When the COVID pandemic began to hit the US economy, the federal government released trillions of dollars of economic stimulus. Some business people engaged in activities that have spawned more government investigations, and more charges for white-collar crime.
Situation: Covid Fraud
According to the DOJ, people have taken more than $80 billion in COVID-related relief loans under false pretenses. So, it should not surprise anyone that government investigations into COVID-related fraud are on the rise. In a recent press conference, Attorney General Merrick Garland reinforced the DOJ’s commitment to prosecuting anyone “who would exploit a national emergency to steal taxpayer-funded resources.”
In fact, The Project on Government Oversight (POGO) just published a detailed review titled Red Flags: The First Year of Covid Relief Fraud Cases. The review concludes that the government has just scratched the surface in identifying and prosecuting COVID relief fraud. According to reports, thousands of COVID-related loans are already flagged for further investigation.
So far, the DOJ Criminal Division has filed more than 125 fraud cases involving the PPP (Paycheck Protection Program) and the EIDL (Economic Injury Disaster Loan program). Of the $625 million that DOJ has seized or forfeited so far, about $445 million involves PPP or EIDL loan fraud.
Law enforcement observers agree that the rest of 2021 will bring a significant wave of criminal cases involving PPP and EIDL loan fraud. Civil enforcement will also play an important tool going forward. Therefore, anyone participating in the PPP, EIDL, or similar COVID-related economic relief programs should understand the scope of the government’s enforcement efforts.
Current Environment of Covid Fraud
The risk of investigations and prosecutions related to COVID economic relief fraud is rising. Together with the DOJ, other government watchdogs are ramping up their efforts. The PPP and EIDL loan programs could end up accounting for about a trillion dollars in COVID relief loans. Such massive programs are bound to require significant government oversight for years to come. (The federal government has several years to investigate and prosecute loan fraud before the statute of limitations expires.)
With more than 125 criminal fraud cases on file, the red flags for loan fraud are evident. These include:
- inflated payroll numbers to qualify for larger PPP loans;
- shell companies, defunct companies, and bogus companies applying for PPP or EIDL loans;
- loan proceeds diverted for personal use (including private planes, luxury travel, and sports cars);
- loan applications in the of existing legitimate companies with falsified ownership information; and
- loan applications using stolen identities or aliases.
The Biden-Harris administration is determined to shore up preventative and investigative efforts. According to a February White House press release, this administration seeks to reduce waste, fraud, and abuse across all federal programs, especially the PPP and EIDL loan programs. For this reason, PPP loan guaranty approval is now contingent on businesses passing SBA fraud checks and Treasury’s Do Not Pay database. Also, the SBA will perform manual loan reviews for the largest loans in the PPP portfolio and a random sampling of other loans. Loan applications are more likely to be held for further investigation now. Of course, even after a PPP or EIDL loan is approved and funded, applicants can be subject to criminal charges should a later investigation reveal fraud.
Background and Analysis on Covid Relief Fraud
On March 29, 2020, Congress passed the Coronavirus Aid Relief, and Economic Security (the CARES Act). This was the very first emergency measure offering financial assistance to millions of Americans suffering the devastating economic impact of the COVID-19 pandemic. Since then, Congress passed two additional economic relief packages.
PPP is a signature component of the CARES Act. The PPP offered forgivable loans so small businesses could keep employees on their payrolls during the pandemic. In total, Congress allocated $850 billion in forgivable PPP loans. Congress allocated many more billions to additional loan programs. Individually, Americans also received direct economic injury payments and enhanced unemployment benefits.
Criminal Enforcement: Covid Fraud
Reports of fraud and abuse began to surface soon after the initial wave of PPP and other economic relief became available. In one Texas case, Dinesh Sah applied for 15 PPP loans using 11 different companies and received more than $17 million in fraudulent loans. Sah used the money intended to help struggling small businesses to purchase real estate and other personal luxuries. He pleaded guilty to one count of wire fraud and one count of money laundering. He awaits sentencing and faces up to 30 years in prison. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.
The U.S. Sentencing Guidelines are complicated to understand. Judges must consider the federal sentencing guidelines when assessing how much time to impose as a sanction for the offense. The guidelines will consider many factors, including the severity of the offense on an objective vertical scale, and the person’s criminal history.
The Federal Sentencing Guidelines will include a grid, with intersecting points that define the sentencing range. Besides the crime itself, other factors, such as loss amounts, can influence the sentencing range. Judges may even consider esoteric terms like relevant conduct. Since the guidelines are only advisory, rather than mandatory, each individual should work to create an extensive mitigation strategy to influence the judge. As long as the judge considers specific factors, the judge may vary from the sentencing guideline range, either going higher or lower than the punishment range that the guidelines recommend.
Another case involves Stephen Smith of Milwaukee, Wisconsin. Smith illegally received more than $600k in PPP loans. According to a plea agreement, Smith submitted fraudulent applications on behalf of three different companies, making misleading statements regarding payroll expenses. Smith will be sentenced in July 2021 and faces up to 30 years in prison.
Francis Joseph, a physician in Colorado exploited PPP and other COVID relief programs. Joseph is charged with misappropriating almost $300k in loan proceeds and making false statements in connection with bankruptcy proceedings. According to court documents, Joseph diverted $118k provided to the medical clinic where he worked. He spent the money on personal travel and home improvements. Joseph also diverted $180k from a PPP loan, then falsified documents claiming bankruptcy on behalf of the medical clinic that received the PPP loan. Joseph faces charges of Theft in Connection with Healthcare and Theft of Government Property (each one carries up to 10 years in prison). In addition, Joseph is charged with Wire Fraud, and False Statements in a Bankruptcy Proceeding (each of those carries up to 5 years in prison).
These representative cases indicate that the government is prepared to use all the tools at its disposal to file substantial criminal charges where it sees PPP and EIDL loan fraud.
Civil Enforcement: Covid Fraud
POGO’s government oversight study also highlights the power of civil enforcement in the fight against PPP and EIDL loan fraud. In civil enforcement cases, the burden of proof is much lower for the government than in criminal cases, making them even easier to win. Among the various statutes the government can use in civil cases is the False Claims Act (FCA). Under this law, either the government or private whistleblowers can initiate civil enforcement actions. Whistleblowers can receive a monetary reward in successful cases. The availability of civil enforcement by private individuals significantly expands the tools for holding individuals accountable.
The DOJ has already announced plans to bring more False Claims Act cases to fight against COVID-related loan fraud. This past January, it obtained the first civil settlement for fraud. Online retailer SlideBelts Inc., and Brigham Taylor, the company’s president and CEO, agreed to pay $100,000 in damages and penalties to resolve allegations that they committed PPP loan fraud. SlideBelts also repaid the PPP funds it received. More civil enforcement actions like this one are on the way.
Covid Fraud Scrutiny
In addition to the DOJ Criminal and Civil Divisions, the government may deploy other resources to investigate COVID-related fraud. For example, financial institutions are required to file suspicious activity reports (SARs). According to GAO, 2,300 financial institutions reported more than 41,000 instances of suspicious activities related to PPP and EIDL between May and October 2020.
Suspicious activity reports go to FinCEN at the Treasury Department, where they can be flagged for further investigation and enforcement. Suspicious activity reports related to possible small business loan fraud are now higher than usual.
Various Inspectors General are also watchdogs for fraud. For example, the FDIC-OIG (Federal Deposit Insurance Corporation Office of Inspector General) was actively involved in the $17 million fraud case against Dinesh Sah in Texas. The FDIC-OIG has vowed to vigorously investigate any attempts to defraud the PPP and other crimes against its financial institutions.
Activity is also on the rise at the Small Business Administration’s Office of Inspector General. This office is currently investigating over 200 PPP and EIDL loans for possible fraud. This trend is likely to continue.
The federal government is increasingly focused on COVID-related loan fraud. As such, PPP and EIDL loans are under more scrutiny than ever. Multiple agencies can take action, including the DOJ Criminal and Civil Divisions, as well as Inspector General Offices (like the SBA or FDIC) and FinCEN at the Treasury Department. Private civil enforcement actions are also possible.
This Case Study highlights how many government agencies are focused on combatting COVID-related loan fraud. These agencies have many tools at their disposal. Therefore, the stakes have never been higher for anyone under investigation or prosecution for PPP, EIDL and related loan fraud.
The defendants in the criminal cases highlighted above are awaiting sentencing. As with any person that violates the law, significant personal and financial consequences follow. Loss of personal freedom, time with family and financial resources represent part of the sanction. Collateral consequences also follow, such as lost earning power in the job market.
If facing any type of government investigation or prosecution, defendants should learn more about options, and consider crafting a mitigation strategy to help stakeholders understand more about their intentions, their character, and efforts to make things right.