Federal prosecutors are coming down hard on suspected abuse of the Paycheck Protection Program.
The Paycheck Protection Program (PPP), provided under the CARES Act, has made available $659 billion in federal crisis aid for small businesses hurt by the COVID-19 pandemic and by the necessary state shutdown measures. Offering potentially forgivable loans covering up to eight weeks of payroll, the PPP seeks to stem the rising tide of unemployment, help small businesses keep their employees, and enable them to rebound quickly after states let them reopen.
However, $659 billion is a very big pie. Inevitably, there may be illegal efforts to sneak extra slices. Federal prosecutors are now bringing the first cases of alleged fraud used to obtain PPP loans. The article below tells three of these stories.
While these cases are outliers—most loan applications have been made in good faith—they are reminders that PPP loans are not “free money,” a view we heard too often on the small-business street when the program began. As with TARP crisis aid for companies in 2008–2009, federal law enforcement is watching very carefully for any abuse of the Paycheck Protection Program. (See my recent article Paycheck Protection Program Loans And Risk Of Government Investigation: Advice From Former Federal Prosecutors and an earlier piece, How To Avoid Going To Prison For Your Paycheck Protection Program Loan: Advice From Former Federal Prosecutors.)
The Case Of The Businesses So Small They Don’t Actually Exist?
The first federal accusation of PPP loan fraud was announced by the US Department of Justice (DOJ) on May 5. Two men, one from Massachusetts and the other from Rhode Island, were charged with conspiracy to commit bank fraud, among other accusations. They are alleged to have applied for a PPP loan totaling $543,881. According to the DOJ charges, in the application they certified that they had “dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses.”
The DOJ further alleges that the businesses “were not operating prior to the start of the COVID-19 pandemic.” In one instance, the DOJ adds, a PPP loan was allegedly requested for “a business the loan applicant did not own.”
There’s a lot to unpack in these alleged misdeeds. However, the most important point for our purposes here is that PPP loan fraud will be swiftly detected. According to an alert on the charges from the law firm Foley & Hoag, “this case demonstrates that outright fraud will be quickly prosecuted and is a good example of the type of fraud that the DOJ is likely interested in pursuing.”
Things Get Real For Reality TV Star
On May 13 in Georgia, federal prosecutors charged a well-known figure on reality TV with bank fraud, according to the related DOJ statement. In addition to his television work, the man is also the sole owner of a Georgia company called Flame Trucking. According to the DOJ charges, he applied for and received a PPP loan for Flame Trucking on the basis that it has “107 employees and an average monthly payroll of $1,490,200.” The loan amount he received was slightly over $2 million.
“Within days,” claim the federal prosecutors, he “allegedly used more than $1.5 million of the PPP loan proceeds to purchase $85,000 in jewelry, including a Rolex Presidential watch, a diamond bracelet, a 5.73 carat diamond ring for himself, and to pay $40,000 for child support.” Stating what seems obvious to most PPP loan applicants, the DOJ points out that “such payments are not an authorized use of PPP funds under the CARES Act.”
The accused applied for the PPP loan in April. By early May, the feds were curious. Although the DOJ does not say what prompted the federal investigation, it seems likely that a whistleblower was involved. Whistleblowers who provide material information about PPP abuse may be eligible for a financial reward from the US government.
On May 6, federal agents interviewed the accused. According to the DOJ statement, the reality TV star “claimed that he used all of the PPP loan proceeds to pay payroll and other business expenses incurred by Flame Trucking and denied using any of the PPP loan proceeds to pay his personal debts and expenses.”
However, reality hit on May 11, when “agents executed a search…and seized approximately $80,000 in cash, including $9,400 that [he] had in his pockets, and the jewelry he purchased with the PPP funds, and further discovered a 2019 Rolls-Royce Wraith, which still had a temporary dealer tag on it.”
“The defendant allegedly took advantage of the emergency lending provisions of the Paycheck Protection Program that were intended to assist employees and small businesses battered by the coronavirus,” stated one of the federal prosecutors in the DOJ statement on May 13. “We will investigate and charge anyone who inappropriately diverts these critical funds for their own personal gain.”
Texas Toast: Business Owner Obtains $10 Million To Pay 250 Employees But Evidently Has No Employees
In another case that the DOJ announced on May 13, the sole proprietor of a business in Texas was charged with “wire fraud, bank fraud, false statements to a financial institution, and false statements to the SBA.” The man “allegedly sought $10 million in PPP loan proceeds by fraudulently claiming to have 250 employees with an average monthly payroll of $4 million.” He also “allegedly sought approximately $3 million in PPP loan proceeds by fraudulently claiming to have 250 employees with an average monthly payroll of approximately $1.2 million.”
The federal investigators were thorough. According to the DOJ, the Texas Workforce Commission has no records of employee wages paid in 2020 by the accused or his business.
They even searched his trash. In garbage outside the man’s residence, they found “handwritten notes that appear to reflect an investment strategy for the $3 million, which is the amount of money that [he] allegedly sought from the second lender.”
Approach To Borderline Cases Of PPP Abuse Still Unclear
All three of these cases, if true, represent extremely blatant and intentional abuses of the Paycheck Protection Program. The Rolls-Royce, in particular, drew some attention among expert observers. “Purchasing a Rolls-Royce Is Not a Permissible Use of PPP Funds” is the tongue-in-cheek title of an alert (May 14) on the Georgia case from the white-collar-law department at Foley & Hoag.
While the DOJ playbook for “obvious instances of fraud” is clear, Foley & Hoag believes that approaches to less obvious or borderline cases of PPP abuse may be different. “The question remains how criminal and civil enforcement authorities will handle closer calls, including certifications made by companies regarding their need for the PPP funds,” says the firm’s alert.
My Other Articles On PPP Loans At Forbes.com