COVID-19 Defenses of SBA Loan Fraud During Pandemic


COVID-19 – Defenses of SBA Loan Fraud During Pandemic

Federal emergency relief legislation, such as the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”), has allocated more than $2 trillion to individuals, businesses, and other entities to reduce the financial uncertainty caused by the COVID-19 crisis. However, the fallout has yet to be predictable.

Many companies receiving SBA loans via the Paycheck Protection Program (“PPP”) face allegations of fraud in the federal loan qualification process. Allegations include application fraud in the initial, receipt of loan proceeds, funds transfer to personal or overseas bank accounts, and unauthorized use of funds.

In fact bank fraud carries a maximum penalty of 30 years in prison and a $1 million fine, or twice the gross gain to the defendant or gross loss to the victim, whichever is greater. False representation of Social Security number carries a maximum penalty of five years in prison and a $250,000 fine, or twice the gross gain to the defendant or gross loss to the victim, whichever is greater. Money laundering carries a maximum potential penalty of 20 years in prison and a $500,000 fine, or twice the gross gain to the defendant or gross loss to the victim, whichever is greater.

The FBI, DOJ, IRS, U.S. Secret Service, U.S. Attorney’s Office and other Federal authorities have issued indictments to both individuals and companies and face substantial penalties. U.S. Treasury Secretary Steven Mnuchin told Fox Business that “any individual or business that should not have received PPP loan proceeds may be held criminally accountable”. Attorney General William Barr had oredered all U.S. Attorneys, "to prioritize Coronavirus-related fraud scheme investigations and prosecutions to help reveal fraud weaknesses and promote awareness.

Widespread fraud under the PPP has forced federal authorities to aggressively target individuals and companies that improperly received loans under the program. This has resulted in heavy scrutiny of loan recipients, including many recipients that had no idea that they may have unintentionally violated the rules of the PPP.”

The SBA has announced its intention to audit all loans over $2 million while reserving the right to audit other loans, and has stated that it will operate under the assumption that loans under $2 million meet the good faith certification for eligibility. Nevertheless, many smaller PPP loan recipients are still likely to face government inquiries. As In addition the federal government is also likely to overlook many possible instances of fraud as a result of lacking the resources required to effectively scrutinize the large volume of loans issued under the PPP.

The SBA and other federal authorities may be more likely to focus on cases involving larger loans and clear efforts to defraud the federal government. This includes efforts such as creating limited liability companies solely for the purpose of obtaining PPP loans, using fictitious companies, obtaining a series of smaller SBA loans, and diverting or transferring PPP loan funds to foreign accounts beyond the jurisdictional reach of the United States government.

In response to the federal government’s concern about SBA loan fraud under the PPP, banks began freezing individuals’ loan accounts upon identifying suspicious activity or suspected fraud based on loan amounts, transfers, or other irregular activity. However, many company executives, small business owners, and other individuals are also likely to face allegations of making false statements to the SBA and other federal crimes based solely upon submitting false information in their PPP loan applications. Depending on the specific circumstances involved, individuals targeted in SBA loan fraud investigations during the COVID-19 crisis could face federal charges under statutes including:

  • False Claims Act (31 U.S.C. §§ 3729 – 3733)
  • False Statements to the Government (18 U.S.C. § 1001)
  • Making False Statements to the SBA or an FDIC-Insured Bank—Loan or Credit Applications (18 U.S.C. § 1014)
  • Bank Fraud (18 U.S.C. § 1344)
  • Wire and Mail Fraud (18 U.S.C. § 1343)
  • Aggravated Identity Theft (18 U.S.C. § 1028A)
  • Tax Evasion (26 U.S.C. § 7201)
  • Attempt (18 U.S.C. § 1349)
  • Conspiracy to defraud the United States (18 U.S.C. § 371 and 18 U.S.C. § 1349)
  • Making False, Fictitious or Fraudulent Claims (18 U.S.C. § 287)
  • Misrepresentations to the SBA (15 U.S.C. § 645(d))

When targeted in an SBA audit or a federal criminal investigation, it is essential to respond with a comprehensive, cohesive, and proactive defense. This is true whether the audit or investigation is still ongoing, or a criminal complaint has been filed and an indictment is pending. The following are some tips for individuals and businesses that are facing allegations of federal fraud under the PPP and other SBA loan programs:

  • Promptly engage a law firm experienced in dealing with SBA loan fraud cases and in defending its clients during and after FBI, DOJ, and IRS investigations.
  • Gather all available documentation to substantiate and verify the accuracy of the information contained in your company’s PPP or other SBA loan application.
  • Compile all documentation that demonstrates your company’s qualifications and eligibility for an SBA-guaranteed loan, including satisfaction of the “necessity” requirement for PPP loan eligibility (if applicable).
  • Adopt and implement strong internal controls and compliance policies to demonstrate that your business is committed to complying with the requirements for SBA loan eligibility.
  • Make sure any information disclosed to the SBA, in SEC filings, or in other public disclosures are accurate and can be substantiated by records your company has readily available on hand.
  • Ensure that your company has an accurate accounting of its use of all SBA loan funds, including a complete transaction history. If funds were transferred to another account, be prepared to provide documentation as to why this was done.

The more documentation that can be provided (at the appropriate time based on the advice of legal counsel), and the more proactive a target can be in its defense, the greater the likelihood that an indictment can be avoided. With this in mind, as federal authorities continue their efforts to uncover and prosecute instances of fraud under the PPP and other SBA loan programs, individuals and businesses that received loans during the COVID-19 crisis must be thinking about what will be necessary to affirmatively demonstrate compliance with the applicable program requirements should it become necessary to do so.