PPP Fraud: Government Loans and Federal Arrests Based on COVID-19 Relief

Last year, in response to the economic harm suffered in Texas and across the country due to the COVID-19 Pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), authorizing over Two Trillion Dollars ($2,000,000,000,000.00) in relief with $377 Billion of that sum dedicated to help small business owners.

The Paycheck Protection Program

Almost all the money dedicated to help small businesses ($349 Billion) went into the newly-created “Paycheck Protection Program” known as PPP.  One month later, another $310 Billion in funding for the PPP was provided in the Paycheck Protection Program and Health Care Enhancement Act (PPPHCE Act).

By May 2020, the PPP had $659,000,000,000.00 ready to use in making forgivable loans to small businesses whose applications established their qualifications under the federal program’s requirements. The goal was to help small business owners, independent contractors, sole proprietors, and some non-profits in meeting basic needs, like paying rent and utilities and making payroll.

The PPP is overseen by the United States Small Business Administration (SBA), a cabinet-level federal agency created in 1953 to help and encourage small business enterprises in this country.  The SBA not only approves applications from small business owners for PPP loans, it also approves which lenders and banks will be handling the financial transactions on behalf of the federal government.

What is the PPP Exactly? It Offers a Federal Loan That May Not Have to be Paid Back

The PPP was designed by lawmakers to allow the SBA to help small businesses hard hit by the COVID-19 Quarantines and Stay-at-Home Orders, where many were forced to close their doors or limit their operations.  Revenue streams dried up; the PPP was a way to help small businesses stay afloat during the Pandemic.

Under Section 1102 of the CARES Act, the SBA can guarantee 100% of loans offered to qualifying small business owners under the PPP.  (See, Section 7(a)(36) of the Small Business Act (15 U.S.C. §636(a)(36)).

As for having to pay back the PPP money, Section 1106 of the CARES Act states that the borrower need not do so, approving debt forgiveness of up to the full principal amount of qualifying PPP loans.

PPP Extended in March 2021

This week, the PPP Extension Act of 2021 became law, extending the deadline for applications to May 31, 2021, to obtain relief under the program.

The PPP Fraud Problem: Lots of Federal Indictments Are Coming

The SBA is not only on the lookout for helping people suffering during the COVID Pandemic, it is also suspicious that some of the applications received and approved may be based upon inaccurate or dishonest information.

From the federal government’s perspective, lots of PPP applications have proven to be erroneous and therefore, criminal acts of fraud.  So much so, that it’s my opinion that there will be a flood of federal indictments coming in next few years.

Already, the newly appointed U.S. Attorney General, Merritt Garland, has announced the Justice Department’s zeal in going after PPP fraud prosecutions.  He stated the following in a DOJ news release announcing that by March 2021, the DOJ had “… publicly charged 474 defendants with criminal offenses based on fraud schemes connected to the COVID-19 pandemic.“

From AG Garland:

“The Department of Justice has led an historic enforcement initiative to detect and disrupt COVID-19 related fraud schemes.  The impact of the department’s work to date sends a clear and unmistakable message to those who would exploit a national emergency to steal taxpayer-funded resources from vulnerable individuals and small businesses. We are committed to protecting the American people and the integrity of the critical lifelines provided for them by Congress, and we will continue to respond to this challenge.”

Federal Task Force Dedicated to Prosecuting PPP Fraud

To address the PPP Fraud issue, a special task force was formed to focus solely on PPP Fraud prosecutions.  Brian D. Miller was confirmed by the United States Senate on June 2, 2020, to be the “Special Inspector General for Pandemic Recovery” (SIGPR).  Mr. Miller is the person heading up the federal task force to uncover many of these PPP frauds.

Multiple Dipping Allegation as Basis for PPP Fraud Arrest

Of course, there are all sorts of creative ways to commit fraud, especially financial fraud or loan fraud.  However, in the Special Inspector General for Pandemic Recovery’s latest quarterly report to Congress, SIGPR makes one type of fraud a favored target for his investigators.  It is called “multiple dipping.”

What is Multiple Dipping?

The key to double dipping is getting money from the federal government in more than one loan, when the basis for each loan is for the same purpose. Why is this a problem, when a small business owner is fighting to stay open during quarantines?

Explains SIGPR: “[I]f an individual or entity receives funding from the federal government twice for the same purpose, only one of the funding streams can be put to the use for which it was granted, meaning the second funding stream represents waste, at best, or fraud, at worst.”

There are lots of federal programs designed to help business owners.  However, borrowers have to pick which program and they cannot get money from more than one of these programs without running the risk of being accused of criminal acts.  For instance, federal regulations bar anyone who get funds in a direct Department of the Treasury (Treasury) loan to apply for and get a loan under the Federal Reserve’s Main Street Lending Program (MSLP).

SIGPR on Multiple Dipping or Double Dipping and PPP Loans

SIGPR has summarized the most relevant program-specific rules relating to capital access and multiple-dipping under the CARES Act in the latest report to Congress.  Regarding PPP Loan Fraud, he provides the following:

• Loan Must Be New in Purpose and Amount. “An eligible recipient applying for a covered loan shall make a good faith certification . . .”
  • “that the eligible recipient does not have an application pending for a loan under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan . . ..”
  • “during the period beginning on February 15, 2020 and ending on December 31, 2020, that the eligible recipient has not received amounts under this subsection for the same purpose and duplicative of amounts applied for or received under a covered loan.”
  • SBA Guidance Regarding EIDL Recipients.
• “Nothing in this paragraph shall prohibit a recipient of an economic injury disaster loan made under subsection (b)(2) during the period beginning on January 31, 2020 and ending on the date on which covered loans are made available that is for a purpose other than paying payroll costs and other OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR PANDEMIC RECOVERY SPECIAL INSPECTOR GENERAL FOR PANDEMIC RECOVERY | QUARTERLY REPORT TO CONGRESS | OCTOBER 1 – DECEMBER 31, 2020 10 CARES Act Program Rules Relating to Access to Multiple Streams of Funds obligations described in subparagraph (F) from receiving assistance under this paragraph.”
• “Borrowers can apply for both the PPP and EIDL, although funds from both cannot be used for the same purpose.”
• “If you took out an Economic Injury Disaster Loan (EIDL) between February 15, 2020 and June 30, 2020 and you want to refinance that loan into a PPP loan, you would add the outstanding loan amount to the payroll sum.”
• Rules for Current Federal Awards. “[P]ayroll costs paid with the Paycheck Protection Program (PPP) loans or any other Federal CARES Act programs must not be also charged to current Federal awards as it would result in the Federal government paying for the same expenditures twice.”
• MSLP Recipients: The Federal Reserve has taken the position that “a Business that has received PPP loans, or that has affiliates that have received PPP loans, is permitted to borrow under Main Street, provided that the Business is an Eligible Borrower.”

Criminal Charges:  Bases for PPP Fraud Arrests

Insofar as federal prosecution of individuals for PPP loan fraud, the ultimate indictments and prosecutions can include several different charges in a federal criminal law palette, such as:

1. False Statements to a Bank: 18 U.S.C. 1014;
2. Wire Fraud: 18 U.S.C. 1343;
3. Bank Fraud 18 U.S.C. 1344;
4. Money Laundering 18 U.S.C. 1957; and
5. Conspiracy to Commit Fraud: 18 U.S.C. 1349.

For more details on these federal charges from a criminal defense perspective, read:

• Arrested for Bank Fraud in Texas
• Things to Know about Wire Fraud Today: It’s a Big Deal
• Money Laundering and Federal Sentencing Guidelines
• Top 10 Defense Mistakes in Federal Conspiracy Cases and How to Avoid Them.

Example of Recent Texas PPP Fraud Case

Out of Houston comes a good example of how these PPP Loan Fraud cases are being prosecuted by the federal government.  Filed as U.S. v. LaDonna Wiggins, Criminal No. 4:21-cr-66 in the United States District Court for the Southern District of Texas, Houston Division, the Indictment (filed on February 24, 2021) alleges that:

• The accused registered her business (an LLC) with the Texas Secretary of State in August 2017 and thereafter got a certificate of business for its assumed name, “The Concession Stand.”
• The LLC lost its business name in January 2019 due to tax forfeiture.
• The accused had earlier registered another business, “Pink Lady Line,” in December 2011 but had never incorporated it and its tax identification number became inactive in March 2012.
• The alleged scheme involved:
  • May 2020 PPP Loan Application for the LLC dba The Concession Stand;
  • The accused as part of this Application initialed the following language on one of the loan applications: “I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law…and, if submitted to a federally insured institution, under 18 USC § 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
  • This application stated that average monthly payroll was $731,428 with 108 employees. In support, a Form W-3 was provided that showed payment of $8,722,079.24 in wages, tips, and other compensation in 2019.  Additionally, a Check Register Report generated by payroll system Paycom was provided for The Concession Stand that showed 153 employees.
  • The government alleges that Paycom never serviced The Concession Stand or the LLC.
  • The government alleges that the Check Register Report was altered with the original document coming from the company where the accused worked in the human resources department.
  • The government alleges the EIN (Employer Identification Number) provided on the PPP Application could not be confirmed.
  • The accused received $1,828,568.00 in a loan guaranteed by the SBA based on the PPP Application.
  • The money was deposited in a checking account that was a personal checking account for the accused.
  • In June 2020, the accused submitted a PPP Loan Application for the company Pink Lady Line.
  • This Application showed the accused as owner, and included her initials on a certification that stated: “I further certify that the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects. I understand that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law…and, if submitted to a federally insured institution, under 18 USC § 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.”
  • This PPP Application showed Pink Lady Line average monthly payroll to be $727,831, with supporting documentation that included a Form W-3 showing payment of $8,577,756.24 in wages, tips, and other compensation in 2019 and a bank statement showing a beginning balance of $1,093,862.73 on May 9, 2020.
  • It is alleged by the government that the above referenced bank statement was altered from an original belonging to the accused with a negative balance on May 9, 2020.
  • It is alleged by the government that the EIN for Pink Lady Line could not be confirmed.
  • The accused received $1,819,577.00 in a loan guaranteed by the SBA based on the PPP Application for Pink Lady Line.
  • The government alleges that after the loan proceeds for the two PPP Loans were funded, the accused moved the deposits to several other accounts as well as made several debit card purchases to places like Amazon.com, Neiman Marcus, Hermes, Capital One Auto (for the purchase of a Nissan Murano), and Momentum Land Rover for the purchase of a 2020 Range Rover.
  • It is also alleged that the money was used to purchase residences in Cypress, Texas, and Katy, Texas.

Included in the Indictment was a Notice of Forfeiture pursuant to 18 U.S.C. 982(a)(2).  For more on forfeiture, read:

• Federal Forfeiture Reform: 81% Property Seized by DOJ from People Never Charged with a Crime; and
• The Forfeiture Epidemic: When the Government Just Takes Your Property and Keeps It.

On March 2, 2021 the U.S. Attorney’s Office for the Southern District of Texas issued a news release reporting the arrest of Ms. Wiggins on bank fraud, making a false statement to a bank, and money laundering.  If convicted, she faces up to 30 years in federal prison and a maximum fine of $1,000,000.00.

Accused of PPP Loan Fraud?  Defending Against PPP Fraud Charges

The unprecedented Coronavirus changed our world, and the Texas economy was hard hit by the rapid public safety edits from federal, state, and local governments that included social distancing, masks, and stay-at-home orders.  Many business owners, particularly those in the service industries, were devastated by the Pandemic.

Faced with bills to pay and loyalty to employees, there was pressure and panic to find ways to keep things afloat.  This was the reason for the passage of the CARE Act in March 2020, and the rapid funding of the PPP in the first place.

However, in all the chaos and confusion, many people may have not understood or may have been misinformed about how federal assistance programs worked.  Boilerplate on loan documents may not have been comprehensible from an anxious and emotional state.

Nevertheless, the Justice Department and the SIGPR’s Task Force have made it clear: there is, and will continue to be, an aggressive and dedicated federal focus on finding and accusing people who have had approved loan applications and funded loans with PPP Fraud.

Accordingly, if you suspect that you are being investigated for PPP Fraud, it is wise to obtain the help from experienced federal criminal defense counsel to help build a strong defense against both state and federal fraud charges.  This is especially true given the federal ability to seek forfeiture of the accused’s property as part of the government’s case.

For more:

1. Federal Investigations:  Target Letters, Proffers, and Plea Deals;
2. Grand Jury in Texas: Defending Witnesses and Targets of Grand Jury Investigations; and
3. FBI Investigations and DOJ Prosecutions: Fighting for Your Privacy Rights.

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For more information, check out our web resources, read Michael Lowe’s Case Results, and read his in-depth article,” Pre-Arrest Criminal Investigations.”