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May 12, 2020

First Federal Indictment Arising Out of Fraudulent Applications for Paycheck Protection Program Loans Highlights Focus on COVID-19 Related Investigations

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On May 5, 2020, the U.S. Attorney’s Office for the District of Rhode Island announced the first prosecution of a defendant for defrauding the Paycheck Protection Program (PPP), part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act aimed to provide forgivable loans to small businesses for job retention and certain other expenses to address the economic impact of the COVID-19 pandemic.

The criminal complaint charged two individuals with conspiracy to commit bank fraud and conspiracy to make false statements to influence the Small Business Administration ("SBA"), charged with administering PPP loans, and additionally charged one defendant with aggravated identity theft and bank fraud. The charges are based on loan applications filed by the defendants seeking over $500,000 in funds collectively. The investigation appears to have been initiated based on reports by a complaining witness to a local police department.

The complaint alleges that the defendants submitted multiple false loan applications, including applications for three restaurants in Rhode Island and Massachusetts. Two of the business had closed prior to the loan application for reasons unrelated to COVID-19 and defendants did not have any ownership interest or role in the third restaurant. The complaint also addresses a fourth loan application for a business with seven full-time employees and alleges the employees never worked for the business and were never paid by the business or the defendant who submitted the application. Additional charges for identity theft and bank fraud were based on one of the defendants applying for a PPP loan for a business owned by his brother without his brother’s knowledge and other actions taken using his brother’s identity.

The U.S. Attorney for the District of Rhode Island noted that Attorney General Barr has directed U.S. Attorneys to prioritize the investigation and prosecution of crimes related to COVID-19. Although this first prosecution represents an obvious example of fraudulent statements, including loan applications for fictitious businesses with fictitious employees, additional cases will inevitably follow. Future cases will likely address statements that fall in more grey areas that require business owners to make judgment calls about the certifications they are making in their PPP applications.

The SBA’s guidance for the PPP loan program is imprecise and evolving, leaving many business owners to guess at whether they qualify for a loan and how to complete the application. In light of the potentially draconian penalties for making false statements, as illustrated by this case, it is important to document any assumptions or analysis made in completing the loan applications and keep written records of any clarification provided by a bank supervisor processing the loan, an authorized local SBA representative, or other trusted industry guidance particular to the individual business. Such documentation can help counter any later allegation that an intentional misrepresentation was made on the application.

The SBA’s guidance on PPP loans is updated frequently, but notes that borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. The guidance indicates that the SBA will review loan applications above $2M and others as appropriate. The SBA plans to issue further guidance regarding its plan to review applications.

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