SBA-OIG Investigations Relating to PPP Loan Fraud

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In addition to auditing all companies that received Paycheck Protection Program (PPP) Loans of $2 million or greater, the Small Business Administration Office of Inspector General (SBA-OIG) is also conducting investigations targeting PPP loan fraud.

While the Paycheck Protection Program (PPP) provided critical financial stability for many companies struggling during the COVID-19 pandemic, for some companies, obtaining a loan under the PPP is proving to be more trouble than it was worth. Preserving eligibility for loan forgiveness is proving to be a challenge, and many PPP loan recipients are finding themselves suddenly and unexpectedly facing invasive inquiries from the federal government.

Among various federal agencies currently working to target companies (and company owners, executives, and board members) accused of PPP loan fraud, the Small Business Administration Office of Inspector General (SBA-OIG) is one of the most active. The SBA-OIG has two divisions – the Auditing Division and the Investigations Division – and both are involved in uncovering fraud under the PPP. While the SBA-OIG’s Auditing Division is currently auditing all companies that received PPP loans of $2 million or greater pursuant to a mandate from the U.S. Treasury Department, the office’s Investigations Division is undertaking targeted efforts to identify and prosecute individuals and companies suspected of fraudulently obtaining taxpayer funds through the PPP.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

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)

Why is the SBA-OIG Investigating PPP Loan Fraud?

The SBA-OIG is investigating PPP loan fraud because the PPP is an SBA program. Even though many large companies applied for (and received) PPP loan funds, the program was intended to benefit small businesses that were forced to shut down or significantly curtail their operations due to the COVID-19 crisis. The SBA is administering the PPP, and funds are being issued through pre-existing SBA 7(a) lenders.

The SBA-OIG is the law enforcement arm of the Small Business Administration. It executes its mission to, “provide[] independent and objective oversight to improve the integrity, accountability, and performance of the SBA and its programs for the benefit of the American people,” by conducting audits and investigations focused on uncovering program fraud. Its specific objectives include:

  • “Promot[ing] economy, efficiency, and effectiveness in the management of SBA programs and supporting operations;
  • “Conduct[ing] and supervis[ing] audits, investigations, and reviews relating to the Agency’s programs and support operations; [and,]
  • “Detect[ing] and prevent[ing] fraud and abuse.”

With regard to the PPP specifically, the SBA-OIG Investigations Division is reviewing companies’ loan applications for signs of fraud (i.e. misrepresentations made in order to secure loan eligibility), as well as their use of PPP loan funds and their certifications for loan forgiveness under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

What is the SBA-OIG Looking for in PPP Loan Fraud Investigations?

If the SBA-OIG Investigations Division launches an investigation into your company’s PPP application or its use of PPP funds, what will it be looking for specifically? Currently, several acts, omissions, and misrepresentations are being prosecuted as forms of PPP loan fraud; and, in criminal fraud cases, the U.S. Department of Justice (DOJ) is using evidence obtained by the SBA-OIG to pursue various other charges as well. Potential allegations arising out of SBA-OIG PPP loan fraud investigations include:

  • Submitting a Fraudulent PPP Loan Application – From inadvertently omitting information that was material to a company’s application to intentionally misrepresenting payroll data, the SBA-OIG is scrutinizing companies’ PPP loan applications for any and all indicators of fraud. The SBA-OIG is also examining companies’ certifications on the Borrower Application Form, which required an affirmative representation that, “the borrower is a small business concern as defined in section 3 of the Small Business Act (15 U.S.C. 632), meets the applicable SBA employee-based or revenue-based size standard, or meets the tests in SBA’s alternative size standard, after applying the affiliation rules, if applicable.”
  • Making Unauthorized or Illegal Use of PPP Loan Funds – Under the terms of the PPP, loan funds are only permitted to be used for payroll expenses, interest and rent payments under pre-existing obligations, utilities, and insurance premiums. Additionally, the U.S. Treasury Department has stated, “if the proceeds [of a PPP loan] are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.”
  • Submitting a Fraudulent PPP Loan Forgiveness Certification – In order to obtain forgiveness of the obligation to repay their PPP loans, companies must certify that they have used their loans for authorized purposes. The SBA’s PPP loan frequently-asked questions (FAQs) also state that, “If SBA determines in the course of [a] review that a borrower lacked an adequate basis for the required certification concerning the necessity of [its] loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.”
  • Bank Fraud – Since PPP loan funds were issued through private lenders, companies that violated the terms of the PPP can be at risk for prosecution for bank fraud as well. Under the federal bank fraud statute, 18 U.S.C. § 1344, “Whoever knowingly executes, or attempts to execute, a scheme or artifice—(1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises[] shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”
  • Wire FraudWire fraud is a federal crime that carries statutory fines and up to 20 years of federal imprisonment. The DOJ has filed wire fraud charges in several PPP loan fraud cases already, and the wire fraud statute’s breadth is sufficient to allow for prosecution in virtually all cases involving the alleged improper receipt or use of PPP loan funds.
  • Making False Statements to Federal AgentsMaking false statements to federal agents is a criminal offense under 18 U.S.C. § 1001, and company owners, executives, board members, and others accused of submitting false or misleading information to the SBA-OIG can face up to five years in prison and a $250,000 fine. Companies accused of violating 18 U.S.C. § 1001 can be fined $500,000. Similar to wire fraud, the DOJ is using 18 U.S.C. § 1001 to pursue charges in several PPP-related cases as well.
  • Tax Fraud and Tax Evasion – Misrepresentations regarding payroll made in order to fraudulently establish PPP loan eligibility could also lead to allegations of tax fraud and tax evasion. Additionally, the Internal Revenue Service (IRS) has taken the position that expenses paid with PPP loan funds are not eligible for many of the deductions that would ordinarily apply. If the SBA-OIG uncovers evidence that a PPP loan recipient may have committed tax fraud or tax evasion, it could turn this information over to IRS Criminal Investigations (IRS-CI) for further examination.
  • Aggravated Identity Theft – In some cases, individuals are facing federal charges for federal identity theft arising out of allegations that they fraudulently submitted PPP loan applications on behalf of companies they did not own. The SBA-OIG will be looking for evidence of this form of fraud as well, and PPP loan recipients will need to be prepared to demonstrate that they own the companies on behalf of which they filed PPP loan applications in the event of an investigation.
  • Attempt or Conspiracy to Commit Any of the Above – When defending against PPP loan fraud investigations, companies and individuals must be extremely careful to avoid asserting “defenses” that may protect against liability for fraud, but that create exposure to prosecution for attempt or conspiracy. Attempt to commit PPP loan fraud and conspiracy to commit PPP loan fraud are both federal crimes that carry substantial fines and long-term imprisonment.

How is the SBA-OIG Identifying Companies to Target in PPP Loan Fraud Investigations?

In order to identify companies and individuals to target in PPP loan fraud investigations, the SBA-OIG is relying on information obtained from a variety of different sources. For example, federal authorities have sent subpoenas to PPP lenders, and any information these banks provide may be used to prosecute loan recipients for PPP loan fraud.

Whistleblowers are a key source of information for the SBA-OIG as well. The SBA-OIG encourages employees and other individuals to come forward with information about fraud, waste, and abuse involving SBA programs, and whistleblowers can receive significant financial awards for providing tips to the government.

Finally, the SBA-OIG is also relying heavily on information provided by SBA loan recipients directly. The Investigations Division is looking for a number of “red flags” in companies’ Borrower Application Forms and their loan forgiveness certifications. If there is any evidence to suggest that your company has engaged in fraud under the PPP, then there is a high likelihood that your company could be targeted in an SBA-OIG (or other federal agency) investigation.

Contact the PPP Loan Fraud Defense Lawyers at Oberheiden P.C.

Our federal defense lawyers are representing companies nationwide in PPP loan fraud audits and investigations during the COVID-19 crisis. If you have questions or concerns and would like to speak with an attorney in confidence, we urge you to call us promptly at 888-680-1745 or contact us online for a free consultation.

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