Federal prosecutions continue to increase across the country against businesses and individuals accused of fraudulent conduct under the Coronavirus Aid, Relief and Economic Security (CARES) Act. In March, the Department of Justice announced the implementation of new tools to help identify and prosecute fraud related to COVID-19 financial relief programs. As losses associated with exploitation of CARES Act programs reportedly exceed $569 million, Attorney General Merrick B. Garland stated that the Criminal and Civil Divisions are specifically focused on combating fraud in the following areas: 

To aid in investigating and prosecuting CARES Act fraud cases, the Department of Justice relies on the International Computer Hacking and Intellectual Property (ICHIP) system which monitors cyber-related crime worldwide. 

Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) Fraud: Banks Beware!

The PPP was intended to help struggling businesses through the worst of the COVID-19 economic crisis with loan forgiveness available for businesses that met all required criteria for protecting jobs and paying overhead. The EIDL program provides relief to small businesses experiencing a temporary loss of revenue where proceeds can be used to cover a wide array of working capital and normal operating expenses. An applicant that obtains a PPP loan may not use EIDL funds for the same purpose as the PPP funds. 

As anticipated at the launch of these relief programs in 2020, the application system was ripe for abuse. At this point, PPP and EIDL fraud cases are being prosecuted across the country – including in all three districts within North Carolina – with many defendants already sentenced. Initial prosecutions for abuse of the PPP primarily focus on those alleged to have fraudulently obtained PPP loans through the Small Business Administration (SBA) or used legitimately obtained funds for impermissible purposes. Additionally, however, the DOJ has also signaled that the False Claims Act (FCA) may also be used as prosecutorial tool to claw back ill-gotten PPP loans even when the borrower has not applied for loan forgiveness.

Within North Carolina, federal prosecutions have demonstrated that investigations are not necessarily limited by the amount of loss. A Charlotte woman recently entered a guilty plea to wire fraud as part of an EIDL fraud scheme amounting to $150,000 in wrongfully obtained loans. Within the same federal district, indictments were returned in April alleging $1.5 million against a North Carolina man accused of submitting fraudulent PPP loan applications. 

Banks also need to be aware of the potential for criminal exposure. Although the program was administered through the SBA, financial institutions hold responsibility for fund distribution and processing forgiveness applications. As the DOJ investigates fraudulent conduct by borrowers, banks are routinely responding to subpoenas which require the production of records and interviews with agents. 

While criminal liability for banks may include aiding or complacency in perpetuating fraud by borrowers, there are also compliance risks to consider, including violations of the application rules, document maintenance requirements, improperly disadvantaging minority and women owned businesses, and know-your-customer (KYC) violations. Review of initial cases reveals that financial institutions would be wise to consult closely with counsel to determine the necessary reporting requirements and take appropriate action in the event that red flags appear. 

The emergency response necessary to quickly implement these loan programs led to an assortment of questions for legitimate borrowers as well as opportunities for individuals seeking to take advantage. Individuals who engaged in outright fraud have good reason to be fearful, but legitimate borrowers should also take stock of their position. The CARES Act provides for criminal liability under 15 U.S.C. § 645 when a false statement is made for the purpose of obtaining an SBA loan. A false statement occurs when there is knowledge that the statement is false and there is intent to use the statement to obtain a loan. Further criminal exposure can exist via the general wire fraud, mail fraud, and bank fraud statutes. The Justice Department has signaled its intent to focus resources on investigating and prosecuting instances of fraud, and borrowers and lenders can expect to find themselves in the crosshairs.  

Unemployment Insurance (UI) Fraud

Although underreported when compared to PPP and EIDL abuse, unemployment insurance fraud has exploded during the COVID-19 pandemic. The Office of the Inspector General (OIG) has reported that billions of dollars in potential UI fraud has been identified. The expansion of unemployment benefits under the CARES Act include three programs which will receive increased scrutiny by enforcement agencies: the Pandemic Unemployment Assistant Program, the Federal Unemployment Compensation Program, and the Pandemic Emergency Unemployment Compensation Program. 

The administration of these programs was delegated to the states and, within North Carolina, the Department of Commerce Division of Employment Security (NCDES) manages the distribution of benefits. According to reports, there have been more than 17,000 complaints and investigations related to improper UI benefits and more than 90,000 complaints received through the National Center for Disaster Fraud that are under review. UI fraud investigations reportedly make up 87% of the OIG’s investigations, up from 12% prior to the COVID pandemic. 

A common fact pattern for UI fraud involves an individual or a group (including international organized crime) illegally using the personal data of third parties, which may include deceased, elderly, or incarcerated individuals, to apply for and receive unemployment benefits. In response, the Department of Justice has developed the National UI Fraud Task Force, hired additional investigators, assigned 12 specifically designated Assistant United States Attorneys to prosecute cases, and taken enhanced steps signaling a long-term focus on combatting UI fraud. Following a recent OIG investigation which forecast the expected trend, a Virginia woman was sentenced to nine years in prison and ordered to pay more than $455,000.00 in restitution following a guilty plea for fraudulently filing UI claims using the identities at least 37 individuals. Like other CARES Act financial crime prosecutions, charges for unemployment insurance can be expected to increase as federal and state agencies focus their investigative resources to address widespread abuse.  

Identify a Proactive Response Strategy Now

Borrowers and lenders are encouraged to seek experienced counsel immediately when dealing with compliance or fraud matters involving CARES Act relief programs. The options for favorable resolution will be highest if issues are addressed before they become problems or a law enforcement investigation is launched.