Establishing a wise and environment friendly precedent for combating credit score fraud

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Establishing a smart and efficient precedent for combating credit fraud

If any lesson is learned from the cases where entrepreneurs have experienced bank stoppages or law enforcement encounters, the impression is that banks and Justice Department officials have attempted to use standard law enforcement protocols regardless of the nature of the allegations or the size of the fraud .

It went wrong; It consumes enormous government resources and at the same time risks over-criminalization. Not every hardworking but troubled business owner should face asset freezes and criminal prosecution just for making a simple accounting mistake, for example. To be clear, the vast majority of customers were not buying a new boat or luxury car with loan money; They simply miscalculated the correct loan amount when even their own CPA was understandably unfamiliar with the qualification requirements.

United States Assistant Attorney Matthew R. Belz of the Eastern District of California recognized the dilemma and announced a sensible solution that would punish the applicant for the mistake while redistributing the funds plus penalties to the government.

First nationwide civil PPP loan fraud settlement

The US Department of Justice (DOJ) has just announced that it has reached the first civil settlement resulting from allegations of fraud under the Federal Paycheck Protection Program (PPP). The case concerned SlideBelts Inc. and its CEO Brigham Taylor. SlideBelts Inc. had received a loan of $ 350,000 under the PPP.

The DOJ’s decision to reach a civil settlement is a reasonable approach to resolving many PPP credit fraud investigations. While some PPP fraud cases warrant prosecution, it is equally clear that many do not. In many cases, companies and their executives have unwittingly violated the hastily worded and difficult-to-interpret provisions of the PPP. Additionally, many companies, including SlideBelts Inc., have partnered with the DOJ and returned their PPP loan funds on investigation. Solving these types of cases through civil law settlement enables an efficient solution with reasonable results for the company, the federal government. and the PPP lender.

The civil settlement results in a repayment of $ 350,000 PPP loan and a payment of $ 100,000 in damages and penalties

SlideBelts Inc. is an internet retail company that sells belts, wallets, watches, and other personal accessories. Following bankruptcy, SlideBelts Inc. applied for a PPP loan from several banks during the COVID-19 pandemic. In the company’s PPP loan applications, SlideBelts Inc. and Taylor misrepresented that the company was not bankrupt “to influence [] Banks Approve and the Small Business Administration (SBA) guarantee “a PPP loan. SlideBelts Inc. eventually received a $ 350,000 PPP loan.

According to the DOJ, SlideBelts Inc. returned the loan “in response to US claims”. During the DOJ’s investigation, SlideBelts Inc. and Taylor admitted misrepresenting the company’s PPP loan applications in violation of the False Claims Act and Financial Institution Reform, Forbearance and Enforcement Act (FIRREA). Rather than pursuing criminal charges under the False Claims Act, the DOJ opted for a civil settlement that completely resolved allegations against SlideBelts Inc. and Taylor. In addition to returning the $ 350,000 PPP loan, SlideBelts Inc. and Taylor agreed to pay a total of $ 100,000 in damages and penalties as part of the settlement.

Civil resolution is the correct approach to many PPP loan fraud investigations

A civil settlement is the right outcome in such cases. While SlideBelts Inc. and Taylor admitted they misrepresented several banks in order to obtain a PPP loan, they admitted wrongdoing and returned the loan when approached by the DOJ. The DOJ’s press release announcing the settlement does not refer to the intent, but criminal charges were not warranted in the circumstances.

“While PPP criminal fraud is indeed a very real problem, many cases of PPP fraud do not warrant prosecution. Small businesses in particular that have made mistakes – and who can correct those mistakes by repaying their PPP loans or otherwise – should be spared the extreme costs and risks of federal criminal prosecution. “- Dr. Nick Oberheiden, founding attorney for Oberheiden PC

The DOJ’s civil law regime allows the PPP lender not only to get their loan back and the federal government to cover the costs of its investigation, but also to SlideBelts Inc. – a small company that struggled during the COVID-19 pandemic – another chance for success. By using civil law settlements to efficiently resolve PPP credit fraud cases that require attention but do not warrant the provision of the resources necessary to prosecute, the DOJ can fulfill its mandate while adequately representing the interests of all parties involved.

Understand PPP fraud allegations

When it was first announced, the PPP represented a vital lifeline for small businesses struggling due to the downtime and other economic impact of the COVID-19 pandemic. The PPP was founded under the Coronavirus Aid, Relief and Economic Security (CARES) Act and offered forgivable, low-interest loans to struggling companies from banks that had received guarantees from the US Small Business Administration (SBA). In order to get PPP loan funds into companies’ bank accounts as quickly as possible, the SBA outlined the parameters of the program, but its guidelines left many questions unanswered.

When the PPP opened and applications flooded, many of those applications contained errors and omissions. These errors and omissions are considered fraud under federal laws such as the False Claims Act and FIRREA. For example, some of the most common mistakes (both intentional and unintentional) made with PPP loan applications included:

  • Misrepresentation that the company has qualified as a “small business”.

  • Misrepresentation that “the uncertainty of current economic conditions makes the loan application necessary to support the day-to-day operations of the entitled recipient.”

  • Misrepresentation of the number of employees or the company’s payroll.

  • Misrepresentation of this loan proceeds would only be used for payroll and other qualified expenses under the PPP.

  • Trying to obtain (or actually obtain) PPP loans from multiple lenders – a practice known as “stacking”.

As questions continued to arise about PPP eligibility and funding requirements, the SBA updated its guidance (mainly its Frequently Asked Questions) to provide additional guidance to PPP loan applicants and beneficiaries. However, uncertainty persisted and invalid applications continued to be received by banks during the second round of PPP funding.

In addition to errors and omissions in PPP loan applications, many PPP loan recipients have also made mistakes in the use of their loan proceeds. Loan certification fraud has been a key issue for both the DOJ and the US Treasury Department.

The purposes for which qualified companies could use PPP loan proceeds were limited. In particular, the CARES Act allowed loan proceeds to be used only for (i) labor costs, (ii) interest and rent payments under pre-existing obligations, (iii) insurance premiums and (iv) utility companies. In order to be able to grant their loans, the loan recipients had to certify under the CARES Act that they had met the requirements of the program.

However, many PPP loan recipients were unaware or did not fully understand the restrictions placed on the use of PPP funds. Also, many beneficiaries were unaware of the steps required (i.e. setting up a separate account and carefully documenting all PPP loan expenditures) to demonstrate compliance. Many small businesses relied on media coverage of the PPP’s “interest-free loans” and assumed that certification was just another formality in the PPP lending process. As a result, by the time it came to certification, many small businesses either didn’t understand what was required, didn’t take the implications seriously, or had come to a point where they needed forgiveness to survive.

Of course, not all false statements by loan applicants resulted from confusion or ambiguity about the eligibility criteria and loan use requirements of the PPP. Many PPP loan applicants knew (or at least suspected) that their applications were not compliant. Even so, in many cases, the rewards of law enforcement are still outweighed by the efficiency and practicality of a civil law settlement, allowing the DOJ to focus its law enforcement efforts on other areas.

When (if at all) is prosecution warranted in a PPP loan fraud investigation?

To be clear, some PPP credit fraud cases warrant prosecution. In addition to the civil settlement with SlideBelts Inc., the DOJ has also announced several criminal cases related to PPP credit fraud. These cases included allegations ranging from manufacturing entire businesses to claiming sole proprietorship employing dozens of people, and filing amended tax returns to confirming PPP compliance after using loan proceeds to pay for luxury cars, swimming pools, and other personal expenses were.

When individuals knowingly and intentionally defraud banks for their own benefit, it is a different scenario than a small business making a mistake that can be corrected. Crimes deserve to be prosecuted as such – especially if they want to use programs designed to help those in need in times of crisis. The pursuit of substantial fines and jail terms in such cases is well worth the DOJ’s resources as it not only punishes the culprit but also discourages other potential scammers.

However, if a civil settlement adequately serves the law enforcement objectives of the DOJ, a civil settlement is sufficient. It’s not worth using federal funds to track down small businesses that have made mistakes and don’t make the same mistakes again. Not only that, but the inefficiency of pursuing unnecessary criminal charges ultimately defeats the DOJ’s purpose in enforcing the rules of the PPP and helping banks and the government recover as much of their fraudulent losses as possible.

The DOJ’s efforts to enforce the PPP are not going to end anytime soon. As federal prosecutors continue to assess and pursue allegations in PPP credit fraud cases, the prospect of negotiating civil settlements in appropriate cases should remain on the table. This is the right approach in many cases and offers the DOJ the greatest opportunity to cheaply resolve as many PPP credit fraud cases as possible.

Oberheiden PC © 2020 National Law Review, Volume XI, Number 95