Criminal Justice Insider

An in-depth review and analysis and of emerging topics in both federal and New York State criminal law. This blog explores developments in substantive and procedural criminal law, providing practical insights to the latest case law and statutory changes.

Go, Set a Watchman – Criminal Liability for COVID-19 Relief Fraud


To date, the federal government has authorized over $2 trillion dollars in relief for individuals and businesses affected by the COVID-19 pandemic. An initial tranche of $349 billion was allocated to small businesses in order to cover expenses and retain employees under the Paycheck Protection Program (“PPP”). When the initial PPP funding was depleted in record time, Congress authorized $310 billion in additional funds for the program.

After a string of larger, well-capitalized businesses reported receiving PPP loans which were intended to assist smaller struggling companies, Treasury Secretary Steven Mnuchin announced on April 28, 2020 that any business that received over $2 million in funds will be audited. If it revealed that a recipient was, in fact, ineligible for such funds, it could face “criminal liability.” Consistent with Secretary Mnuchin’s warning, Attorney General William Barr has directed the Department of Justice to “prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.”

There is intensive federal oversight of the PPP program. In addition to the existing enforcement agencies such as the Treasury Department, the Department of Justice and the IRS, Congress has created a Special Inspector General for Pandemic Recovery empowered to conduct audits and investigations relating to the disbursement of CARES Act funds. A Pandemic Response Accountability Committee was also created and imbued with auditing and investigatory power. With such tremendous oversight, there is a very real risk that businesses could face criminal and civil action related to PPP funds in the coming days.

These oversight authorities have an array of potential criminal statutes at their disposal to indict businesses found to have fraudulently applied for and/or received PPP funds. First and foremost amongst these are the mail and wire fraud statutes, 18 U.S.C. §§ 1341, 1343. Under these statutes, a business could be charged with (1) the use of either mail or wire communications in the foreseeable furtherance, (2) of a scheme and intent to defraud another of property and (3) using a material deception. In such a prosecution, the material misstatement would involve either an intentional misstatement or a use of funds inconsistent with certifications made on the application. In large part, applicants submitted their application and/or received their funds using electronic wire rendering this statute applicable to PPP funds.

Additionally, the federal government could also charge bank fraud (18 U.S.C. §1344) for false statements on PPP loan applications or a misuse of PPP funds. In a bank fraud prosecution, a business is charged with defrauding a financial institution by obtaining assets under the control of such an institution. As private banks are involved in the application and distribution process of PPP funds, a material false statement on a PPP application would certainly render the bank fraud statute applicable.

The federal government can also pursue an action pursuant to the False Claims Act (FCA), 31 U.S.C. §§ 3729 et. seq. This act, which has both civil and criminal aspects, prohibits the knowing presentation of a false or fraudulent claim or making a false record or statement material to a false or fraudulent claim in the procurement of federal funds. The PPP applications require a business to certify that it is eligible to receive a loan under the program, that the loan is necessary to support its ongoing operations in light of the pandemic, and that the funds will be used to retain workers and maintain payroll or to make certain expense payments. False statements made on PPP applications create exposure under the FCA. The FCA was an oft-used weapon in the arsenal of prosecutors seeking to expose fraud related to the Troubled Asset Relief Program implemented during the 2008 subprime mortgage crisis.

Notably, the FCA has a scienter requirement whereby any false claim must be made with actual knowledge or with reckless disregard or deliberate ignorance of the truth. Accordingly, the inadvertent violation of unclear or ambiguous PPP requirements will not create FCA liability. The false statement must be made knowingly in order to give rise to a cause of action under the FCA.

If a business is found criminally or civilly liable under the FCA, the penalties can be severe. In addition to criminal penalties such as fines or incarceration, the FCA authorizes treble damages on a per claim basis. Accordingly, a $1 million in wrongfully obtained PPP funds can lead to a judgment of $3 million plus statutory interest.

Given the potential for criminal and civil exposure and the high level of scrutiny focused on the PPP program, we recommend that all businesses applying for PPP loans honestly and accurately complete their applications. We further recommend that all applications consult with knowledgeable counsel throughout the process to evaluate eligibility and to keep abreast of the oft-changing requirements and newly issued guidance. Finally, upon receipt of the funds, a business should design and implement policies and procedures to ensure that funds are being used solely for the intended purposes of the program, i.e. the authorized expenses and payroll. Following these recommendations will limit criminal and FCA exposure during the coming audits.

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04.29.2020  |  PRACTICE AREAS: Criminal Defense

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