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 5 Steps to Navigate PPP Loan Fraud Case 

Michael Santos

Michael Santos

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Business owners receiving PPP loans can learn how to navigate through any potential investigation or prosecution. Avoid prosecutions!

INTRODUCTION

The Department of Justice (DOJ) continues to target business owners receiving US government Covid-19 economic stimulus loans. At this time, there are thousands of open criminal investigations and prosecutions based on loans under the federal Paycheck Protection Program (PPP). Congress has flagged billions of dollars in PPP loans as suspicious. As a result, the DOJ continues to hire dozens of prosecutors specifically to pursue cases of PPP loan fraud.

Anyone receiving a PPP loan will want to stay tuned. The target of any government investigation needs to be proactive to mitigate the short and long-term negative impact that such investigations can leave behind. Risks and consequences vary case by case. However, there are common strategic steps to help business owners navigate PPP loan fraud cases and achieve better outcomes. Learning about all the stages of the criminal process — from investigation to sentencing, including sentence reductions and post-conviction strategies (such as early release) — can make a significant difference in the overall results. This blog post and accompanying video provide a brief overview on triggers for PPP loan fraud investigations.

We also discuss 5 strategic steps to follow in responding to any PPP loan fraud investigation and prosecution to improve likely outcomes. Recently, we advised a client facing a 12-year sentence for white-collar fraud. After working with us, this client received a 37-month sentence. He went on to serve only 10 months in federal prison, and is now rebuilding his life.

Like in any investigation, PPP loan fraud investigations present a range of potential outcomes. Sometimes, it may be possible to avoid formal criminal charges or prison altogether. Prison Professors, an Earning Freedom company, works alongside (not in place of) criminal defense attorneys to help clients proactively navigate through white-collar fraud investigations and prosecutions. It’s our experience that more well-informed and proactive clients obtain better outcomes.

*Pro-Tip: Remember to consult criminal defense counsel for legal advice regarding any court case.

TRIGGERS FOR PPP LOAN FRAUD INVESTIGATIONS

Several government agencies investigate PPP loan fraud. The Small Business Administration (SBA) is the primary agency disbursing  PPP loans and is the lead investigator in many ongoing cases. The FBI, DOJ, and the Treasury Department are also investigating.

Any of the following can trigger a PPP loan fraud investigation:

  • Misuse of loan proceeds
  • False application documents
  • Multiple applications for PPP loans
  • Banks’ reports of suspicious transactions
  • Whistleblower reports
  • Random audits

Alleged misuse of loan proceeds is rampant in the criminal cases filed so far. The government designed the PPP loan program for specific and limited business purposes, primarily to cover employee payroll during the pandemic. The use of PPP loan proceeds to buy luxury cars, vacations, homes, and similar non-business items presents serious issues that often violate the terms of the PPP loan program. Also, some business owners mistakenly believe they can borrow money from their business after receiving a PPP loan, intending to replace it in the future. However, to government investigators, such actions show fraudulent intent in obtaining the loan.

Likewise, the government is targeting business owners who pay themselves distributions after receiving PPP loans. The government expects strict compliance with the intended use of PPP loan proceeds.

Bank reports of suspicious transactions provide another trigger for investigators. Financial institutions must  file Suspicious Activity Reports (SARs) [with the Treasury Department] under certain conditions. A SAR is a document that banks must file with the Financial Crimes Enforcement Network (FinCEN) whenever they suspect money laundering or fraud. Unusual account activity after receiving a PPP loan will likely be flagged for FinCEN. SARs help the government monitor activity that is out of the ordinary.

Whistleblowers can also trigger a PPP loan fraud investigation. The federal government offers an incentive for blowing the whistle on fraud against taxpayer-funded programs such as the PPP: the False Claims Act allows successful whistleblowers to receive up to 30 percent of any money the US government recovers. If a business owner receives a PPP loan primarily to cover payroll and does not do so, employees will be motivated to blow the whistle. Accountants have also been known to turn clients over to the FBI when they become targets in PPP loan fraud investigations themselves.

Business owners should be aware of random audits as well. Given the number and dollar volume of PPP loans disbursed during the pandemic, the government has implemented various random audit initiatives.

Up to now, the DOJ has shown little tolerance towards misuse of PPP loan proceeds or false information on PPP loan documents. We expect to see a very aggressive DOJ quickly filing hundreds of criminal cases in the coming months. The DOJ is looking to make an example out of anyone trying to take advantage of emergency government relief in the middle of a pandemic.

This current environment calls for business owners who may be affected to be proactive. The team at Prison Professors, an Earning Freedom company, helps business owners mitigate their exposure and obtain better outcomes.

FORMAL CHARGES IN PPP LOAN FRAUD CASES

Those under investigation for PPP loan fraud face charges such as bank fraud, mail fraud, wire fraud, making false statements to financial institutions, and money laundering. The DOJ seeks significant prison terms, plus criminal fines and repayment of the PPP loan.

Formal charges in these cases most often come from secret grand jury proceedings. The grand jury –a group of regular citizens from many walks of life, such as teachers, firefighters, and retirees– investigates potential criminal conduct under the leadership of a prosecutor. A grand jury may subpoena physical evidence or a person to testify. In PPP loan fraud cases, bank statements, loan documents, receipts, and the like are available to substantiate misuse of funds, unapproved expenses, and distributions.

Prosecutors do not present countervailing facts to the grand jury. They control the narrative and focus only on the evidence that supports criminal charges. It is important to note that ignorance of the law is not a defense to a criminal charge. So, for example, even if a business owner did not know that it is improper to use PPP loan proceeds for partner distributions or to borrow money from the business, that is not a valid defense. Moreover, prosecutors will use owner distributions or extravagant spending as evidence of a predisposition for fraud.

In most cases, people remain unaware that an investigation is underway or that a grand jury might be considering criminal charges. This further limit people’s ability to offer rebuttal evidence early on. Most defendants learn of the charges against them only when arrested and formally charged.

MITIGATING EXPOSURE

Are you a business owner worried about exposure to PPP loan fraud investigation?

In that case, we recommend 5 steps that could make the difference between probation or the 11-year prison sentence a Texas man just received for PPP loan fraud. The DOJ is aggressively pressing for significant prison terms in the vast majority of these cases. Anecdotally, 36 to 41 months is a common sentence in PPP loan fraud cases.

Step 1: Be Proactive & Honest

Concerned business owners should be proactive. Start by taking an honest and realistic assessment of the situation. Many people believe they may be at risk of a PPP loan fraud investigation but choose to hide their heads in the sand. That is rarely a good strategy. It leaves them in a reactive, not proactive, posture.

Therefore, PPP loan recipients should assess whether there is a profit distribution or non-business expense that the government might consider questionable. There are many more options to deal with a potential problem at the outset of an investigation. In some cases, there may be an opportunity to provide information before an investigation begins (sometimes referred to as a proffer). Other options might include deferred prosecution or non-prosecution agreements. There may be an opportunity to pay back the PPP loan. If an investigation is already underway, counsel may be able to work out a pre-indictment agreement.

Step 2: Talk to Experienced Counsel & Consultants

An honest assessment may lead people to realize the need to consult a criminal defense lawyer. One tool to help with assessing the situation is this 25 question assessment developed by Prison Professors, an Earning Freedom company.



As such, the second critical step we recommend is confidential talks with potential lawyers and consultants, who have extensive experience with white-collar crime investigations and sentencing issues. PPP loan fraud cases stem from federal law. An attorney who specializes in state cases may not be suited for a PPP loan fraud case. The intricacies of the federal process and sentencing guidelines present unique challenges. Our team at Prison Professors, an Earning Freedom company, works with our clients and their legal team towards reducing exposure even before charges are filed. We continue to advise clients throughout the process, during the pre and post-sentencing phases. Click here for more information understanding the US Sentencing Guidelines.

Step 3: Talk to Sentencing Mitigation Consultants

Having a sentencing mitigation team from the outset can greatly improve likely outcomes. However, many clients opt for consulting sentencing mitigation experts later in the process. It bears repeating that earlier is better when engaging sentencing mitigation experts.

The options for probation or reduced sentences are much more limited after the sentencing hearing. In addition to the lawyer’s job for the sentencing hearing, there are significant steps individual clients can take to help the sentencing judge see them as worthy of leniency. Clients who take proactive measures in advance of the sentencing hearing tend to see much better outcomes. We recommend working with experienced mitigation experts on strategies for the sentencing hearing, including the presentence investigation report, as early as possible.

Step 4: Create Post-Sentencing Strategy

When sentenced to a prison term, there are still many strategies to implement after the sentencing hearing to lower the time spent away from home in federal prison. Our team is familiar with all the Federal Bureau of Prisons jobs and programs to help inmates gain skills while incarcerated, earn programming credits, and return home sooner.

Step 5: Take Charge of Re-Entry Plans

People can bounce back from a criminal conviction and prison term. Success upon re-entry is possible. Click here for article on Justin Paperny’s Success Story. We work with clients to help them define success, set their priorities, and create a self-driven plan. No doubt, a criminal investigation or prosecution can be very disruptive. However, people can and do emerge from the federal criminal justice system and rebuild their lives by executing a carefully crafted personal plan for success.

CONCLUSION

The target of any government investigation, including PPP loan fraud, should be proactive to mitigate the short and long-term negative impact that such investigations can leave behind. Risks and consequences vary case by case. However, there are common strategic steps to help business owners navigate PPP loan fraud cases and achieve better outcomes.

Prison Professors, an Earning Freedom company, works alongside (not in place of) civil and criminal defense counsel to help clients proactively navigate through investigations and prosecutions. Our team also helps clients prepare mitigation and compliance strategies.


If you have any questions or are uncertain about any of the issues discussed in this post, schedule a call with our risk mitigation team to receive additional guidance.

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