As many taxpayers and practitioners know, the Paycheck Protection Program (the “PPP”) was passed as part of the CARES Act in response to the economic hardships imposed on taxpayers as a result of the COVID-19 pandemic. The PPP is implemented by the Small Business Administration with support from the Department of the Treasury. This program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Specifically, the PPP provides businesses with loans to pay certain operating expenses and payroll costs—with the possibility that a portion of the loan will be forgiven if the proceeds are used in a particular manner.
While the program has provided relief to many taxpayers, certain other taxpayers have seized the opportunity to obtain a loan from the Small Business Administration under false pretenses. The government has acted swiftly and has already made a number of arrests and indictments. These indictments indicate that the Department of Justice’s has turned its focus onto prosecuting PPP fraud. Indeed, the Government Accountability Office released a report urging the SBA to ramp up efforts to respond to PPP fraud.[1] Specifically, the GAO stated:
Because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved . . . In addition, the lack of clear guidance has increased the likelihood that borrowers may misuse loan proceeds or be surprised they do not qualify for full loan forgiveness.[2]
The Department of Justice, with the help of the SBA, has heeded the call.
On July 10, 2020, the DoJ issued a press release regarding the indictment of a Florida native based on allegations that “he fraudulently sought several Paycheck Protection Program (PPP) loans, and that he participated in a scheme to defraud Medicare of at least $5.6 million. It is further alleged that a portion of the PPP loan proceeds were potentially used in furtherance of the Medicare fraud scheme.”[3] The DoJ has charged the taxpayer with wire fraud, conspiracy to commit health care fraud, payment of health care kickbacks, and making false statements to a financial institution. Specifically, the indictment contends:
[The taxpayer] submitted several fraudulent PPP loan applications to federally insured financial institutions, other SBA-approved lenders, and the SBA in the name of R&S Pharmacy Inc. (R&S Pharmacy), a durable medical equipment company that allegedly submitted false and fraudulent claims to Medicare for orthotic braces that were medically unnecessary, ineligible for Medicare reimbursement and/or not provided as represented.
As part of the healthcare fraud scheme, the government alleges that the taxpayer submitted fake tax documents and doctored profit and loss statements for R&S Pharmacy—resulting in him fraudulently obtaining nearly $22,000 in PPP funds.
On June 30, 2020, the DoJ issued another press release regarding the indictment of a Seattle-based doctor based on allegations that he fraudulently sought over $3 million in PPP loans.[4] Specifically, the indictment alleges:
[The doctor] submitted several fraudulent PPP loan applications to federally insured financial institutions, other U.S. Small Business Administration (SBA)-approved lenders, and the SBA in the names of businesses with no actual operations or by misrepresenting the business’s eligibility. In the applications, [the doctor] allegedly misrepresented the number of employees and payroll expenses in several applications and concealed his own criminal history. To support the fraudulent applications, the complaint alleges that [the doctor] submitted fake tax documents and the names of purported employees who did not, in fact, work for the businesses for which [the doctor] claimed they worked. The complaint alleges that [doctor] fraudulently sought over $3 million in PPP loans.[5]
Just a few days prior to this indictment, the DoJ issued yet another press release regarding the indictment of a funeral director on allegations that he fraudulently sought over $13 million in PPP loans.[6] Specifically, the indictment contends:
[He] submitted several fraudulent PPP loan applications to federally insured banks, including applications on behalf of a business that did not exist and other applications on behalf of a business with which he had no affiliation. In these applications, [he] allegedly falsified his identity, misrepresented the number of employees and payroll expenses of the putative companies and made numerous other inaccurate statements. According to the complaint, [he] also submitted falsified tax documents and bank account information in support of these applications. He submitted fraudulent applications for over $13 million in PPP funds and ultimately received over $1.6 million in PPP funds.[7]
Another indictment alleges that a Los Angeles native fraudulently obtained PPP funds and then “transferred the fraudulently-obtained loan proceeds to his brokerage account to make risky stock-market bets and similarly spent hundreds of thousands of dollars in fraudulently-obtained loan proceeds at a Las Vegas casino.”[8]
These indictments are just a few examples of recent indictments related to PPP fraud. A quick review of recent DoJ press releases indicates that at least 19 indictments have been made since May regarding PPP fraud. This demonstrates that the government has placed a heavy focus on prosecuting PPP fraud. I suspect that this trend will continue, as the government has received pressure from government watchdog groups and the public in general to ensure that PPP loans are being given to the taxpayers that are truly in need.
The PPP structure is complex, and the lack of guidance on the proper use of funds continues to remain a question for many taxpayers. This is particularly the case given the government’s enhanced scrutiny of PPP proceeds. Taxpayers should ensure that they fully comply with the terms of the PPP, as the government has indicated its willingness to prosecute PPP fraud. Should you have any questions regarding the PPP, do not hesitate to contact our firm to help ensure you are in compliance.
Criminal Tax Defense Attorneys
Freeman Law represents companies, executives, and individuals in regulatory and white-collar government investigations and prosecutions. We employ a proactive approach to defend vigorously and strategically position our clients. White-collar matters often involve parallel regulatory and civil proceedings. Freeman Law can navigate the complexities and collateral consequences of multiple proceedings. And when it comes to the court of public opinion, we employ ethical and strategic tactics to manage publicity. Schedule a consultation or call (214) 984-3000 to discuss your allegations and investigations concerns.
[1] GAO, Covid-19: Opportunities to Improve Federal Response and Recovery Efforts, U.S. Government Accountability Office (June 25, 2020).
[2] Id.
[3] Office of Public Affairs, Florida Man Charged with COVID Relief Fraud and Health Care Fraud, The United States Department of Justice (July 10, 2020).
[4] Office of Public Affairs, Seattle Doctor Charged with COVID Relief Fraud, The United States Department of Justice (June 30, 2020).
[5] Id.
[6] Office of Public Affairs, Texas Man Charged with COVID Relief Fraud, The United States Department of Justice (June 24, 2020).
[7] Id.
[8] Office of Public Affairs, California Man Charged with COVID-Relief Fraud, The United States Department of Justice (July 16, 2020).
