No good deed goes unpunished. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which endeavors to give struggling small businesses free money, reportedly has been rife with abuse. In a noble rush to put emergency funds in the hands of Americans in need, the U.S. Small Business Administration (SBA) relaxed many federal loan safeguards, giving the unscrupulous the perfect opportunity for fraud. The U.S. Department of Justice already has begun investigating and prosecuting individuals who have attempted to steal CARES Act funds and has relied on tips from major financial institutions to do so. As new evidence comes to light in the coming months, we can expect DOJ to continue escalating its enforcement efforts.
Earlier this month, Wells Fargo & Co. fired between 100 and 125 employees for allegedly defrauding a federal loan program designed to provide pandemic relief to struggling small businesses. According to an internal memo, the bank identified and terminated employees who may have “defrauded the [SBA] by making false representations in applying for coronavirus relief funds for themselves through the Economic Injury Disaster Loan (EIDL) program.” Wells Fargo is not the first financial institution to report suspicions of abuse of pandemic-related relief and is unlikely to be the last. In late September, JPMorgan Chase & Co. announced that more than 500 employees received federal assistance through the Paycheck Protection Program (PPP), dozens of whom should not have, and the bank dismissed several employees as a result.
Banks are not only monitoring their employees’ access to CARES Act money but also are keeping an eye on their customers’ receipt of funds. To avoid attracting the attention of law enforcement, businesses which have received CARES Act funding should take care to comply closely with the accompanying regulations for each loan. Any expenditures for non-business purposes will wave a red flag at DOJ.
The CARES Act Relief Programs
The CARES Act was passed and signed into law in March and provided over $2 trillion in economic relief to businesses and workers. The CARES Act made two types of emergency financial assistance programs available to small businesses affected by the pandemic: EIDL and PPP. Under the EIDL program, small business owners could apply for as much as $2 million in loan funds to be repaid over 30 years. These loans were to be used to pay debt, payroll, and other business expenses. In addition, small businesses experiencing temporary revenue losses could apply for an advance from the SBA of up to $10,000, which was not required to be repaid. Small businesses could receive the cash advance even if their loan application was subsequently rejected.
Under the PPP, small business owners could apply for funding from the SBA to cover payroll expenses, overhead and to hire back employees who may have been laid off due to the coronavirus shutdowns. Unlike EIDL, the interest and principal of PPP loans would be forgiven if businesses spent the proceeds within a set time frame and used at least a certain percentage of the funds for payroll expenses. Through PPP, the SBA ultimately disbursed over $500 billion to more than 5 million companies.
Signs of CARES Act Abuse
In July, the SBA Office of the Inspector General (OIG) released a report citing “strong indicators of widespread potential fraud” in the EIDL program. Specifically, the SBA OIG identified $250 million in economic injury loans and advance grants “given to potentially ineligible recipients” and approximately $45.6 million in potentially duplicate payments. By the end of July, nearly 440 financial institutions had contacted the SBA to report fraud-related concerns. In August, Bloomberg Businessweek analyzed SBA data and determined that more than $1 billion in coronavirus aid from the EIDL program may have been distributed to phantom companies. In September, the U.S. House of Representatives Select Subcommittee on the Coronavirus Crisis published a memo identifying over $1 billion in potential PPP fraud. By early October, the SBA OIG had received tens of thousands of fraud tips. By comparison, the SBA fraud hotline received fewer than 800 calls in all of 2019.
Both CARES Act programs were administered at rapid speeds and likely received much less scrutiny than typical SBA loans would during non-emergency times. While rushing to get money to businesses as quickly as possible, the SBA allowed banks to rely on borrowers’ own certifications to determine their eligibility for these loans. In his October 1, 2020 congressional testimony, William Shear of the U.S. Government Accountability Office (GAO)’s Financial Markets and Community Investment Team explained, “There was a push to get loans out, but with the passage of time it becomes much more troubling that the fraud framework is not in place.” Shear added, “[I]t will be a long time until we know how much fraud” has affected the EIDL and PPP programs.
DOJ Enforcement Priorities
Although rooting out fraud in EIDL and PPP is likely to prove to be a years-long effort, DOJ already has begun aggressively pursuing abusers of the CARES Act loan programs. In early May, DOJ announced its first charges against two individuals who attempted to steal PPP funds by falsifying loan documents claiming the need to pay non-existent employees of non-existent companies. Days later, DOJ sent grand jury subpoenas to several leading banks as part of a broader investigation into the potential abuse of emergency loan programs. In September, DOJ charged 57 individuals with attempting to steal a total of $175 million in PPP funds. Though DOJ has not released a statement regarding the total number of EIDL and PPP prosecutions it has brought so far, outside institutions tracking these indictments indicate the number of individuals who have been charged is voluminous and is expected to grow exponentially.
DOJ has partnered with several other law enforcement agencies to carry out its CARES Act fraud investigations, including the Federal Bureau of Investigation, the Internal Revenue Service, the U.S. Postal Inspection Service, the Federal Deposit Insurance Corporation OIG, the U.S. Secret Service, the SBA, and local law enforcement.
Thus far, the government is pursuing two broad categories of cases: (1) those involving individuals or small groups who claimed to need CARES Act funds for legitimate business purposes but instead used loan proceeds to purchase “splashy luxury items” for themselves; and (2) those involving coordinated criminal rings who stole large sums of money from the federal loan programs. Acting Assistant Attorney General Brian C. Rabbitt told reporters recently that DOJ is focusing its efforts on investigating the latter type of cases going forward, but the government will not likely altogether abandon its pursuit of prosecuting taxpayer-funded purchases of Lamborghinis and yachts. In addition to extravagant purchases and organized crime, the Inspector General of the SBA, Hannibal “Mike” Ware, has indicated that the SBA is interested in identifying ordinary individuals who have made false statements to gain access to CARES Act loan programs.
Throughout its investigations, the government has announced several indicators of suspicious activities reported by financial institutions that may point to fraudulent use of CARES Act funds:
· Accounts established using stolen identities
· Account holders unable to explain origins of deposits or identify business names on loans
· Accounts holders claiming to use the funds to open a business
· Account holders attempting to transfer funds into investment accounts
· Account holders attempting to transfer funds to foreign accounts
· Loan deposits being made into accounts that were established remotely just before receiving the loan funds, with no other account activity
· Account holders attempting to withdraw loan funds in cash or transfer the funds to other newly established accounts
· Economic injury loans or advance grants being deposited into personal accounts with no evidence of business activity
Abusers of the CARES Act loan programs have faced a variety of criminal charges, including conspiracy, wire fraud, mail fraud, bank fraud, theft of government property, false statements to the SBA, false statements to a financial institution, money laundering, identity theft, aggravated identity theft, and engaging in transactions in unlawful proceeds. Most individuals indicted thus far have been charged with several of these offenses.
What remains to be seen is just how expansive DOJ’s enforcement efforts will become, but the investigations already underway certainly are just the tip of the iceberg. The government’s enthusiasm in bringing perpetrators of CARES Act fraud to justice spells trouble for the recently terminated Wells Fargo and JPMorgan employees and any other fraudsters hoping to fly under the radar.