With some estimates as high as $80 billion, fraud within the Small Business Administration’s Paycheck Protection Program (PPP) has been described as the worst in a generation. The government has taken note with aggressive enforcement strategies across the country. Starting with what can be described as low-hanging fruit, the government’s enforcement efforts have expanded and become more sophisticated over the last two years. Currently, the government is making use of advanced data analytics, whistleblowers, and an army of investigators and prosecutors to track down alleged fraudsters.
The Early Cases – The Low Hanging Fruit
In May 2020, only shortly after the PPP began issuing checks to struggling businesses, DOJ began announcing charges against those accused of defrauding the program. These, and other early cases pursued through 2020, usually involved egregious fraudulent conduct including the misuse of proceeds for extravagant luxury items. The conduct alleged in these cases made for straight-forward investigation and prosecution.
On May 5, 2020, the Department of Justice (DOJ) announced the indictments of two men for seeking over $500,000 in PPP loans for four business that had no employees. This first-in-the-nation prosecution for PPP fraud charged the defendants with conspiracy to make a false statement to the SBA and conspiracy to commit bank fraud. Both defendants subsequently pled guilty.
On May 13, 2020, the DOJ announced charges against a former reality TV star alleging that he applied for a PPP loan of $3,725,500. The government alleged the defendant received over $2 million of the loan, which he then spent on a diamond bracelet, a 5.73 carat diamond ring, a Rolls Royce, and his child support payments. The DOJ press release notes that none of these expenses are approved uses of PPP funds. When federal agents executed a search warrant on the defendant’s home, they found $80,000 in a case, including nearly $10,000 in his pockets. He also used $230,000 to pay associates who assisted him in running a Ponzi scheme. The defendant pled guilty and was sentenced to over 17 years in prison for the PPP violations and Ponzi scheme.
Also, on May 13, 2020, the DOJ announced charges against a Texas engineer for wire fraud, bank fraud, false statements to a financial institution and false statements to the SBA, for fraudulent applications of over $10 million in PPP loans. Authorities alleged that the defendant submitted applications for two companies representing they had 250 employees each. The government alleged no such employees existed.
Unsurprisingly, during this initial period, the government focused on the most brazen frauds. Defendants often fabricated companies or employees and used the funds obtained for ostentatious consumer goods. Such cases have proved to be numerous, however, making up a good portion of the scores of PPP criminal prosecutions.
The Big Cases – More Complex Frauds
With time, experience, and additional resources, DOJ investigations have turned up larger and more sophisticated frauds. In November 2020, DOJ indicted seven individuals in two states for their alleged participation in a fraud scheme to obtain approximately $16 million in PPP loans. According to the indictment, defendants conspired to submit more than 80 PPP loans applications with falsified employee counts and monthly payroll amounts. In support of the application, they submitted fraudulent bank account and tax records. Defendants also submitted loan applications for entities allegedly owned by third-party entities in exchange for large kickbacks. Finally, defendants laundered the loan proceeds by writing checks to fake employees and cashing over 1,100 of them at a check cashing business owned by one of the defendants.
In February 2022, DOJ announced the indictment of 22 defendants for wire fraud and other charges related to applications of PPP loans totaling nearly $4 million. DOJ alleges defendants conspired to submit false applications and fabricate documents in support of the loan applications.
In September 2022, DOJ announced charges against a defendant who allegedly recruited individuals on Facebook to submit fraudulent loan applications. According to the indictment, the defendant submitted approximately 110 loan applications as a sole proprietor business. The defendant recruited others to provide their bank account information for receipt of the loans. She then submitted false loan applications with fabricated documentation to the SBA’s lending bank. The recipients of the loans paid the defendant an up-front fee to participate in the scheme, and a larger fee upon receipt of the loan. Because the maximum amount of a PPP loan for a sole proprietorship is $20,833, the defendant submitted many applications for numerous individuals resulting in requests for over $1.1 million in loans.
We expect the government to continue investing its resources in investigating PPP fraud criminally, as it continues to identify more widespread conspiracies involving multiple actors.
Perhaps the last category of PPP enforcement to mature are civil cases based on False Claims Act (FCA) and FIRREA violations. Often the result of a whistleblower complaint and based on a violation of technical rules, such cases typically take longer to investigate and involve more nuanced facts than criminal prosecutions. Nonetheless, FCA- and FIRREA-based cases have begun cropping up with many more investigations no doubt under way within DOJ.
According to Bloomberg Law Research, DOJ has initiated at least 17 civil lawsuits alleging PPP fraud under the FCA. DOJ has also settled several other FCA- or FIRREA-based cases prior to filing suit. The first such case was settled by DOJ in January 2021 and involved a company that had falsely certified that it was not in bankruptcy and therefore eligible for a PPP loan. The defendant returned the loan proceeds and agreed to pay $100,000 in damages and penalties.
On August 26, 2021, the United States announced the settlement of an FCA case brought by a whistleblower against a defendant for misuse of PPP proceeds. The defendant received a PPP loan of $1,173,382 in April 2020. The whistleblower alleged that the owner of the company diverted about $98,000 of the loan to personal use as opposed to approved business expenses. The owner settled the case for $287,055 representing nearly three times the alleged damages.
In an interesting whistleblower case where alleged healthcare fraud and PPP fraud intersect, the government entered an agreement with a defendant for $24.5 million to settle allegations of healthcare fraud and PPP fraud. The PPP fraud theory was that the defendant falsely certified in its PPP application that it was not involved in illegal activity. The government alleged that because the defendant was involved in healthcare fraud it lied in its PPP application when it represented that it was not engaged in illegal activity. Although the defendant paid $24.5 million to resolve the case, the settlement documents do not reveal how much of the settlement was for the alleged PPP fraud as opposed to the alleged healthcare fraud.
Because so many FCA cases are based on whistleblower complaints, DOJ is likely investigating multiple allegations of fraud that are under seal. In fact, PPP loan fraud cases are particularly suited to whistleblower allegations as they may be predicated on the use of the proceeds or the internal accounting of a company known only to insiders. Additionally, the government has begun pursuing PPP loan cases premised on alleged technical violations of PPP eligibility requirements. Such cases are often subject to nuanced arguments and significant pushback from defense counsel. We expect to see more public activity in civil enforcement as whistleblower cases continue to emerge, and cases based on alleged regulatory violations work their way through SBA processes.
PPP loan fraud enforcement has matured along a spectrum from the most egregious fraudulent activity to more complex criminal conspiracies and to civil enforcement actions based on whistleblower allegations and nuanced regulatory violations. With estimates that as much at $125 billion of the $800 billion distributed in the PPP was fraudulently obtained, we expect enforcement in all areas will be robust for many years to come.