Since the authorization of CARES Act emergency loans and other payments to Americans affected by the coronavirus pandemic, federal prosecutors have brought over 100 charges of fraud in connection with the rollout of those programs. In these charges, the Department of Justice has alleged that individuals and companies fraudulently sought more than $360 million in government-backed loans and other benefits. These numbers are likely to climb dramatically in 2021 with the installation of new DOJ leadership under incoming President Joe Biden.
In passing the CARES (Coronavirus Aid, Relief, and Economic Security) Act and related legislation beginning in March 2020, Congress provided for several different types of emergency pandemic relief to be administered by the Small Business Association and other federal agencies. These include PPP (the Paycheck Protection Program), EIDL (Economic Injury Disaster Loans), PUA (Pandemic Unemployment Assistance), FPUC (Federal Pandemic Unemployment Compensation), and EIP (Economic Impact Payments). Of the more than $2 trillion dollars authorized under the CARES Act, over $500 billion dollars has been allocated to PPP loans. Many of these loans are forgivable in the event that participants in the programs comply with rules involving the use of the loan proceeds and related business operations, such as maintaining employees on payroll.
These programs are focused on keeping smaller businesses and their employees afloat, and the loan statistics reflect that goal: The average PPP loan size has been around $100,000, and more than 80% of PPP loans have been for $150,000 or less. Similarly, the average EIDL loan size has been a little over $50,000.
Banks began taking applications for these loans in April 2020, and it didn’t take long for the first fraud charge to be filed. Just over a month after the CARES Act’s enactment, federal prosecutors in Rhode Island charged two individuals with bank fraud and other charges in connection with their application seeking $543,000 in PPP loans and other funds. Since that time, over half of the United States Attorney’s Offices have filed charges involving allegations of PPP, EIDL, or other CARES Act program fraud. Of these charges, around 75% have involved allegations of PPP and/or EIDL fraud; the other 25% have been related to unemployment or other benefits fraud under the PUA, FPUC, and related programs.
The district leaders in bringing these charges as of January 11, 2021, are the Southern District of Florida (with 14 cases) and the District of New Jersey (with 11 cases). While only 1.6% of the PPP loans are for more than $1 million, the average amount at issue in the PPP and EIDL fraud cases to this point is around $3.7 million. The largest amount at issue is from a Southern District of Ohio case, in which the defendants allegedly schemed to file more than $24 million worth of PPP loan applications and ultimately received over $17 million in loan proceeds.
Like those in most fraud charges, the allegations in the CARES Act cases involve two different types of conduct: fraudulent representations in the application for the CARES Act relief, and fraudulent use of relief proceeds. The types of fraudulent representations at issue include the following: eligibility for relief; falsified business, employee, and tax records; and false certifications about criminal records and other issues. Most of the fraudulent uses involve funds diverted for personal expenses, but at least one case involves allegations that a Utah defendant used the loan proceeds for business expenses that were different from those he included in the loan application. In another case, prosecutors brought fraud charges against several defendants even after those charged repaid loans and withdrew other loan applications.
There is good cause to believe that there will be a significant uptick in CARES Act fraud charges and other enforcement actions coming this year. The House Select Committee on the Coronavirus Crisis released a report in September 2020 estimating that over $1 billion went to companies that took more money than was authorized or received multiple loans in violation of program rules. Fraud is also likely to be an intense focus of the Biden Justice Department after federal fraud charges have been at all-time lows during the Trump Administration. There are reports that the FBI (just one of the law enforcement agencies that could have jurisdiction over these types of fraud matters) has already opened “several hundred” investigations into PPP fraud. This kind of widespread investigatory activity could also lead to a DOJ-led interagency strike force like those involved with health care fraud or procurement fraud. These efforts bring agencies together to use data analysis and other advanced techniques to target likely suspects and bring charges quickly. DOJ will also likely initiate civil enforcement proceedings seeking loan repayment with interest and penalties in situations where there are less serious violations of program rules. Putting together a focused campaign to combat CARES Act and related fraud is one that should quickly pay dividends; these kinds of undertakings often more than pay for themselves in a short period of time and bring much needed resources back into the federal coffers.
There are several things that a company can do to decrease the chances of being subject to a CARES Act investigation. One is to commission an internal audit to document how loan proceeds or other benefits were used. If it appears that a company used CARES Act funds in an unauthorized manner, redirecting funds to make sure the company is in compliance with program rules will be important. Working with counsel to self-report the unauthorized use of program benefits, to establish compliance, and to repay any benefits before a company is notified of an investigation can also reduce the chances that criminal charges will be filed.
The new Biden Administration will obviously face many challenges in its first year, whether related to the pandemic or otherwise. But one thing is for sure: The time for businesses to get any CARES Act issues straightened out is now.
Ripley Rand is a partner in the Raleigh, North Carolina, office of Womble Bond Dickinson. Before joining the firm, Ripley served as the United States Attorney for the Middle District of North Carolina, a North Carolina state court judge, and a North Carolina Assistant District Attorney. Ripley advises and represents businesses and people dealing with governmental investigations, business disputes, regulatory matters, and corporate compliance issues.