Federal Authorities Target Small Business Owners in Paycheck Protection Program (“P3”) Loan Fraud Investigations

Since the onset of the COVID-19 crisis, the federal government has provided more than $ 2 trillion to individuals, businesses, and government and local entities to help ease the financial burdens and uncertainty caused by the pandemic. Among all the various programs put in place in response to the crisis, the Paycheck Protection Program (“PPP”) established under the Coronavirus Assistance, Recovery and Economic Security Act (“CARES Act”) By far the most problematic for recipients.

The PPP provided financial assistance to companies that had been negatively affected by the COVID-19 crisis. Under the program, businesses could receive federally guaranteed loans ranging from $ 10,000 to well over $ 1 million, and these loans were eligible for full cancellation provided that the recipients use the proceeds for more. eligible purposes. However, as time has shown, the PPP loan application and forgiveness certification processes were both very vulnerable to fraud. As a result, the SBA and federal authorities, including the FBI, DOJ, IRS, and the Secret Service, have undertaken significant and aggressive efforts to identify and prosecute individuals and businesses who have fraudulently obtained funds in the framework of the PPP.

While there have certainly been many instances in which individuals have fraudulently sought (and received) federal COVID-19 relief funds, many individuals and businesses targeted in loan fraud audits and investigations PPP haven’t done anything wrong. Recognizing this fact, federal authorities have indicated that companies whose PPP loan accounts have been seized, frozen or locked in and who have subsequently been acquitted of any wrongdoing will have their funds released within days.

In many cases, business owners have applied for PPP loans in good faith, but the SBA’s subsequent interpretation of the general requirements set out in the CARES Act has called into question the legitimacy of their requests. Since the federal interpretation of the PPP application and the criteria for pardon eligibility have changed over time, and since compliance has ultimately been found to require knowledge of the company’s compliance and practices seen on Fox Business, many business owners learned too late that it was simply impossible for them to comply.

The federal government’s aggressive law enforcement efforts were of particular concern to self-employed workers or small business owners who already faced more than enough concerns during the COVID-19 crisis. Nonetheless, federal authorities continue to actively pursue cases of suspected PPP loan fraud involving companies of all sizes.

Among other agencies, the Secret Service actively participated in federal investigations targeting P3 loan fraud. As The Wall Street Journal reported in August, the Secret Service has already seized around $ 8.2 million in criminal and civil cases, and banks have returned more than $ 650 million in COVID-19 relief funds that they have self-declared as fraudulently obtained.

Banks that have issued federally guaranteed PPP loans have also been extremely vigilant in auditing PPP loans. Of course, this is largely due to the potential for these banks to face federal consequences themselves based on claims of facilitating or not preventing fraud in federal programs. In order to protect themselves, banks have increasingly found it necessary to take steps to address concerns about PPP loan fraud. Legitimate borrowers have had their loan accounts frozen, business owners have had their personal bank accounts frozen and flagged for fraud, and banks have responded to federal subpoenas for new customer information. and existing who had applied for PPP loans.

The relentless pursuit of the federal government, facilitated by the cooperation of PPP lenders, has trapped many business owners who have applied for PPP loans and used their loan funds in good faith. Most of these business owners received loans of less than $ 100,000, but many still had their personal bank accounts frozen and were questioned by the FBI and the Secret Service. This is particularly noticeable because the loans these small businesses have received are well below the SBA’s $ 2 million threshold for auditing loan recipients at the time they submit their forgiveness certifications.

The SBA warned that depositing federal loan funds into a personal bank account was seen as a strong indicator of fraud and urged banks to look into recipients of PPP loans who deposited their loans into personal accounts. However, many PPP loan recipients are sole proprietors and construction workers who manage their finances through their personal bank accounts. This poses a significant challenge for these entrepreneurs, many of whom have legitimately obtained P3 loans, but are now forced to affirmatively demonstrate that they did not intentionally defraud the federal government.

The possibility of a loan fraud investigation and subsequent criminal indictment is a very real concern for many business owners, and it is a concern that requires a careful, proactive and strategic approach. If not careful, many legitimate business owners could find themselves the target of federal P3 loan fraud investigations with substantial fines and years or decades of federal imprisonment on the table. Business owners targeted in P3 loan fraud investigations should promptly engage an experienced federal defense attorney and they should be prepared to provide documentation demonstrating that they have fully complied with the terms of obtaining and signing. use of PPP loan funds.

Oberheiden PC © 2021 Revue de droit national, volume X, number 241

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