The men used shell companies and payment processing businesses, among other  methods, prosecutors said. They concealed cannabis shipments as dog food, face cream and beverages.

While cannabis is legal in some states — including California where Eaze operates — the drug remains illegal under federal law and as such banks and payment processors are prohibited from doing business with cannabis companies. For this reason, major credit card companies like MasterCard and Visa do not have merchant codes for cannabis transactions.

Defense attorneys argued unsuccessfully that the banks were complicit in processing these cannabis-related purchases by credit and debit cards.

As more cashless payment applications, such as Venmo, enter the market, cannabis businesses must be conscious of whether the services are the proper solution to their payment processing needs. Going forward, companies in the cannabis industry should be mindful of these financial services transactions to remain in compliance with federal regulations.


For more information or questions about this alert, please contact Patrick Egan of the White-Collar Criminal Defense & Regulatory Compliance Practice Group at pegan@foxrothschild.com or Joshua Horn, Co-Chair of the Cannabis Law Practice Group at jhorn@foxrothschild.com.

Joshua Ashby and Kimberly L. Kwan have co-authored a Corporate Compliance Insights article entitled “How the Corporate Transparency Act Shakes Up AML: Beneficial Ownership Updates and More.” Their article addresses the recently-enacted Corporate Transparency Act, and how that new law changes what constitutes beneficial ownership and establishes more robust automated data collection. In addition, the law increases responsibilities and incentives for employees to blow the whistle on money-laundering activity. You can read the full article by clicking here.

By Matthew D. Lee and Marissa Koblitz Kingman

The Justice Department has widened its crackdown on COVID-19 fraud, announcing the first criminal case alleging misuse of federal relief funds designated for medical providers. The egregious nature of the alleged fraud and relatively small amount of funds involved provide valuable clues about the pace, breadth and focus of future prosecutions.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 29, 2020, established the Provider Relief Fund, which distributed funds to medical providers for use in responding to the pandemic. Earlier this month, the Justice Department criminally charged the owner of a Michigan home health services business, alleging that she misused relief funds designated for medical treatment and care of COVID-19 patients by issuing checks to her family for their personal use. It is likely the first of many such cases, as federal investigators scrutinize distribution of Provider Relief Fund dollars and the use of such funds by recipients.

The CARES Act

The CARES Act was intended to provide emergency financial assistance to those suffering economic losses related to the COVID-19 pandemic. It included the Provider Relief Fund, which targeted funding to medical providers to cover the costs of pandemic response and COVID-19 patient care.

The Government’s First Prosecution

The owner of the home health services business, Amina Abbas of Michigan, was indicted February 10, 2021 on charges of embezzling government property. The Justice Department’s Criminal Division alleges that Abbas intentionally misappropriated government funds that were allocated to aid medical providers in the treatment of patients suffering from COVID-19. Abbas is the first person to be criminally charged for the intentional misuse of funds intended to provide relief to health care professionals during the coronavirus pandemic.

Abbas previously owned 1 on 1 Home Health, which closed prior to the pandemic. Nonetheless, the shuttered company allegedly received approximately $38,000 through the Provider Relief Fund to pay for the medical treatment of COVID-19 patients. The government alleges that Abbas instead distributed the funds to her family members.

The investigation was carried out by the Office of Inspector General of the United States Department of Health and Human Services (HHS-OIG) and the FBI.

Predictions for Upcoming Prosecutions

Abbas allegedly embezzled less than $40,000, a relatively small amount. However, as we have previously written, the initial Paycheck Protection Program fraud prosecutions addressed loans ranging from as little as $30,000 to $24 million. That the Justice Department’s first Provider Relief Fund prosecution involves a relatively small loan suggests that the government will be aggressively prosecuting these matters. Accordingly, we can expect to see a steady influx of new criminal cases focused on government embezzlement in the months to come.

Further, as we discussed previously, the initial PPP fraud prosecutions also appeared to represent the most egregious cases. Similarly, the government appears to be concentrated on the most brazen examples of embezzlement. In this case, Abbas allegedly used 1 on 1 Home Health, a company that was no longer in existence, to receive government money through the Provider Relief Fund and provide it to her family members. We can expect that the first wave of prosecutions will include similarly egregious matters pertaining to phantom companies.

Just as the PPP loan fraud cases came swiftly, we should anticipate the same rapidity of prosecutions as it relates to the Provider Relief Fund. The government provides a national hotline and an online complaint form available to anyone with information about wrongdoing related to COVID-19.

That multiple federal agencies investigated the Abbas matter also suggests that not only will the government be spending considerable time and resources on prosecuting these matters, but that there will also be several different government agencies involved in investigating such cases.

Any business owner concerned about compliance with the CARES Act Provider Relief Fund should immediately consult counsel and not wait to be contacted by law enforcement. Those who have already received a subpoena or inquiry from any law enforcement agency should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding.


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.

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 PPP loan violations.

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.

In recognition of the continuing economic hardship caused by the COVID-19 pandemic, the Internal Revenue Service is easing its collection activities to avoid the seizure of bank accounts containing either Economic Impact Payments or Paycheck Protection Program loan proceeds.

In a guidance memorandum issued to all collection employees, the IRS has directed that before issuing a levy, employees should contact the taxpayer in question to determine if it received a PPP loan, and if so, where the funds were deposited.  Employees are further directed that they should not levy on a bank account that contains PPP funds received within the prior 24 weeks.  If PPP funds are inadvertently levied, the IRS must release the levy unless there are exigent circumstances, such as the expiration of a statute of limitations or an indication that the taxpayer intends to dissipate assets.

In a separate guidance memorandum, collection employees are directed to contact taxpayers in advance of a levy to determine if the taxpayer received an Economic Impact Payment, and if so, where the funds were deposited.  Collection personal are directed that they must not levy on a bank account known to contain such funds received with the prior 8 weeks.  If Economic Impact Payment funds are levied inadvertently, the IRS must release the levy unless exigent circumstances exist.

The U.S. Justice Department announced its first civil settlement with a Paycheck Protection Program borrower alleged to have committed fraud in connection with this highly popular COVID-19 relief program. A bankruptcy online retailer and its chief executive officer agreed to pay $100,000 in damages and penalties to resolve claims that they committed fraud in connection with multiple PPP loan applications. The company, SlideBelts Inc., also agreed to repay its PPP loan in full.

The Paycheck Protection Program is one of the signature provisions of the CARES Act, enacted in March 2020, to provide emergency financial assistance to individuals and businesses suffering economic hardships due to the pandemic. The CARES Act initially authorized up to $349 billion in forgivable PPP loans to small businesses. In April 2020, Congress increased PPP funding by $300 billion, and just last month, Congress approved an additional $285 billion for PPP loans. To date, more than 5.2 million PPP loans have been approved in an aggregate amount of more than $525 billion.

In the early days of the COVID-19 pandemic, the Justice Department mobilized quickly to fight COVID-19 fraud nationwide. In May 2020, only a few weeks after enactment of the CARES Act, the Justice Department announced its first criminal fraud charges against two PPP borrowers. Federal prosecutors and investigators have since moved at an unheard-of pace to file criminal charges against nearly 200 PPP borrowers.

Potent Civil Fraud Tools

With its announcement of the first civil settlement, the Justice Department has demonstrated that it will use additional tools in its fraud-fighting arsenal: the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Both of these statutes authorize the government to impose massive civil penalties for fraudulent conduct and to recover damages sustained by the government as a result of such conduct.

The FCA, enacted during the Civil War, allows the government to recover damages and penalties for the presentation of false claims for payment to the United States. The statute provides for a civil monetary penalty of $23,331 (as adjusted for inflation) per false claim, as well as three times the damages suffered by the government as a result of the false claim.

FIRREA, which Congress passed in 1989 in response to the savings and loan crisis, authorizes the Justice Department to impose civil monetary penalties for violations of certain federal criminal statutes, including those that affect federally-insured financial institutions. The statute provides that the civil penalty amount for each violation shall be $2,048,915 (as adjusted for inflation).

Enormity of Civil Penalty Exposure

The SlideBelts case illustrates in stark terms the enormity of the civil penalty exposure a company may face under these statutes. While SlideBelts applied for and received only $350,000 in PPP funding, the government asserted that the company was liable for a whopping $4.2 million in damages and penalties under the FCA and FIRREA. The damages portion of this amount is only $17,500, which consists of loan processing fees. The remaining portion consists of civil penalties under the two statutes.

In the SlideBelts settlement agreement, the company did not admit liability, but acknowledged that it had submitted three PPP loan applications to different financial institutions and on each application failed to disclose that it was a debtor in bankruptcy. The first financial institution – a creditor in the company’s bankruptcy proceeding – denied the application on the basis of the bankruptcy. Pursuant to SBA regulations, companies in bankruptcy were deemed ineligible to apply for PPP funding. The second financial institution was unaware of the bankruptcy and approved the loan in the amount of $350,000.

In the settlement, the company agreed to repay its PPP loan in full and to pay the government $100,000 in damages and penalties under the FCA and FIRREA. The agreement makes clear that the government was willing to accept $100,000 in compromise of its $4.2 million civil claims only because of the poor financial condition of SlideBelts and its CEO.

The SlideBelts settlement demonstrates that the FCA and FIRREA are potent tools that the federal government can use against companies alleged to have committed fraud in connection with PPP loans. With the ability to assert multimillion-dollar penalties, and to recover damages, the government can use these statutes to obtain civil recoveries from borrowers that are exponentially higher than the principal amount of their PPP loans. And because both statutes provide for civil recoveries, the government’s burden of proof is preponderance of the evidence, a substantially easier burden to satisfy than the much higher reasonable doubt standard required in criminal cases.

Both the FCA and FIRREA provide for lengthy statutes of limitations, meaning that the government has years to investigate PPP borrowers. Finally, in most FCA settlement agreements, the government’s release will not cover criminal conduct, so that settling parties like SlideBelts and its CEO remain exposed to potential criminal charges.

On January 12, 2021, please join members of Fox’s Tax Controversy team for a review of recent developments in federal tax controversy and civil and criminal tax enforcement, as well as a look ahead at what 2021 may hold.  Matthew D. LeeJerald David August and Vivian Hoard will review recent developments in federal tax controversy with a focus on the following topics:

  • Developments in IRS enforcement regarding conservation easements
  • Latest updates and guidance regarding centralized partnership audit rules
  • Federal tax enforcement in the age of COVID-19
  • Developments in the United States Tax Court
  • IRS-Criminal Investigation Division update

To register for this free event, please click here.

The Consolidated Appropriations Act, 2021 (Act), signed into law on December 27, 2020, amends certain tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Families First Coronavirus Response Act (FFCRA). It also clarifies the tax treatment of Paycheck Protection Program (PPP) loan forgiveness, extends certain deferred payroll taxes and expands the deduction for business meals, among other provisions.

While the Act is helpful in extending and expanding current tax benefits, as well as providing new tax relief to businesses, certain benefits may not be realized until the 2021 tax year.

Forgiveness of PPP Loans

The Act provides that with respect to original and second draw PPP loans allowed to certain small business under the Act “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income [of forgiven PPP loan amounts].”

Under the CARES Act, PPP loan forgiveness does not result in taxable cancellation of indebtedness income, or a loss of tax attributes. The Internal Revenue Service (IRS) previously stated that expenses paid with PPP loan proceeds were not deductible for U.S. federal income tax purposes. The Act reverses the IRS’s position and allows taxpayers whose PPP loans are forgiven to deduct otherwise deductible expenses paid with PPP loan proceeds. The Act also provides additional allowable and forgivable uses for PPP funds such as covered operations expenditures, property damage costs, supplier costs, and worker protection expenditures.

Pass-Though Entities
With respect to partnerships and S corporations, the Act clarifies that any amount excluded from income due to PPP loan forgiveness will be treated as tax-exempt income and will increase an S corporation shareholder’s stock basis and a partner’s basis in their partnership interest. This basis increase does not appear to occur until the loan is forgiven. Therefore, if a PPP loan is not forgiven until 2021, the deduction for expenses paid with PPP loan proceeds in 2020 may be limited due to inadequate tax basis.

Example:
Assume that an S corporation obtained a PPP loan for $500,000. The S corporation has one shareholder who has a stock basis of $0. The S corporation used the $500,000 to pay eligible expenses such as payroll, rent, and utilities and intends to deduct such expenses on its 2020 U.S. federal income tax return. As a result of the deductions, the S corporation will recognize a $500,000 loss for the year. The S corporation requested PPP loan forgiveness from its lender and anticipates that the loan will be forgiven. However, the S corporation is not informed of the loan forgiveness until 2021. In this scenario, it appears that the S corporation will not recognize tax-exempt income until the loan is forgiven in 2021. The S corporation shareholder will not be permitted to increase his or her stock basis until 2021 when the S corporation recognizes tax-exempt income as a result of the PPP loan forgiveness. As the $500,000 loss incurred in 2020 is in excess of the shareholder’s stock basis ($0), the shareholder will not be permitted to claim the loss until he or she has sufficient stock basis, which will not occur until 2021.

State Tax Treatment of PPP Loan Forgiveness
There is some question as to whether particular states will follow the provisions in the Act in permitting taxpayers both non-taxable treatment of PPP loan forgiveness and the deduction of expenses paid with PPP loan proceeds. Typically, states either conform to the Internal Revenue Code on a rolling basis (i.e., as changes are enacted) or on a static basis (i.e., as of a certain date). States that have rolling conformity are likely to permit both the deduction of expenses incurred with PPP loan proceeds and the non-taxable treatment of PPP loan forgiveness. To the extent that states with static conformity do not explicitly adopt the recent changes, they may not allow taxpayers either or both of these benefits. Finally, certain states (e.g., California and Pennsylvania) adopt certain provisions of the Internal Revenue Code as of a specified date. Businesses should continue to monitor state revenue department guidance to determine whether they may avail themselves of the tax benefits provided in the Act.

Employee Retention Credit

As originally enacted in the CARES Act, the Employee Retention Credit was generally available to all employers regardless of size, including tax-exempt organizations, but excluding (i) government employers, and (ii) small businesses that receive a Paycheck Protection Program (PPP) loan under the CARES Act, unless the loan was repaid by May 14, 2020. The credit was limited to 50 percent of qualified wages that employers pay their employees after March 12, 2020 and before January 1, 2021. The maximum credit was $5,000 per employee, allowable against the employer’s share of social security taxes.

The Act extended and expanded the Employee Retention Credit for calendar quarters beginning after December 31, 2020. Under the extension, qualified wages must be paid before July 1, 2021 (instead of January 1, 2021). Additionally, beginning on January 1, 2021, the credit is increased from 50 percent to 70 percent of qualified wages and qualified wages are increased from $10,000 for the year to $10,000 per quarter (increasing the annual cap from $5,000 to $28,000).

The Act further amended the CARES Act retroactively to permit PPP loan recipients to claim the credit. For PPP loan recipients, the Act provides that a recipient must either (1) exclude “qualified wages” that qualified for PPP loan forgiveness from its payroll costs; or (2) exclude “qualified wages” that allowed the employer to claim the credit from its payroll costs in determining its PPP loan forgiveness amount. These two restrictions ensure that a PPP loan recipient is not receiving a double benefit by claiming the credit for wages that were paid with PPP loans that are ultimately forgiven.

The Act also decreased the required year-over-year gross receipts decline from 50 percent to 20 percent, and added a safe harbor allowing employers to use the immediately preceding calendar quarter to determine their eligibility, both as of January 1, 2021. Under the Act, an employer qualifies for the Employee Retention Credit for the period beginning in a calendar quarter in which the employer’s gross receipts are less than 80 percent of gross receipts for the same calendar quarter in 2019 and ending with the first calendar quarter that follows the first calendar quarter in which the employer’s 2021 quarterly gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.

Prior to amendment, the CARES Act provided that an employer with more than 100 full-time employees could only count qualified wages of employees who were not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. As January 1, 2021, the Act increases the employee threshold from 100 to 500 full-time employees for 2021. This increase permits employers with 500 or fewer employees to claim the credit for qualified wages paid to employees who continue to provide services.

In addition, employers are now permitted to claim the Employee Retention Credit for bonus pay to essential workers due to the removal of the 30-day wage limitation (which provided that wages were only qualified wages for the purposes of the Employee Retention Credit if they did not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding the wage period).

The Act further expands eligibility for the credit by permitting public colleges and universities, public healthcare and medical providers and federal credit units to claim the Employee Retention Credit in 2021.

Paid Sick and Family Leave Credit

The FFCRA originally provided an eligible employer with refundable payroll tax credits to cover wages paid to employees while they take time off under the FFCRA paid sick and family leave programs between April 1, 2020 and December 31, 2020. The Act amended the FFCRA by extending the period during which employers may claim credits for emergency paid sick leave and paid family leave to March 31, 2021.

Deferred Payroll Taxes

On August 8, 2020, President Trump issued a presidential memorandum permitting employers to defer withholding, deposit and payment of the employee portion of Social Security taxes for any employee with pre-tax wages or compensation during any biweekly pay period that were less than $4,000 between September 1, 2020 and December 31, 2020. Employers were required to withhold and pay the deferred payroll taxes from wages paid between January 1, 2021 and April 30, 2021. The Act extends the deferral of the withholding, deposit and payment of the employee portion of Social Security taxes to December 31, 2021.

Business Meals Deduction

Taxpayers were permitted under the Tax Cuts and Jobs Act of 2017 to deduct 50 percent of business meal expenses. The Act now increases the credit amount to permit businesses to deduct 100% of business meals expenses during 2021 and 2022.

By Gabriel B. Herman

The $900 billion Consolidated Appropriations Act of 2021 (the Act) modifies the Paycheck Protection Program (PPP) in a variety of business-friendly ways likely to benefit both existing PPP borrowers and businesses that receive a second PPP Loan.

Specifically, the Act includes the following noteworthy changes:

Uses Eligible for Forgiveness

The Act expands on the types of expenses that PPP borrowers may use their proceeds to pay and later seek forgiveness. Notably, these changes apply to existing borrowers that have not received loan forgiveness.

Originally, PPP borrowers were eligible to seek forgiveness only for amounts spent on payroll costs, covered mortgage interest payments, rent and certain utility payments. In addition to the original permitted uses, the Act now permits PPP borrowers to seek forgiveness for the following:

  • Covered Operations Expenditures: payments for any business software or cloud computing service that facilities business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
  • Covered Property Damage Costs: costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that was not covered by insurance or other compensation.
  • Covered Supplier Costs: expenditures made to a supplier for goods that are essential to the operation of the PPP borrower at the time at which the expenditure is made, and is made pursuant to a contract, or order in effect any time before the applicable covered period or with respect to perishable goods, in effect before or at any time during the covered period.
  • Covered Worker Protection Expenditures: operating or capital expenditure to facilitate the adaptation of business activities to comply with requirements established or guidance issued by the DHS, CDC, OSHA, or equivalent state or local guidance. Examples of eligible expenses include amounts spent to purchase, maintain, or renovate indoor, outdoor, and drive-through business space, as well as personal protective equipment.

The inclusion of such additional covered costs is likely to benefit existing PPP borrowers who have not yet received forgiveness and who were previously unable to use 100% of their loan proceeds on forgivable expenses. In such an instance, existing PPP borrowers may now be able to increase the amount of loan forgiveness sought by including proceeds spent on the newly added covered expenses.

The Act does not modify the requirement that 60% of the forgiven amount be spent on eligible payroll costs.

Forgiveness Process

The Act introduces a simplified forgiveness application for PPP borrowers with loans of $150,000 or less. Such borrowers now only need to execute a one-page certification as to the number of employees the company was able to retain, the estimated amount spent on covered payroll costs and the total loan amount. Unlike previous applications, the forgiveness certification for loans of $150,000 or less will not require that PPP borrowers document how responses to certain questions were determined. Rather, PPP borrowers will only be required to self-certify as to PPP eligibility and how loan proceeds were used. PPP borrowers will remain obligated to comply with certain record-keeping requirements including the need to retain employment and payroll records for four years. PPP borrowers should be aware that the SBA reserves the right to audit the forgiveness certification. Congress has instructed the SBA to release the forgiveness certification within seven days of the Act becoming law.

The Act does not alter the Loan Necessity Questionnaire (form 3509) required to be submitted by each PPP borrower that, together with its affiliates, received a PPP loan in the original principal amount of $2 million or more.

Tax Treatment

Reversing prior IRS rulings, the Act confirms that: (1) the amount of loan forgiveness will not be considered taxable income and (2) deductible expenses paid with forgiven PPP proceeds will remain tax-deductible.

In IRS Revenue Ruling 2020-27 issued earlier this fall, the IRS stated that expenses paid with forgiven PPP proceeds typically would not be deductible. The Act overrides that Revenue Ruling and provides that the expenses are deductible, despite the fact that the loan proceeds are not includable in income. This change is retroactive and applies to all PPP borrowers, whether forgiveness has or has not been granted.

EIDL Changes

The Act makes clear that EIDL grants are not taxable income and businesses will not forgo a tax deduction for qualified expenses paid for with EIDL funds. In addition, the Act repeals the prior requirement that an EIDL grant would reduce the amount of PPP forgiveness. The SBA is expected to issue guidance as it relates to borrowers that have already received loan forgiveness and whose forgivable amount was reduced by the amount of its EIDL grant.

Due to the historically changing nature of the PPP, we encourage all existing PPP borrowers, and businesses interest in borrowing under the PPP Second Draw, to continue to monitor Fox Rothschild’s Coronavirus Response Resource Center for future updates.