Paycheck Protection Plan fraud has been an area of intense concern by federal investigators almost since the program began in the spring. Authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the program is intended to be a lifeline for small businesses impacted by the COVID-19 pandemic.
Should companies meet criteria laid down by the Small Business Administration (SBA), they were eligible to receive loans to cover payroll, rent, utilities, and other overhead expenses, with the understanding that use of the funds for those expenses would be forgiven. The massively popular program has so far granted 5.2 million loans totaling $525 billion. However, several of those applications have been flagged on suspicion of fraud. According to an estimate by the federal government, many tens of thousands of those loans are likely to contain either inadvertent errors or outright fraud.
A typical scenario is embodied by that of a Dade City man who was recently charged in federal court. According to prosecutors, the defendant stated in the application that he operated a scrap metal business with almost 70 employees and an annual payroll of $9 million. However, investigators say they uncovered no evidence of the payment of any payroll for the past two years.
Rather than using the funds for other qualified expenses, prosecutors say he instead laundered the money and used a portion of it to purchase two new cars. The defendant was charged last month with bank fraud and illegal money transactions and is facing up to four decades in federal prison without parole. He may also face prosecution at a later date on similar charges from the state of Florida.
Prosecutors have alleged several different types of PPP fraud to date. Among the more typical scenarios involve the following:
- Applying for several PPP loans
- Laying off employees after receiving PPP funds
- Submitting applications with falsified information regarding the size of the labor force or exaggerating totals for other expenses
- Using more than 25 percent of the funds for non-payroll expenses or for executive bonuses
- Misrepresenting the need for the PPP funds.
A conviction for PPP fraud has serious consequences. Due to the fact that the Small Business Act, which authorizes the SBA, is a Federal law, those suspected of PPP fraud are subject to prosecution under Federal law. Two of the crimes outlined in the CARES Act are:
Overvaluing securities, which is a felony that carries a penalty of 2 years in federal prison and/or a fine of $5,000, and
Embezzlement, which is a felony that carries a penalty of 5 years in prison and/or a fine of $10,000.
Those convicted on either count are also typically liable for restitution as well.
Two of the more common defenses to PPP fraud are lack of intent and mistake. As with any crime, one must possess the proper intent to be convicted. If a defendant can show that he or she did not have the requisite intent, perhaps by claiming the incorrect information on the application was inadvertent and not intentional, they can be acquitted because the prosecution could not prove that element of the crime.
Just as a mistake is possible for the defendant, the SBA may also have introduced an error into the process. Therefore, retaining all communications from the SBA and all supporting documentation for your loan is critical if facing a charge of PPP fraud.