DOJ Enforcement Actions Involving COVID-19 Relief Fraud: An Update (September 2021)

As the COVID-19 pandemic continues, so does Department of Justice (DOJ) enforcement of COVID-19-related fraud. In our first alert on this topic, in May 2020, we tracked early fraud cases involving the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act). In our last alert, March 2021, we predicted that fraud enforcement would ramp up as Paycheck Protection Program (PPP) loans became due and borrowers sought loan forgiveness. Indeed, that is what we have seen over the ensuing five months. This client alert offers new predictions for the future, focused primarily on loan forgiveness.

PPP Status Update

The PPP officially ended on May 31, 2021, meaning that borrowers could not submit new loan applications after that date. By then, the Small Business Administration (SBA) had approved nearly 12 million loans totaling almost $800 billion dollars.[1] Although no more money is available through the PPP, other COVID-19 relief is available through the SBA, such as Economic Injury Disaster Loans.

The SBA continues to process loan forgiveness for existing PPP borrowers.  As we explained in our March 2021 alert, PPP loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement, (1) employee and compensation levels are maintained, (2) the loan proceeds are spent on payroll costs and other eligible expenses, and (3) at least 60% of the proceeds are spent on payroll costs. According to SBA data as of September 5, 2021,[2] 88 percent of PPP loans issued in 2020 have submitted forgiveness applications, and the SBA has forgiven $456 billion of loans issued in 2020. Meanwhile, only 31 percent of 2021 PPP loans have submitted forgiveness applications. To date, the SBA has forgiven $53.7 billion of the approximately $270 billion in loans issued in 2021.

Until recently, borrowers had to seek loan forgiveness through the lenders who processed their loan application. However, on July 28, 2021, the SBA announced a new online loan forgiveness portal that streamlines the forgiveness process for eligible borrowers.[3] Beginning on August 4, 2021, borrowers that received PPP loans of $150,000 or less have been able to seek forgiveness directly from the SBA.[4] Given that most outstanding PPP loans are for less than $150,000,[5] this online portal should help wrap up the PPP.

Continued DOJ Enforcement

Although the PPP is winding down, DOJ enforcement related to PPP fraud is far from over. DOJ continues to charge and settle PPP fraud cases.[6] In August 2021, DOJ announced that the Criminal Division’s Fraud Section has prosecuted more than 100 defendants in more than 70 criminal cases since the PPP began and has seized more than $65 million in cash, as well as luxury items purchased using fraudulently obtained funds.[7] We believe that those numbers underreport enforcement to date and, in any case, may be just the tip of the iceberg. A new study released in August 2021 estimated that around 15 percent of all PPP loans—or approximately $76 billion in total—contained at least one indication of possible fraud.[8] According to that study, FinTech firms are five times more likely than traditional lenders to have issued suspicious loans.[9] Altogether, we expect DOJ to pursue more cases, involving bigger and more complex fraud schemes.

It is not surprising, then, that DOJ continues to ramp up its enforcement infrastructure. In May 2021, Attorney General Merrick Garland established a COVID-19 Fraud Enforcement Task Force to coordinate continued enforcement efforts.[10] And in July, the Fraud Section listed a new job posting for a lead trial attorney to manage CARES Act cases.[11]

Loan Forgiveness and Beyond

DOJ enforcement of COVID-19-related fraud is far from over largely because the loan forgiveness process remains ongoing.  Assuming that most borrowers intend to seek loan forgiveness, that process could take years to unfold.

Loan forgiveness is related to fraud enforcement for several reasons. First, borrowers who properly filed their applications may mistakenly or fraudulently represent that they complied with loan forgiveness requirements. For instance, they may misrepresent payroll data or headcounts. Because borrowers must certify their loan forgiveness applications under penalty of perjury, such false information creates a compliance and enforcement risk. Second, the SBA may uncover problems with the initial loan amount during the loan forgiveness process or a subsequent audit. That is, the SBA may have overlooked errors in loan applications during the chaotic early days of the PPP, but may catch such errors on the back end. Third, companies themselves may uncover problems with their initial loan in putting together their loan forgiveness materials.

Ultimately, borrowers should be careful during the loan forgiveness process, reviewing all forgiveness documentation to identify potential false or inaccurate information. Depending on what borrowers uncover, there may be multiple strategies to pursue. For some borrowers, it may make sense to pay back their PPP loan. In the event borrowers identify false information, they should alternatively think through the benefits of self-reporting the errors, rather than waiting for the SBA or DOJ to come to them. In all cases, companies should consider engaging counsel before interfacing with the SBA or DOJ.

We will continue to monitor how COVID-19 related fraud enforcement unfolds in the future. Stay tuned here for more updates or reach out with any questions.

[1] https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program/ppp-data#section-header-11.

[2] https://www.sba.gov/sites/default/files/2021-09/2021.09.07_Weekly%20Forgiveness%20Report_Public-508.pdf.

[3] https://www.sba.gov/article/2021/jul/28/sba-announces-opening-paycheck-protection-program-direct-forgiveness-portal.  The interim final rule promulgated on July 28, 2021, also extends the loan deferment period of PPP loans where the borrower timely files an appeal of a final SBA loan review such that borrowers need not pay interest and principal while their appeals are pending.

[4] One caveat is that lenders have to agree to use the portal. So far, approximately 900 lenders have signed up, but several larger banks have held out, including JPMorgan Chase. https://www.nytimes.com/2021/08/04/business/ppp-loan-forgiveness-portal.html.

[5] https://www.washingtonpost.com/business/2021/07/29/ppp-loan-forgiveness-portal/.

[6] See, e.g., https://www.justice.gov/legal-careers/job/lead-trial-attorney-assistant-deputy-chief-mimf-unit; https://www.washingtonpost.com/local/legal-issues/tezna-ppp-fraud-conviction/2021/07/16/39ceeb2c-e57b-11eb-a41e-c8442c213fa8_story.html; https://www.justice.gov/usao-edva/pr/senior-nasa-employee-sentenced-covid-19-related-loan-fraud; https://www.justice.gov/opa/pr/texas-man-sentenced-24-million-covid-19-relief-fraud-scheme;

[7] https://www.justice.gov/opa/pr/washington-tech-executive-sentenced-covid-19-relief-fraud-scheme.

[8] https://www.nytimes.com/2021/08/17/business/ppp-fraud-covid.html.

[9] https://www.bloomberg.com/news/articles/2021-08-17/fintechs-found-to-be-much-more-likely-to-ok-suspicious-ppp-loans.

[10] https://www.justice.gov/opa/pr/attorney-general-announces-task-force-combat-covid-19-fraud; see also https://www.justice.gov/opa/pr/deputy-attorney-general-convenes-inaugural-meeting-covid-19-fraud-enforcement-task-force.

[11] https://www.justice.gov/legal-careers/job/lead-trial-attorney-assistant-deputy-chief-mimf-unit.