) take advantage of a PPP loan for unauthorized purposes, or (iii) secure PPP loan forgiveness without eligibility can be prosecuted as PPP loan fraud. While companies are facing civil allegations in some cases, the SBA-OIG and the DOJ are intent on pursuing criminal charges in cases in which it appears that efforts to defraud the PPP were intentional.

What are the Criminal Implications of PPP Loan Fraud?

So, those are some examples of acts that constitute PPP loan fraud. Now, what are the criminal implications of fraudulently obtaining (or attempting to fraudulently obtain) the benefits of the PPP?

1. Possible Criminal Charges in PPP Loan Fraud Cases

As noted above, the CARES Act does not itself contain provisions for criminal prosecution of PPP loan fraud. Instead, criminal charges are being filed under pre-existing criminal statutes—and there are numerous federal laws that are broad enough to encompass fraudulent practices in relation to the Paycheck Protection Program. Some of these federal laws include:

  • False Claims Act (31 U.S.C. §§ 3729 – 3733)
  • 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)
  • Bank Fraud (18 U.S.C. § 1344)
  • Wire Fraud (18 U.S.C. § 1343)
  • Aggravated Identity Theft (18 U.S.C. § 1028A)’
  • Tax Evasion (26 U.S.C. § 7201)
  • Making False Statements to Federal Agents (18 U.S.C. § 1001)
  • Conspiracy (18 U.S.C. § 371 and 18 U.S.C. § 1349)
  • Attempt (18 U.S.C. § 1349)

The U.S. Department of Justice has already filed criminal complaints in several PPP loan fraud cases, and the number of cases will continue to rise as the SBA-OIG, DOJ, and other agencies uncover evidence of fraudulent practices.

2. Possible Criminal Penalties for PPP Loan Fraud

Each of the statutes listed above specifies a maximum prison sentence, and many specify maximum fines as well. For those that do not specify maximum fines, the financial penalties that are at stake are determined by 18 U.S.C. § 3571.

Put simply, at the federal level, the penalties for fraud offenses are severe. For example, under 18 U.S.C. §§ 1014 and 1344, the maximum penalties include a $1 million fine and 30 years of federal imprisonment. These are charges that the DOJ is pursuing in PPP loan fraud cases already. For the other crimes listed above, maximum prison sentences range from two years (under 18 U.S.C. § 1028A) to 20 years (under 18 U.S.C. § 1343), although defendants charged with conspiracy and attempt can face the same penalties as those who fully executed the underlying offense.

Under 18 U.S.C. § 3571, the maximum fine for individuals is $250,000 in most cases, and businesses can face fines of up to $500,000. However, these fines can be increased up to, “the greater of twice the gross gain or twice the gross loss,” incurred as a result of the defendant’s fraudulent activity.

3. Risk of Exposure to Criminal Prosecution for PPP Loan Fraud

What is your company’s risk (or your personal risk) of facing criminal liability for PPP loan fraud? The answer to this question depends on whether and to what extent federal prosecutors feel confident that they will be able to prove fraud in federal district court. This is almost entirely dependent on the evidence that is available, and this is why it is essential for individuals and companies that are facing PPP loan fraud investigations to engage federal defense counsel to intervene in their investigations as soon as possible.

When assessing an individual’s or company’s risk of facing criminal liability for PPP loan fraud, there are several key questions that need to be answered. These questions include:

  • Can your company substantiate all of the information contained in its PPP loan application (Borrower Application Form)?
  • Does your company have sufficient documentation to support its PPP loan certification (i.e. that “[c]urrent economic uncertainty ma[de] the loan necessary to support your [company’s] ongoing operations”)?
  • Did your company deposit its PPP loan funds into a segregated account?
  • Can your company account for all expenditures from its PPP loan account, and were all of these expenditures for eligible business expenses?
  • Can your company produce adequate documentation to substantiate its request for loan forgiveness, including its representation of full compliance with the terms of the PPP?

4. Mitigating Risk in Criminal PPP Loan Fraud Investigations

When facing an SBA-OIG or DOJ investigation, avoiding criminal liability requires a proactive defense strategy that is focused specifically on the allegations at hand. This means that one of the first steps involved in fending off prosecution is gaining a clear understanding of the specific type of PPP loan fraud that is being investigated. Are you being accused of submitting a fraudulent PPP loan fraud application? Or, has a whistleblower accused your company of improperly using PPP funds? These are very different allegations that require different evidence and different defense strategies.

As federal defense counsel for individuals and companies facing criminal allegations of PPP loan fraud, we take a comprehensive approach that is designed to achieve a favorable outcome without criminal charges being filed. This approach includes:

  • Promptly intervening in the SBA-OIG’s or DOJ’s (or other federal agency’s) investigation in order to slow down the process and identify the specific allegations at issue;
  • Conducting an attorney-client privileged internal assessment in order to identify all potential evidence and assess any potential risk exposure;
  • Developing a comprehensive and custom-tailored defense strategy that is focused specifically on the facts at hand;
  • Engaging with the federal agents who are handling the investigation in order to identify issues, clarify misunderstandings, and demonstrate that prosecution is unwarranted;
  • Steering the investigation toward a favorable resolution, ideally without criminal charges ever being filed.

Are You Facing Criminal Liability for PPP Loan Fraud?

Individuals and companies that are at risk for criminal liability due to a PPP loan fraud investigation cannot afford to take chances, and they must engage experienced federal defense counsel as soon as possible. To discuss your situation with a federal defense attorney at Oberheiden P.C. in confidence, call 888-680-1745 or request a free case assessment online now.

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