What Statutes Can Federal Prosecutors Use to Bring PPP Loan Fraud Cases?

In this article, we discuss the statutes that federal prosecutors are most likely to use to charge individuals in cases related to fraud in connection with Paycheck Protection Program (PPP) loans.  This is not an exhaustive review of all potential statutes that might apply, but rather addresses the statutes most likely to be applied.

The Federal CARES Act was enacted on March 29, 2020 to bring financial relief to those in need as a result of the COVID-19 pandemic.

In addition to direct individual payments and other forms of relief, the CARES Act authorized nearly $349 billion in Small Business Administration loans through the so-called Paycheck Protection Program, or PPP.

The PPP allows certain small businesses and sole proprietors to receive loans with a low 1% interest-rate and a 2-year maturity timeframe, free of the need for a personal guaranty from business owners or principals, and with a robust process allowing forgiveness in full under certain circumstances.

Not surprisingly, there are allegations of fraud emerging in connection with PPP loans throughout the country.

The Department of Justice announced its first prosecution for PPP fraud in May, 2020. By December, 2020, the DOJ had recovered or frozen more than $30 million in assets alleged to have been obtained fraudulently.

What Is PPP Fraud?

We have discussed what constitutes PPP Fraud in a prior post on our criminal defense blog.

For purposes of this article, the primary point is that “PPP Fraud” does not, itself, have a standalone definition.

There is no federal or state statute designed specifically to address “PPP Fraud.”

Instead, prosecutors have a variety of federal statutes to choose from in charging individuals who they alleged have engaged in PPP fraud.

Under What Federal Statutes Are PPP Fraud Case Being Prosecuted?

  1. 18 U.S.C. § 1343: Wire Fraud

Wire Fraud is defined in 18 U.S.C. § 1343 as the devising or the intent to devise any scheme for obtaining money or property by means of false or fraudulent pretenses, representations, promises by way of the wire, radio, or television communication.

This is a very broad statute that can cover a wide swath of conduct, provided there is an interstate wire involved.  The offense carries a potential 20-year prison sentence in addition to fines, although as with most fraud-type cases, the advisory sentencing guidelines will be driven to a large extent by the amount of money alleged to be involved in the fraud—the “loss” amount.

Further, if the scheme occurs in connection with a “Presidentially declared major disaster,” the maximum prison sentence for this offense can be increased to 30 years—with a possible maximum $1 million fine.

  1. 18 U.S.C. § 1349: Conspiracy to Commit Wire Fraud

Simply put, a conspiracy is an agreement between two or more people to commit a crime.

18 USC § 1349 is the brief statute allowing for those who attempt or conspire to commit any Federal fraud offense to be charged as a member of a conspiracy.

The statute provides that:

“Any person who attempts or conspires to commit any offense under this chapter shall be subject to the same penalties as those prescribed for the offense, the commission of which was the object of the attempt or conspiracy.”

So, for example, if Smith approaches Jones and tells Jones that he intends to secure a PPP loan by falsely claiming that Jones is an employee in an online application (the wire), and Jones participates in falsely representing to the bank issuing the loan that he is an employee, Jones can be charged with conspiracy to commit wire fraud.

The maximum penalty for Conspiracy to Commit Wire Fraud is the same as for Wire Fraud: 20-30 years in prison along with fines up to $1 million, but again, the actual sentence imposed will depend heavily on the amount of the fraudulent loan.

  1. 18 U.S.C. § 371: Conspiracy to Defraud the United States

Similar fraud conspiracy, 18 U.S.C. § 371 may be used to charge two or more persons conspiring to commit any offense or to defraud the United States, so long as at least one of the members of the conspiracy commits an act to effect the object of the conspiracy.

That is, someone actually has to do something to commit the act of fraud.

The possible sentence for this offense is a statutory fine or a maximum prison sentence of 5 years. However, if the underlying criminal act that is the object of the conspiracy is only a misdemeanor, the maximum penalty for a conviction conspiracy to commit that act can be no greater than the misdemeanor penalty. Keep in mind that if this charge is brought alongside another charge that carries a more significant penalty, the 5-year maximum does on this charge does not prevent a higher sentence on the other charge(s).

  1. 18 U.S.C. § 1956(a)(1)(B)(i)): Laundering of Monetary Instruments

Money Laundering is another very broadly defined federal offense which is being used to prosecute those accused of PPP Fraud.

This statute says, in essence, that anyone conducting a financial transaction knowingly utilizing the proceeds of an unlawful activity (such as, say, Wire Fraud) and with the intent of either carrying on that unlawful activity or with the intent to conceal the source or owner of the proceeds is guilty of Money Laundering.

To fall under federal jurisdiction, the financial transaction in question must also involve interstate commerce, meaning that the transaction is conducted over state lines. Given the multi-state and even multi-national operation of most major financial institutions, this is not a high bar for the DOJ to meet.

The maximum sentence for a Federal Money Laundering conviction is a fine of $500,000 or twice the value of the property involved in the transaction, whichever is greater, and imprisonment for up to 20 years.

  1. 18 U.S.C. § 1957: Engaging In Monetary Transactions In Property Derived from Specified Unlawful Activity

A person who knowingly engages in a monetary transaction in property derived from money laundering worth $10,000 or more may be charged under 18 U.S.C. § 1957.

For purposes of this statute, a “monetary transaction” means the deposit, transfer, or exchange of funds through a financial institution in interstate commerce.

This federal statute provides for a fine or imprisonment for up to 10 years—or both. The fine imposed may be statutory or, alternatively, an amount twice the value of the criminally derived property in question.

Significantly, under this statute, the Government is not required to prove that the individual charged knew that the property was derived from money laundering.

  1. 18 U.S.C. § 1344: Bank Fraud

The PPP, although funded by the Small Business Administration, is executed by private banks and credit unions. That is, if you want to apply for a loan from the PPP, you don’t typically apply to the SBA but, rather, a private bank or credit union.

That bank or credit union provides you the application for the PPP loan, reviews the application when you return it, provides substantive feedback if it contains deficiencies, and, ultimately, approves it or disapproves it for submission to the SBA.

That same bank will also later process your application for forgiveness of the PPP loan.

Thus, all of your representations concerning income, employees, profit, loss, and even the existence of the business itself are made to the private bank.

This federal statute makes it a criminal offense to defraud a financial institution generally and, specifically, to obtain money from a financial institution by means of fraudulent pretenses, representations, or promises.

This offense carries a maximum penalty of 30 years imprisonment, a fine of $1,000,000—or both.

  1. 18 U.S.C. § 1341: Mail Fraud

An offense similar to Wire Fraud, Mail Fraud under 18 U.SC. § 1341 simply requires a person to have devised or intended a scheme to defraud utilizing the U.S. Mail.

Any use of the US Mail either by the applicant to the PPP directly or via the PPP application’s submission to the SBA by the processing financial institution could trigger a prosecution under this federal statute.

Again, the maximum penalty here is a 30-year prison sentence, a$1,000,000 fine, or both, but the advisory guidelines will be based heavily on the details of the alleged fraud, including the amount of PPP money sought or obtained.

  1. 18 U.S.C. § 1028A: Aggravated Identify Theft

The federal offense of Aggravated Identify Theft may be charged where a business falsely claims to have employees it does not actually have—and then uses someone’s actual identity to bolster its PPP loan application or PPP loan forgiveness application.

This offense carries a mandatory 2-year prison sentence which must run consecutively with any other sentence.

In other words, this sentence can be “stacked” onto another prison sentence to extend a term of imprisonment.

  1. 18 U.S.C. § 287: False, Fictitious or Fraudulent Claims

This federal statute states that anyone presenting to any officer, department, or agency of the United States a false, fictitious, or fraudulent claim is liable to be imprisoned for up to 5 years and subjected to a statutory fine.

18 U.S.C. § 286 likewise allows for a parallel Conspiracy to Defraud the Government with Respect to Claims offense to be charged.

This offense has not, to date, been charged in any PPP Fraud case that we are aware of. However, depending upon the DOJ’s characterization of what is or is not a “claim,” it could find its way into an indictment.

  1. 18 U.S.C. §§ 981(a)(1)(C) & (D) and 982(a)(1)): Forfeiture of Property

While these statutes do not codify offenses or criminal charges, they are nonetheless pertinent to PPP Fraud prosecutions.

These federal statutes contain the bases for the remedies of civil and criminal forfeiture of property, respectively.

18 U.S.C. § 981(a)(1)(C) is the civil forfeiture statute.

It allows the government to seek the forfeiture of any real or personal property involved in a transaction in violation of §§ 1956 and 1957, above, or traceable to the gross receipts obtained from Wire Fraud, Wire Fraud, and a variety of other offenses.

18 U.S.C. § 982(a)(1) is the criminal forfeiture statute.

It simply states that a court, when sentencing a person convicted of an offense under a variety of offenses, including Wire Fraud, Mail Fraud, and Money Laundering, shall order that person to forfeit to the United States any real or personal property involved in the offense or any property traceable to property involved in the offense.

Thus, if a person fraudulently obtains funds from the PPP, the funds themselves are subject to forfeiture, and so is the Lamborghini purchased with the funds.

The word shall is important here: it means the sentencing judge lacks discretion in his or her sentencing decision.

Whatever else the judge sentences a person convicted of Money Laundering to, the judge shall also order forfeiture.

A Word About Statutes of Limitations

While the statute of limitations for most federal crimes is 5 years, there are some notable exceptions.  Bank Fraud, for example, has a statute of limitations of 10 years.  Wire Fraud and Mail Fraud, if committed against a financial institution, likewise have a statute of limitations of 10 years.  18 U.S.C. § 3293.

It often takes a significant amount of time and resources for prosecutors to investigate and bring white collar cases, especially during emergencies such as the COVID pandemic.  With statutes that allow prosecutions within a 10-year window, federal prosecutors will undoubtedly invest significant time and resources to pursue these matters, and we are likely to see a significant number of PPP Fraud prosecutions in the coming years.

Experienced PPP Loan Fraud Defense Attorneys

If you are being investigated or prosecuted for PPP Loan Fraud, it is essential that you speak to a PPP Loan Fraud defense attorney immediately.

You may have defenses available to you. However, the earlier you bring an experienced criminal defense attorney onto your team, the more useful the representation is going to be.

At Burnham & Gorokhov, PLLC, we have represented many clients in PPP loan and other fraud prosecutions.

To schedule a free case evaluation, which is done by phone, please call us at 202-386-6920, or complete our online contact form.

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