United States: DOJ Enforcement Actions Involving COVID-19 Relief Fraud: An Update

Soon after Congress passed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in March 2020, the Criminal Division of the U.S. Department of Justice (DOJ) moved quickly to address potential COVID-19 related fraud. One area of early focus was the Paycheck Protection Program (PPP), a program under the CARES Act that provides loans to small businesses to help pay employees. The Fraud Section set up a team devoted to PPP fraud and, within two months of the passage of the CARES Act, had charged several individuals. Our  client alert from May 2020 detailed the very first wave of PPP-related charges and offered several predictions for how such cases would unfold.¹ This update reviews recent developments in DOJ enforcement and provides new predictions for the future of COVID-19 relief fraud enforcement. In short, DOJ enforcement of PPP fraud remains in its early stages, still focused more on brazen acts of fraud than sophisticated corporate fraud. At the same time, there have been several new developments, including a widening enforcement framework and the first use of the False Claims Act (FCA) to pursue PPP fraud. Ultimately, we predict that law enforcement will continue to aggressively pursue PPP fraud, with possible civil settlements and more attention on lenders.

The Paycheck Protection Plan: An Updated Overview

On March 27, 2020, Congress passed the CARES Act, which authorized several types of COVID-19 related relief, including PPP loans for small businesses. The PPP stopped accepting new applications on August 8, 2020, after approving 5.2 million loans for a total of $525 billion.² The Consolidated Appropriations Act, 2021, passed in December 2020, added an additional $284.5 billion in PPP funding.³ The Small Business Administration (SBA) re-opened the PPP loan portal in January 2021. The Second Draw PPP limited loans to a maximum amount of $2 million (down from $10 million) and restricted the criteria for eligible businesses.

The current funding expires on March 31, 2021. While President Biden's $1.9 trillion pandemic relief plan earmarked significant funds for small businesses, it did not provide additional funding for the PPP. The Biden Administration has modified the PPP, limiting loans during a two-week period to businesses with fewer than 20 employees.⁴

Trends from Continued DOJ Enforcement

Almost immediately after the CARES Act was passed, DOJ pledged to aggressively crack down on COVID-19 relief fraud.⁵ DOJ has backed up this pledge:

• By mid-May 2020, DOJ had already charged a handful of individuals with fraud related to the PPP.
• By September 2020, DOJ had charged over 50 individuals for attempting to fraudulently obtain PPP funds. The then-Acting Assistant Attorney General (A/AAG) for DOJ's Criminal Division delineated two categories of PPP fraudsters: (1) individuals who lied about non-existent business or payroll needs and then used PPP funds to buy luxury items for themselves; and (2) organized criminal rings that engaged in sophisticated conduct to loot PPP funds.⁶ The A/AAG stated that the second category—sophisticated criminal rings—would be an enforcement priority going forward.
• By December 9, 2020, DOJ had charged over 90 individuals in cases involving alleged losses totaling $250 million.⁷
• As of January 28, 2021, DOJ had charged more than 100 individuals in over 70 criminal cases since the PPP began. They had seized more than $60 million in cash as well as real estate and luxury items purchased using PPP funds.⁸

Several of these cases have recently culminated in guilty pleas. For example, on February 9, 2021, Shashank Rai pleaded guilty to one count of making false statements to a bank after filing fraudulent applications for more than $10 million in loans under the CARES Act.⁹ As discussed in our earlier alert, Rai was charged on May 13, 2020, with wire fraud, bank fraud, false statements to a financial institution, and false statements to the SBA. He allegedly submitted two separate applications for PPP funds—the first for $10 million and the second for $3 million. In both cases, he claimed to have 250 employees when, in fact, he had no employees. On January 21, 2021, Austin Hsu pleaded guilty to one count of wire fraud after he submitted nine fraudulent disaster loan applications for both Economic Injury Disaster Loans and PPP funds.¹⁰ Altogether, Hsu obtained more than $700,000 from these nine loan applications. He had allegedly provided lists of current and former employees for four separate businesses and faked federal tax filings.

One notable trend in criminal enforcement of PPP fraud is the increased involvement of U.S. Attorney's Offices (USAOs). Whereas the Fraud Section played a central role in earlier cases, USAOs across the country are increasingly charging cases on their own. In August 2020, for example, the District of Columbia and District of Maryland teamed up to prosecute a man who fraudulently obtained over $2 million in PPP funds.¹¹ In December 2020, the Southern District of New York charged three individuals for conspiring to fraudulently obtain over $13 million in PPP funds.¹² And in recent months, both the Central District of California¹³ and the Southern District of Florida¹⁴ have charged or resolved multiple cases involving PPP-related fraud without assistance from the Fraud Section.

In addition to criminal enforcement, DOJ announced its first civil settlement of an FCA case involving a PPP borrower on January 12, 2021.¹⁵ The defendant in that case, SlideBelts, Inc., is an online retailer and bankruptcy debtor. According to DOJ, the company lied about its bankruptcy to federally insured banks in order to receive PPP loans. As part of its settlement, the company admitted to making false statements, repaid the $350,000 in PPP funds that it received, and paid $100,000 in damages and penalties. The case was brought by the U.S. Attorney's Office for the Eastern District of California.

PPP Fraud and the Broader Oversight Framework

DOJ is not alone in investigating fraud related to the PPP. The agencies responsible for administering the PPP each have inspectors general who investigate waste, fraud, and abuse. For instance, the inspectors general at the SBA and Federal Deposit Insurance Corporation have worked with law enforcement to investigate PPP fraud.¹⁶

Two new entities specially created to help with this effort are the Special Inspector General for Pandemic Recover (SIGPR), an office within the Treasury Department, and the Pandemic Response Accountability Committee (PRAC), an interagency committee of inspectors general. During a March 8, 2021 presentation, Special IG Miller, speaking with the Acting U.S. Attorney for the Northern District of Texas, noted that Treasury is still disbursing CARES Act funds and that his office's investigations are still in their early stages. "We're looking at if companies are getting money from different programs. We're looking to see that they're not double dipping or multiple dipping. We're looking at whether or not they're going to self deal—take advantage of the money," Miller said. "If we can, we're going to make a criminal case and a False Claims Act case. . . . We are going to be formidably aggressive in our approach at SIGPR. We're going to be looking at every company we can."¹⁷ In an earlier interview, Special IG Brian Miller emphasized that SIGPR has been focused on data collection.¹⁸ As of February 7, 2021, SIGPR's data scrubbing efforts had uncovered 69 potential fraud cases, which SIGPR referred to law enforcement. SIGPR has established relationships with 11 USAOs, along with other government agencies such as Treasury's Financial Crimes Enforcement Network.¹⁹ According to Special IG Miller, his office has also been working closely with PRAC.

Congress also plays a prominent oversight role. There is a Congressional Oversight Commission tasked with overseeing how Treasury and the Federal Reserve implement the CARES Act. In addition to this bicameral commission, the House and Senate have committees that monitor waste, fraud, and abuse related to COVID-19 relief. As of September 2020, the House Select Subcommittee on the Coronavirus Crisis had identified more than $4 billion in improper PPP loans.²⁰ It is likely that the new Congress will continue to prioritize oversight of the PPP.

What to Watch for Going Forward

Fraud enforcement should ramp up as PPP loans become due and borrowers ask for loan forgiveness. PPP loans made to eligible borrowers qualify for forgiveness during the 8-to-24-week period following disbursement if employers maintain their employee and compensation levels, spend the proceeds on payroll costs and other eligible expenses, and spend at least 60 percent of the proceeds on payroll. The loan forgiveness period recently closed for the very last First Draw PPP borrowers. Whereas most enforcement efforts to date have focused on fraudulent loan applications, it is possible that qualified borrowers will commit fraud on the back end of the PPP by misrepresenting how they used the funds.

The recent FCA settlement related to PPP fraud likely portends more civil enforcement and more focus on corporate defendants. It is not surprising that FCA cases against corporations have been slow to develop; those investigations take significant time and resources, and the potential offenses are likely less brazen than the crimes charged against individual defendants. Indeed, DOJ was still resolving FCA cases related to the 2008 Troubled Asset Relief Program (TARP) as recently as 2015.²¹ The similarities between TARP and the PPP are unmistakable: both made significant money available in response to crises; both came about from quickly drafted legislation; and both involved a robust oversight framework (a special inspector general was also established to oversee TARP) that only got up and running after programs launched. The multi-year process of tracking down fraudulently obtained TARP funds suggests that DOJ has just scratched the surface of PPP fraud enforcement.

Future investigations could also focus on liability for lenders in addition to borrowers. Under the FCA, for example, liability ordinarily extends to any individual or entity that "knowingly presents, or causes to be presented, a fraudulent claim for payment or approval" to the government.²² In other words, lenders may be liable for forwarding false loan applications to the government. Under the "hold harmless" provision in the PPP, lenders are not liable if they acted in good faith relating to loan origination or forgiveness.²³ Yet they may be civilly or criminally liable if they knew about or encouraged fraudulent loan applications. And the aggregate penalties for lenders who routinely approve unqualified loan applications may be significant.

With respect to compliance, companies should be careful to follow all of the PPP's requirements and to stay abreast of updates to the eligibility criteria. Borrowers should be diligent when filling out loan applications and should carefully record how they spend the funds they receive. Notwithstanding the PPP's "hold harmless" provision, lenders should not simply rubber stamp loan applications—especially for repeat players or recently incorporated companies. In all cases, borrowers and lenders should expect scrutiny from investigators regardless of the loan amount.

Footnotes

1 Predicting the Future of DOJ Enforcement Actions Involving COVID-19 Relief Fraud, Morrison & Foerster Client Alert (May 21, 2020), available at  /resources/insights/200521-future-of-doj-enforcement-involving-covid-19-relief-fraud.html.

2 Paycheck Protection Program (PPP) Report, Small Business Administration, available at  https://www.sba.gov/sites/default/files/2020-08/PPP_Report%20-%202020-08-10-508.pdf.

3 Summary of the Consolidated Appropriations Act, 2021, National Credit Union Administration, available at  https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/summary-consolidated-appropriations-act-2021.

4 Biden criticizes earlier rollout of PPP as his administration changes rules to help smaller businesses, Aaron Gregg, Washington Post (Feb. 22, 2021), available at https://www.washingtonpost.com/business/2021/02/22/biden-ppp-rules/.

5 See, e.g., COVID-19 – Department of Justice Priorities, Memorandum for All United States Attorneys (Mar. 16, 2020), available at https://www.justice.gov/ag/page/file/1258676/download;  Justice Dept. anticipates coronavirus stimulus will be a major target for fraud,  Matt Zapotosky, Washington Post (Apr. 22, 2020).

6 Acting Assistant Attorney General Brian Rabbitt Delivers Remarks at the PPP Criminal Fraud Enforcement Action Press Conference (Sept. 10, 2020), available at  https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-rabbitt-delivers-remarks-ppp-criminal-fraud.

7 Acting Deputy Assistant Attorney General Robert A. Zink Delivers Remarks at Virtual GIR Live Interactive: Regional Spotlight-North America (Dec. 9, 2020), available at  https://www.justice.gov/opa/speech/acting-deputy-assistant-attorney-general-robert-zink-delivers-remarks-virtual-gir-live.

8 Man Charged with $1.9 Million COVID-Relief Fraud, DOJ Press Release (Jan. 28, 2021), available at  https://www.justice.gov/opa/pr/man-charged-19-million-covid-relief-fraud.

9 Engineer Pleads Guilty to More Than $10 Million of COVID-Relief Fraud, DOJ Press Release (Feb. 9, 2021), available at  https://www.justice.gov/opa/pr/engineer-pleads-guilty-more-10-million-covid-relief-fraud.

10 Man Pleads Guilty to COVID-19 Relief Fraud Scheme, DOJ Press Release (Jan. 21, 2021), available at  https://www.justice.gov/opa/pr/man-pleads-guilty-covid-19-relief-fraud-scheme.

11 District Man Charged with Over $2 Million in Paycheck Protection Program and Related Loan Fraud, USAO-DC Press Release (Aug. 11, 2020), available at  https://www.justice.gov/usao-dc/pr/district-man-charged-over-2-million-paycheck-protection-program-and-related-loan-fraud.

12 3 Defendants Arrested For Over $13 Million Fraud Scheme To Obtain Loans Intended To Help Small Businesses During COVID-19 Pandemic, USAO-SDNY Press Release (Dec. 10, 2020), available at https://www.justice.gov/usao-sdny/pr/3-defendants-arrested-over-13-million-fraud-scheme-obtain-loans-intended-help-small.

13 See, e.g., Santa Clarita Man Pleads Guilty to Fraudulently Obtaining Over $1 Million in COVID-19 Relief PPP Loans for His Sham Companies, USAO-CDCA Press Release (Jan. 26, 2021), available at  https://www.justice.gov/usao-cdca/pr/santa-clarita-man-pleads-guilty-fraudulently-obtaining-over-1-million-covid-19-relief;  San Fernando Valley Man Admits to Fraudulently Obtaining $655,000 in COVID-19 Relief PPP Loans, USAO-CDCA Press Release (Dec. 7, 2020), available at  https://www.justice.gov/usao-cdca/pr/san-fernando-valley-man-admits-fraudulently-obtaining-655000-covid-19-relief-ppp-loans.

14 See, e.g., Man Purchased Lamborghini After Receiving $3.9 Million PPP Loan, USAO-SDFL Press Release (Feb. 11, 2021), available at  https://www.justice.gov/usao-sdfl/pr/man-purchased-lamborghini-after-receiving-39-million-ppp-loan;  Local Basketball Coach Charged in Federal Court with Defrauding Covid-19 Relief Program out of Almost $1 Million, USAO-SDFL Press Release (Nov. 13, 2020), available at  https://www.justice.gov/usao-sdfl/pr/local-basketball-coach-charged-federal-court-defrauding-covid-19-relief-program-out.

15 Eastern District of California Obtains Nation's First Civil Settlement for Fraud on Cares Act Paycheck Protection Program, USAO-EDCA Press Release (Jan. 12, 2021), available at  https://www.justice.gov/usao-edca/pr/eastern-district-california-obtains-nation-s-first-civil-settlement-fraud-cares-act.

16 See, e.g., Pewaukee Man Pleads Guilty to Directing COVID-Relief Fraud Scheme, USAO-EDWI Press Release (Feb. 23, 2021), available at  https://www.justice.gov/usao-edwi/pr/pewaukee-man-pleads-guilty-directing-covid-relief-fraud-scheme.

17 A Q&A Between Brian Miller and Prerak Shah, Dallas Bar Association (Mar. 8, 2020).

18 SIGPR works to ensure pandemic relief money gets to its intended recipients, Beatrix Haddon, Government Matters (Feb. 7, 2021), available at  https://govmatters.tv/sigpr-works-to-ensure-pandemic-relief-money-gets-to-its-intended-recipients/.

19 Quarterly Report to the United States Congress, Office of the Special Inspector General for Pandemic Recovery (Dec. 31, 2020), available at  https://www.sigpr.gov/sites/sigpr/files/2021-02/SIGPR-Quarterly-Report-to-Congress-December-31-2020.pdf.

20 See Select Subcommittee Releases Preliminary Analysis of Paycheck Protection Program Data, Select Subcommittee on the Coronavirus Crisis Press Release (Sept. 1, 2020), available at  https://coronavirus.house.gov/news/press-releases/select-subcommittee-releases-preliminary-analysis-paycheck-protection-program.

21 See Justice Department Recovers Over $3.5 Billion From False Claims Act Cases in Fiscal Year 2015, DOJ Press Release (Dec. 3, 2015), available at https://www.justice.gov/opa/pr/justice-department-recovers-over-35-billion-false-claims-act-cases-fiscal-year-2015.

22 31 U.S.C. § 3729(a)(1)(A).

23 Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20,811 (Apr. 15, 2020) (to be codified at 13 C.F.R. pt. 120); see also SBA Updates Rules, Forms for PPP Loan Forgiveness, ABA Banking Journal (Jan. 19, 2021), available at  https://bankingjournal.aba.com/2021/01/sba-updates-rules-forms-for-ppp-loan-forgiveness/.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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