By Matthew D. Lee and Marissa Koblitz Kingman

Shortly after the Small Business Administration began accepting applications for Paycheck Protection Program (PPP) loans, two Rhode Island businessmen quickly applied for a combined $543,881 from the program. A few days later, the Justice Department announced that both were criminally charged with conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud, becoming the first individuals to face criminal charges related to the program, which was created by the federal Coronavirus Aid, Relief and Economic Security (CARES) Act. In the press release announcing the charges, the Justice Department said the arrests should serve as a stern warning to other PPP loan applicants, and promised that the FBI and other federal law enforcement agencies would aggressively pursue anyone taking advantage of the pandemic to commit fraud. The Justice Department has kept that promise, and to date has criminally charged 15 individuals alleged to have defrauded the PPP loan program of millions of dollars. On June 24 alone, three criminal cases were announced in Virginia, Texas, and Ohio.

The CARES Act Paycheck Protection Program

The CARES Act is designed to provide emergency financial assistance to Americans who have suffered economic losses related to the COVID-19 pandemic. It provides forgivable loans to small businesses to cover payroll and other specified expenses through the PPP loan program. Most PPP loans were funded in April and May. Since then, 15 individuals have been criminally charged across the country in connection with allegedly fraudulent PPP loan applications. These criminal cases are notable for several reasons.

Are These White Collar Investigations Happening Unusually Quickly?

The rapidity with which these initial PPP cases were investigated and charged is highly unusual. In typical white-collar cases, federal agents first try to determine if a crime was committed. Investigations can take months or even years to determine what potential crimes occurred and who was responsible. As the investigators review materials, talk to witnesses and subpoena records, investigations evolve, generating new leads and revealing more materials to review. White collar investigations often involve voluminous financial records which can take years to obtain and analyze. In stark contrast, the first 15 PPP cases were investigated and charged within a few short weeks after passage of the CARES Act.

Why Are These Crimes Being Charged?

One of the explanations for the atypical pace of these investigations is no doubt to deter others from engaging in similar misconduct. Each of the initial cases was announced by a strongly-worded press release from the Justice Department. With billions of dollars in public money at stake in the PPP, the federal government wants to ensure that borrowers who are tempted to misuse the money are fully aware of the very real criminal penalties they will face if they are caught. By aggressively prosecuting these cases, the DOJ is sending a clear message to the public that this behavior will not be tolerated.

How is the Government Able to Investigate and Charge These Cases so Quickly?

Federal prosecutors rarely reveal their sources, so at this point we do not know how these 15 cases came to light so soon. There are a variety of ways such information could make its way to investigators. Banks could be a source of information via their customary filing of Suspicious Activity Reports with the Financial Crimes Enforcement Network, a division of the U.S. Treasury. As the DOJ acknowledged in one recent press release, it was thankful for the “due diligence” of the “SBA’s lending partners to maintain the integrity of the lending programs.” Whistleblowers are another possibility. Many federal agencies encourage whistleblowers and offer rewards for information. For example, the FBI makes whistleblowing fairly easy by maintaining a 24/7 Cyber Complaint Center.

Which Agencies Are Investigating and Prosecuting These Crimes?

The sheer number of federal agencies involved in investigating PPP loan fraud is notable. Not surprisingly, the inspectors general of several federal agencies are leading the charge, including the Small Business Administration, the Federal Deposit Insurance Corporation, Federal Housing Finance Administration and the Federal Reserve. Other traditional federal law enforcement agencies, including the FBI, the Internal Revenue Service–Criminal Investigation Division, and the U.S. Postal Inspection Service are well represented in these cases. Finally, state and local law enforcement agencies are supporting this effort, too.

What Kind of White Collar Crimes Are Being Charged?

Most of the charges in these cases involve bank fraud, wire fraud, false statements to a financial institution and/or false statements to the Small Business Administration. For example, on May 22, 2020, William Sadleir, a film producer, was charged in the Central District of California with wire fraud, bank fraud, false statements to a financial institution and false statements to the SBA. Sadleir was the owner and founder of Aviron Group, LLC, which was the parent of several film distribution companies. Sadleir allegedly made misrepresentations to a bank to secure a PPP loan in excess of $1.7 million. He then allegedly used the funds to retire personal credit card debt and pay other personal expenses, rather than legitimate business needs.

The initial cases that have been charged appear to represent the most egregious cases, with allegations spanning phantom companies and non-existent employees to the use of PPP loan proceeds to pay personal expenses and fund lavish lifestyles. This does not mean that others will not be criminally charged, however. Other PPP borrowers will certainly be investigated in the months and years to come. Indeed, some of the potential charges that can be brought in a PPP loan fraud case carry a ten-year statute of limitations, providing federal law enforcement agencies plenty of time to build cases.

The Future of PPP Loan Fraud Enforcement

Scrutiny of PPP loans from all quarters is expected to intensify in the coming months. The Trump administration has vowed to audit all loans in excess of $2 million. The Justice Department shows no signs of slowing down its initial efforts to combat PPP loan fraud. Congressional oversight will be intense as well, with the CARES-Act created Pandemic Response Accountability Committee charged with detecting mismanagement of COVID-19 relief funds. The Special Inspector General for Pandemic Recovery, also created by the CARES Act, is charged with conducting audits and investigations related to CARES Act relief programs, including the PPP.

Any business owner concerned about PPP loan compliance should immediately consult counsel and not wait to be contacted by law enforcement. Any business owner who has already received a subpoena or inquiry from any law enforcement agency regarding a PPP application or loan should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding to any such subpoena or inquiry.

PPP Fraud Prosecution Tracker

Fox Rothschild’s White-Collar Criminal Defense & Regulatory Compliance Practice Group is tracking in real time all federal criminal cases alleging violations of the CARES Act Paycheck Protection Program.

To access our PPP Fraud Prosecution Tracker, contact White-Collar Criminal Defense & Regulatory Compliance Practice Group Co-Chairs Matthew S. Adams at madams@foxrothschild.com or 973.994.7573 and Matthew D. Lee at mlee@foxrothschild.com or 215.299.2765.


For additional information on the topic of this alert, contact Matthew D. Lee at mlee@foxrothschild.com or 215.299.2765; Marissa Koblitz Kingman at mkingman@foxrothschild.com or 973.548.3316; or any member of the firm’s national White-Collar Defense & Regulatory Compliance Practice.

On March 25, 2020, following the onset of the COVID-19 pandemic, the IRS unveiled its People First Initiative to provide wide-ranging compliance relief to taxpayers experiencing hardships relating to the health crisis. This relief includes issues ranging from postponing certain payments related to Installment Agreements and Offers-in-Compromise to collection and limiting certain enforcement actions. The IRS has created a resource page on its website (www.irs.gov) providing significant details regarding the People First Initiative, including Frequently Asked Questions and Answers about audits, collection activities, payments, liens and levies, passport certifications, and IRS customer service. The People First Initiative resource page is available here.

Please check out Fox Rothschild’s COVID-19 resource page, which is available here.

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Following up our post earlier today that the Tax Court will resume receiving mail on July 10, 2020, the Tax Court has issued another announcement regarding its operations.  Also beginning on July 10, the Clerk’s Office will accept hand-delivered documents between the hours of 8:00 AM and 4:30 PM, Monday through Friday.

Please check out Fox Rothschild’s COVID-19 resource page, which is available here.

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Due to the COVID-19 pandemic, operations of the United States Tax Court have been severely impacted.  The Tax Court’s building in Washington, D.C. has been closed since March 19, 2020, all trial sessions have been cancelled through the end of June, and all Tax Court employees, including judges, have been working remotely.

Due to the closure of the Tax Court building, no mail has been delivered to the building. All mail was to be held until the Court reopened, although many private delivery services such as a Federal Express were returning mail addressed to the Tax Court as “undeliverable.”

The Tax Court has recently announced that it will resume receiving mail effective July 10, 2020.  Any mail that had been held by the U.S. Postal Service or private delivery service will be delivered to the Court on that day.  The Tax Court building will remain closed to the public until further notice.

This announcement follows the Tax Court’s earlier announcement that all proceedings, including trials, will be held remotely by Zoom videoconference for the foreseeable future.

Please check out Fox Rothschild’s COVID-19 resource page, which is available here.

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Our colleague Jana Volante Walshak has published an article addressing the steps that businesses can take now to protect themselves against qui tam actions related to the CARES Act Paycheck Protection Program. Many organizations may have thought the “hard part” was over when they received loans under the Paycheck Protection Program. In reality, the hard part is only beginning for loan recipients as they attempt to comply with the program’s constantly changing regulatory scheme. The uncertain nature of the rules and regulations governing the Paycheck Protection Program makes it possible for the leaders of an organization to mistakenly believe it is in full compliance when it is not. Failure to comply with the rules and regulations governing the program could render the certifications made to obtain the funds false, potentially resulting in severe consequences – liability under the False Claims Act. However, there are certain steps organizations can take now to protect themselves.

You can read Jana’s article here.

Please check out Fox Rothschild’s coronavirus resource page, which is available here.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.

 

 

Our colleagues Oksana Wright and Charles DeMonaco have published an article in Corporate Compliance Insights discussing management and corporate compliance measures for companies to prioritize during the uncertainty posed by COVID-19 pandemic.  You can read their article here.

Please check out Fox Rothschild’s coronavirus resource page, which is available here.

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The Internal Revenue Service’s Large Business & International Division has announced another compliance campaign, its 64th such campaign since the first set of campaigns was unveiled in 2017. This latest campaign will focus on the Tax Cuts and Job Act legislation enacted in late 2017.

These compliance campaigns reflect LB&I’s movement toward issue-based examinations and a compliance process in which LB&I decides which tax issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach is intended to make the best use of the IRS’s knowledge and to deploy the right resources to address these issues. The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. The overall goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources. A complete list of all active campaigns is available here. A list of retired campaigns is available here.

The Tax Cuts and Jobs Act (TCJA) campaign was created to closely monitor issues relating to the TCJA. LB&I will be examining a select pool of returns that reflect tax law changes brought about by the TCJA, and will share that information throughtout the IRS. As part of this campaign, LB&I will also consider the impact of the CARES Act on these returns as well as any others examined. The goal of this campaign is to identify transactions, restructuring, and technical issues and better understand taxpayer behavior under the new law. The treatment streams for this campaign may include examinations, soft letters, outreach, new and improved practice units, and development of future issue-based campaigns.

Please check out Fox Rothschild’s coronavirus resource page, which is available here.

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The Internal Revenue Service has published two Frequently Asked Questions about how taxpayers can seek release of tax levies and federal tax liens due to hardship circumstances caused by the COVID-19 pandemic.  The FAQs can be found at the bottom of the IRS web page entitled “IRS Operations During COVID-19: Mission-critical functions continue,” which is available here.

According to the FAQs, tax levies will not be automatically released because of the COVID-19 pandemic, but the IRS will consider taxpayer requests to release levies on a case-by-case basis if the levy is causing an economic hardship.  “Economic hardship” means that the levy is preventing the taxpayer from meeting basic, reasonable living expenses.  The IRS may ask for additional financial information to determine if a levy is causing an economic hardship.

The FAQ provides detail on how to request a levy release.  If the taxpayer is working with a revenue officer, they should contact the revenue officer.  For cases not assigned to a revenue officer, taxpayers should first call the telephone number on the notice of levy.  If the taxpayer is unable to get through on the number (which is unlikely given that all IRS customer service phone lines are closed), the taxpayer should fax a levy release request to (855) 796-4524.  The levy request must include the taxpayer’s name, address, and social security number (including spouse if they filed jointly), as well as the name, address, and fax number of the taxpayer’s employer or bank where the levy is being processed.  The IRS cautions that this fax number will only be used to address emergency levy release requests.

The IRS has published a second FAQ addressing how taxpayers can address issues relating to federal tax liens, including how to obtain a lien release or certificate of discharge. The IRS says that it is processing all electronically-submitted lien certificate applications normally and assigning them within 10 days. To protect the health and safety of IRS employees and taxpayers, the IRS is not currently processing lien certificate applications sent by regular mail to the Advisory Consolidated Receipts location in Florence, Kentucky. Instead, the IRS requests that taxpayers fax requests to (844) 201-8382 for certificates such as discharge of property from a federal tax lien; withdrawal of the notice of federal tax lien; and subordination of the federal tax lien.

Please check out Fox Rothschild’s coronavirus resource page, which is available here.

For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.