Which Federal Agencies Investigate PPP Loan Fraud?

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As the scope of the fraud perpetrated under the federal Paycheck Protection Program (PPP) continues to come into sharper focus, multiple federal agencies are undertaking efforts to investigate and prosecute those involved. In addition to the U.S. Small Business Administration’s (SBA) audits of companies that received PPP loans of $2 million or more, several other agencies and divisions are conducting civil and criminal PPP loan fraud investigations as well.

For all companies that received low-interest, forgivable loans under the PPP, this means that it is imperative to promptly conduct an internal assessment focused on assessing PPP compliance. If a federal investigation is imminent, you need to know what (if anything) federal agents will find that could lead to prosecution. When facing a PPP loan fraud investigation, identifying the agency (or agencies) involved is a key early step as well, as each agency follows its own investigative procedures, and the steps involved in executing a successful defense can vary.

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4 Federal Agencies that are Currently Conducting PPP Loan Fraud Investigations

At present, there are at least four federal agencies that are conducting PPP loan fraud investigations. These agencies are collecting evidence through the issuance of subpoenas, criminal complaints, and other means, and they are working to build cases based on a variety of different charges. In some cases, federal authorities are also freezing companies’ PPP loan accounts as they work to determine whether these companies obtained their loans unlawfully or are using the funds for unlawful purposes.

The primary federal agencies that are currently conducting PPP loan fraud investigations are:

1. SBA Office of Inspector General (SBA-OIG)

The SBA Office of Inspector General (SBA-OIG) is the accountability and integrity arm of the SBA. “The two operating components of the [SBA-OIG] are the Auditing Division and the Investigations Division. The Auditing and Investigations Divisions each administer their respective activities through field offices around the country. . . . [SBA-OIG] conducts financial and performance audits of . . . participants in SBA programs to promote the economical, efficient, and effective operation of SBA programs. . . . Most investigations are conducted in conjunction with a U.S. Attorney’s Office [and] the vast majority of the subjects are applicants for or participants in [SBA] programs.”

The SBA-OIG’s Auditing Division is involved in the ongoing audits of all recipients of PPP loans of $2 million or greater. The Investigations Division is handling allegations of PPP loan fraud on a case-by-case basis. As noted in the above quote from the SBA-OIG’s website, when an investigation reveals evidence of criminal fraud, this can lead to prosecution by the local U.S. Attorney’s Office in federal district court. As a result, while the SBA is not generally viewed as a law enforcement agency, companies that are targeted in SBA-OIG investigations need to be prepared to defend themselves effectively in order to mitigate their risk of facing federal criminal charges.

2. Federal Bureau of Investigation (FBI)

The Federal Bureau of Investigation (FBI) investigates all forms of federal fraud. The FBI’s White Collar Crime division is primarily responsible for conducting investigations of corporate entities, including investigations targeting government benefit program fraud. The FBI receives tips from company insiders, clients, and customers, and it acts on verifiable information that has the potential to support federal criminal charges.

With regard to PPP loan fraud specifically, the FBI is targeting individuals and companies that have either (i) submitted false information or fraudulent certifications in support of their PPP loan applications, (ii) used PPP loan funds for unlawful purposes, (iii) submitted fraudulent certifications for loan forgiveness. While the structure of the PPP’s rollout made it easy for companies to secure funding under the program, the lax enforcement mechanisms and limited guidance for establishing and preserving forgiveness eligibility resulted in many companies submitting improper applications and making improper use of PPP funds. This has led to widespread allegations of fraud, and companies that may have violated the PPP’s requirements (or that lack the documentation required to substantiate PPP compliance) will need to be prepared to defend themselves in the event that they are targeted by the FBI.

3. U.S. Department of Justice (DOJ)

The U.S. Department of Justice (DOJ) is aggressively targeting and prosecuting individuals suspected of perpetrating fraud under the PPP. The DOJ filed its first PPP-related criminal complaint in early May; and, since then, it has initiated numerous cases against company owners, executives, and alleged scam artists who are accused of fraudulently applying for and obtaining PPP funds. This includes (but is by no means limited to) accusations such as:

  • Submitting multiple PPP loan applications to multiple lenders (a practice called “stacking” that is expressly prohibited under the terms of the PPP)
  • Creating fictitious companies or payroll data in order to support fraudulent PPP loan applications
  • Falsely claiming to own legitimate businesses in order to obtain and divert PPP loan funds
  • Using PPP funds for personal expenses

In the criminal complaints filed to date, the DOJ has included charges for bank fraud, wire fraud, aggravated identity theft, making false statements, and conspiracy. This list will almost certainly grow to include charges for money laundering, tax evasion, and various other fraud-related offenses. In many cases, the DOJ is working collaboratively with the SBA-OIG and FBI to gather evidence and build cases for prosecution. In appropriate circumstances, it is working with the Internal Revenue Service (IRS) as well.

4. Internal Revenue Service (IRS)

The Internal Revenue Service (IRS) is participating in PPP loan fraud investigations to the extent that they involve the underreporting and/or underpayment of companies’ or individuals’ federal tax liabilities. Internal Revenue Service Criminal Investigations (IRS-CI) is the agency’s criminal enforcement arm, and it aggressively targets companies and individuals that are suspected of federal tax evasion and tax fraud.

Along with failing to report taxable income, fraudulently claiming losses, and fraudulently claiming business deductions for personal expenses, one issue in particular that has the potential to lead to trouble for many PPP loan recipients is the IRS’s determination that expenses paid with forgiven PPP loans are not eligible for ordinary business deductions. As recently reported by the SBA’s Office of Advocacy:

“The IRS has taken the position that small businesses that have used a PPP loan to keep paying their employees during the pandemic will not be allowed to deduct the normally deductible ordinary and necessary business expenses of payroll, mortgage or rent payments, and utilities paid with the PPP loan proceeds. The agency’s position is based on the concept of a ‘double tax benefit,’ because the loan proceeds, if forgiven, would not be included in gross income and the business would claim a deduction for the expenses allocated to the forgiven loan proceeds. . . .
“Notice 2020-32 clarifies the IRS’s position that ordinary and necessary business expenses, although ‘otherwise deductible,’ which are paid with PPP loan proceeds that are later forgiven and excluded from gross income under the CARES Act are not deductible. . . .”

Regardless of the specific allegations involved, federal tax evasion and tax fraud are serious offenses that have the potential to lead to interest, fines, and long-term imprisonment.

How Do I Know if My Company is Under Investigation for PPP Loan Fraud?

There are several ways that companies can find out if they are under investigation by the SBA-OIG, FBI, DOJ, or IRS for PPP loan fraud. For investigations that are civil in nature, these agencies will often provide notice in the form of a target letter or civil investigative demand (CID). If your company receives one of these forms of notification, it is imperative that you engage federal defense counsel promptly. Even though you are not currently facing a criminal investigation, (i) the civil penalties for federal fraud can be substantial; and, (ii) if not handled appropriately, a civil investigation can turn criminal in nature.

If you are being targeted for criminal fraud, then you may learn about the investigation through the issuance of a criminal complaint, subpoena, or search warrant. You may also discover that your company’s PPP loan account has been frozen. Facing a federal criminal fraud investigation is an extremely serious matter, and you will need to engage defense counsel immediately.

Can an SBA PPP Audit Lead to a Federal Fraud Investigation?

Another important factor for PPP loan recipients to keep in mind is that SBA audits and federal fraud investigations are not exclusive of one another. In other words, an SBA PPP audit can potentially trigger an investigation by the SBA-OIG, FBI, DOJ, and/or IRS. If an audit reveals evidence of fraud, the SBA-OIG’s Auditing Division may refer the case to the office’s Investigations Division or another agency, and investigators will be able to utilize the information obtained during the audit process.

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

Our firm is representing companies nationwide in PPP loan fraud audits and investigations during the COVID-19 pandemic. If you have questions or concerns, or if you are in need of immediate legal representation, call 888-680-1745 or contact us online now for a complimentary case assessment.

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