PPP fraud: first quarter update on DOJ activity – Criminal law


United States: PPP fraud: first quarter update on DOJ activity

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Our previous CARES law enforcement alerts predicted a wave of cases by the Department of Justice (“DOJ”) accusing COVID-related fraud for loans obtained under the Paycheck Protection Program (” PPP ”). As expected, the application was quick and consistent. The DOJ announced at the end of February 2021 that it had prosecuted more than 100 defendants in 70 criminal cases and seized more than $ 60 million in cash from PPP funds obtained fraudulently, as well as numerous real estate and luxury items purchased with PPP. . funds.

The PPP provides forgivable loans to help small businesses meet expenses during the COVID-19 shutdown. Like many other federal programs, the P3 requires a series of certifications to receive federal funding. False certifications can expose small businesses to civil liability under the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), as well as to criminal liability under (among other things) federal mail and wire transfers fraud laws.

This alert highlights the most recent DOJ actions regarding PPP loans and what businesses need to know to avoid civil and criminal liability. For additional guidance on implementing a corporate compliance program that meets DOJ’s expectations for preventing and addressing potential fraudulent behavior, see our early warning here.

Civil and criminal cases of PPP loan fraud in 2021

While almost all of the PPP fraud cases brought to date have been criminal cases, the DOJ also intends to use civil enforcement tools such as FCA and FIRREA. In a recent public statement, Brian Boynton, the Acting Assistant Attorney General, highlighted DOJ’s intention to use the FCA to address any alleged “misrepresentation regarding eligibility, misuse of program funds and false certifications relating to loan cancellation ”. He also noted that the Civil Division is working closely with agencies to investigate potential violations and such “collaborative efforts” are “expected[ed] to result in important cases and recoveries. ”

In January, the DOJ announced its first FCA and FIRREA settlement based on PPP fraud, involving SlideBelts, Inc., a California-based online retailer and bankrupt debtor. As part of the settlement, the company and its president and CEO admitted to making false claims that the company was not bankrupt in order to obtain a PPP loan. The DOJ alleged damages and penalties totaling $ 4.1 million. SlideBelts eventually agreed to pay $ 100,000 to resolve the FCA and FIRREA allegations and was forced to return the $ 350,000 loan she obtained.

SlideBelts also points out that a PPP loan of any amount may be subject to FCA action, thus limiting the “safe harbor” for loans under $ 2 million. Although the Treasury Department previously announced – as part of an interim rule issued by the Small Business Administration Interim Rule Four – that only PPP loans over $ 2 million will be subject to a ” full review “to ensure a legitimate economic need before they are. forgiven, certifications for any the loan amount can be verified and may engage the responsibility of the FCA.

Regarding the liability of FIRREA, SlideBelts also demonstrates that almost any inaccuracy towards a financial institution can expose a company to liability under the law, which then entitles the DOJ to civil penalties for postal or electronic fraud that affects a federally insured financial institution. Proving FIRREA’s requirement that fraud or anomalies committed “affect” a financial institution, in practice, has never been a major obstacle for the DOJ; if the anomaly is related to a loan application, the requirement is generally considered to be satisfied. The government must also prove a FIRREA claim only by a preponderance of evidence, so any FCA case based on PPP fraud will likely involve FIRREA penalty claims, as was the case with SlideBelts. In addition, like the FCA, FIRREA provides financial incentives for whistleblowers to report violations to the government.

Finally, of the eight federal COVID fraud-related criminal cases charged in February 2021, six cases involved alleged fraudulent statements in loan applications regarding employee salary expenses. Specifically, the indictments allege that the requests contained false and misleading statements about the number of employees or the average monthly salary expenses for the company’s operations. Some defendants have also reportedly submitted false documents to support their false statements, such as falsified federal tax returns or fake W-2s for alleged employees who were not in fact employed by the company.

Protect your business

Given the substantial resources devoted to investigating and prosecuting COVID relief fraud, and the establishment of the Special Inspector General for Pandemic Recovery (“SIGPR”), we are likely to see cases of COVID relief. PPP fraud in the years to come. Companies should therefore remember to justify their eligibility requirements and statements made in PPP loan applications, and to carefully consider all communications with lenders in particular, as these communications can serve as important and easy-to-collect evidence. that a borrower knowingly submitted a false claim. Once PPP loans are obtained, companies should carefully document their use in accordance with the loan terms. Company record keeping must therefore include documented support for eligibility, for representations made as part of the application, for any decision made by the company in a regulatory gray area in relation to obtaining the loan, and for the appropriate use of the funds obtained.

If an anomaly is discovered after submitting an application or obtaining the loan, consult a lawyer to find out how best to find the necessary corrections.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.

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