03 May Pandemic Relief Fraud Prosecutors (Part One)
The federal government considers the prosecution of pandemic fraud a top law enforcement priority. With millions of people participating in various pandemic relief programs, observers anticipate that pandemic fraud cases will continue to make headlines and comprise a sizable part of the caseloads of prosecutors for many years to come.
In the wake of the COVID-19 pandemic in 2020, Congress authorized billions in relief funds under the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). Companies and individuals submitted thousands of fraudulent applications for various forms of pandemic relief, which were quickly approved and funded.
It will take years to discover all of the fraud that occurred in pandemic relief programs. Given the massive levels of suspected fraud and a ten-year statute of limitations, most expect thousands more pandemic fraud prosecutions, convictions and incarcerations during the next decade.
Many people are serving time in prisons today for pandemic relief fraud. And many more will get sentenced to serve prison time as a result. The federal government and its prosecutors have vowed to spare no expense to prosecute those guilty of pandemic relief fraud and related misconduct.
There are several primary federal law enforcement agencies actively involved in this effort. In addition, the federal government recently appointed a chief prosecutor for pandemic relief fraud. It also established a pandemic fraud task force.
Several federal agencies currently conducting pandemic-related fraud investigations.
Five federal agencies are leading the way in conducting pandemic-related fraud investigations. Dozens of other federal and state agencies are playing significant supporting roles. Together, their reach is astounding. As a result, for prosecutors, pandemic relief cases will become commonplace.
These agencies collect evidence by, among other means, issuing subpoenas, interviewing witnesses, conducting grand jury investigations and filing criminal complaints. In some instances, federal authorities freeze pandemic-related funds while determining whether there is evidence of illegality.
Thus far, the vast majority of reported cases are for criminal violations of PPP (Payroll Protection Program) loan fraud. And most of those involve applicants and borrowers as defendants.
But in a recent shift, federal prosecutors appear ready to expand their scrutiny of misconduct related to pandemic relief fraud to include PPP lenders. In the first criminal prosecution of a PPP lender, federal prosecutors in New York just charged a PPP lender’s CEO with wire fraud, bank fraud and making false statements to the Small Business Administration (SBA). Observers believe this prosecution presages increased government scrutiny of bank and nonbank PPP lenders.
The SBA Office of Inspector General (SBA-OIG)
The SBA Office of Inspector General (SBA-OIG) is the accountability and integrity arm of the Small Business Administration that operates through its Auditing and Investigations Divisions.
Even though the SBA is not generally a traditional “law enforcement agency,” it is one of the primary federal agencies conducting PPP fraud investigations in this instance. By definition, most PPP loans are subject to SBA jurisdiction. And their investigations occur in conjunction with the US Attorney’s Office.
The SBA-OIG conducts financial and performance audits of participants in SBA programs to promote the economical, efficient and effective operation of SBA programs.
The SBA-OIG Auditing Division audits all recipients of PPP loans of $2 million or more. The Investigations Division handles allegations of PPP loan fraud on an as-needed basis.
The SBA-OIG is admittedly bracing itself for massive amounts of work over the coming years. For instance, SBA-OIG officials recently told Congress that their crackdown on pandemic fraud is at the very beginning. The SBA also states that the amount of fraud in the COVID relief programs is going to be larger than any government program that came before it.
The Federal Bureau of Investigation (FBI)
Not surprisingly, the Federal Bureau of Investigation (FBI) plays a significant role in pandemic fraud cases since it investigates all forms of federal fraud. The FBI’s White-Collar Crime Division is responsible primarily for conducting investigations of corporate entities, including investigations targeting fraud in connection with government benefit programs.
To substantiate PPP loan fraud matters, the FBI targets individuals and companies suspected of, among other things, the following:
- submitting false information or fraudulent certifications in support of their PPP loan applications,
- using PPP loan funds for unlawful purposes or
- submitting fraudulent certifications for loan forgiveness.
From the beginning, observers have widely criticized the rollout of pandemic relief programs, including PPP, unemployment and other pandemic relief packages under the CARES Act. For example, the rollout of the PPP made it extremely easy for people to secure loans from different financial entities.
Most observers acknowledge that the vetting of applications for eligibility enforcement was lax at best. The government encouraged lenders to favor speed in funding loans over the careful vetting of applications. And, without implying there could be any excuse for fraud or breaking the law, many people affected by pandemic relief share their consternation about how bankers and other people in the community enticed them to apply for relief and easy money.
Moreover, under the PPP, participants could become eligible for complete loan forgiveness. But guidance for establishing and preserving forgiveness eligibility was not forthcoming.
The lax process of doling out pandemic relief funds resulted in many people submitting improper and incomplete applications. It also resulted in many people improperly using PPP funds, leading to many fraud allegations.
The U.S. Department of Justice (DOJ)
The Department of Justice (DOJ) leads the way in aggressively targeting and prosecuting people suspected of perpetrating fraud under all pandemic programs. In terms of volume, most DOJ cases are under the PPP. But the DOJ works collaboratively with the SBA-OIG and the FBI to gather evidence and build cases for prosecution. And it also works with the Internal Revenue Service Criminal Investigations (IRS-CI) and other federal agencies in appropriate circumstances.
According to the DOJ, close to 200 individuals so far have been convicted in PPP fraud cases. Additionally, many more investigations and prosecutions have commenced. Nearly all these cases involve borrowers who provided false information to obtain the loans, misused loan proceeds or misrepresented something in connection with the loan forgiveness process.
Specifically, cases include allegations of the following:
- creating fictitious companies or payroll data to support fraudulent PPP loan applications,
- falsely claiming to own legitimate businesses to qualify for PPP loan funds,
- submitting multiple PPP loan applications to various lenders (a prohibited practice called “stacking”),.
- using PPP funds for personal expenses and
- misapplying for expanded pandemic unemployment insurance.
Charges levied against those accused include bank fraud, wire fraud, aggravated identity theft, making false statements, conspiracy, tax evasion, money laundering and other fraud-related crimes.
The Internal Revenue Service (IRS)
When pandemic relief fraud involves underreporting or underpayment of federal taxes, the IRS has jurisdiction to investigate. The IRS-CI is the agency’s criminal enforcement arm, aggressively targeting those suspected of federal tax evasion and fraud.
One issue of particular concern for IRS investigators is people claiming deductions for expenses paid with forgiven PPP loans, which are not eligible for ordinary business deductions. Therefore, small businesses that used PPP loan funding to pay employees during the pandemic cannot deduct payroll, mortgage or rent payments and utilities paid with PPP loan proceeds. Doing so would result in an illegal double-dipping because the loan proceeds, once forgiven, would not be included in gross income.
The U.S. Secret Service
The U.S. Secret Service reports close to 1,000 ongoing investigations involving pandemic relief frauds as well. Many of them are complex fraud investigations on an unprecedented scale. Secret Service investigations into pandemic unemployment insurance and PPP loan fraud have led to the seizure of more than $1 billion. They have also led to the return of more than $2 billion of illegally obtained pandemic relief.
Many other federal agencies are supporting pandemic fraud investigative efforts, too.
But these aren’t the only federal agencies pursuing pandemic relief fraud investigations. Other federal agencies playing a significant supporting role in the investigation of pandemic fraud include the following:
- Social Security Administration Office of the Inspector General (SSA-OIG),
- Treasury Inspector General for Tax Administration (TIGTA),
- U.S. Postal Inspector Service (USPIS),
- Department of Labor Office of Inspector General (DOL-OIG),
- Federal Housing Finance Agency (FHFA),
- Drug Enforcement Agency (DEA) and
- Homeland Security Investigations (HSI).
But this is not an exhaustive list.
Ultimately, the federal government’s intense commitment to uncovering as much pandemic relief fraud as possible guarantees the criminal justice system and prosecutors will be dealing with the aftermath of pandemic relief fraud for many years.