Fraud“Never let a good crisis go to waste” was an observation supposedly made by Winston Churchill at the Yalta Conference towards the end of the Second World War while he was pressing for the formation of the United Nations.  In 2020, Churchill’s admonition has found a less lofty home with COVID fraudsters who have abused the Paycheck Protection Program (“PPP”) by submitting false loan applications.  As explained in more detail in this earlier post, PPP authorized banks to make up to $649 billion in forgivable loans to small businesses for job retention and certain other expenses.  Alongside the announcement of PPP and its disbursements over the past summer, DOJ has been vocal about investigating PPP fraud and identifying problems in applications for PPP funds sought by individual and businesses, and its enforcement activity has recently increased.  We cautioned in a prior post here that the PPP application and repayment forms require that the borrower to make “good faith” certifications about their business and its need and use of the PPP funds.  Now, nearly eight months after the first announcement of PPP, we have identified several trends in DOJ’s efforts to investigate and prosecute PPP fraud.

First, the number of DOJ prosecutions continues to steadily increase.  In early September, DOJ reported that it had charged a total of 57 different defendants with PPP fraud.  Two months later, in early November, that number has increased to 73.  This won’t set any records, but it is evident that DOJ is continuing to monitor, investigate, and pursue criminal charges for PPP loan fraud.  Interestingly, however, both in September and this month, DOJ identified roughly 500 individuals who committed PPP fraud, suggesting that, despite its aggressive rhetoric, DOJ has not yet commenced a widescale investigation of the 5.5 million recipients of PPP loans.

Second, the vast majority of PPP fraud cases brought so far generally involve “textbook fraud,” meaning that the DOJ is bringing charges focused on clear misrepresentations like fabrication of employee numbers or the borrower’s use of PPP funds for personal purposes  This is not surprisingly, given both the size of PPP and that it is easier pursue the low-hanging fruit  involving readily-apparent fraud.  For example, in September, DOJ charged a Hawaii-based business man with PPP fraud based on three fraudulent PPP applications for over $12.8 million in funds.  This individual, per DOJ: (a) misrepresented the number of employees at his business and their compensation; (b) deposited $2 million of the PPP funds into his personal bank account; and (c) overstated how his business had been negatively affected by the COVID-19 pandemic.  In another case in October, DOJ charged two individuals in separate, but related, frauds in which each individual provided falsified documents in support of their respective PPP applications that misrepresented the size of the businesses and the number of their employees and, consequently, obtained over $24 million in funds.  Notably, one of the individuals allegedly used a portion of the loan funds to by luxury goods and a Ferrari.

Third, as the above two examples make clear, DOJ appears to be appropriately focused on larger loans, aligning with earlier Treasury statements that loans under $2 million would not be heavily scrutinized.  Where the fraud is egregious, however, DOJ may still bring charges even if the loan is less than $2 million. A recent set of charges were brought against five individuals who obtained $1.1 million in PPP loans when, in actuality, they had no actual business operations or employees.

None of this may seem particularly surprising:  the PPP was a high profile and historically large government program, triggering both increased likelihood of potential fraud and resulting criminal prosecutions.  But these last few months are probably not fully indicative of future DOJ actions.  First, there is no indication that the pace of prosecutions will slow down in the near term; if anything, under the new presidential administration, we may see an increase in fraud prosecutions.  Second, while there are likely more cases of clear-cut fraud, we would expect the DOJ to take a more expansive and creative approach to PPP prosecutions as the low-hanging fruit is resolved.  Third, the federal fraud statutes have a long statute of limitations – for example, ordinary wire fraud is five years, and wire fraud that affects a financial institution, which would likely cover most PPP fraud, is 10 years – giving the DOJ ample time to conduct investigations and prosecute them in an orderly fashion.