If there is a lesson from the cases involving business owners experiencing bank freezes or encouners with law enforcement so far, it is the impression that banks and Justice Department officials have tried to apply standard law enforcement protocols irrespective of the nature of the allegations or the size of the fraud.

It failed; it consumes vast government resources while risking over-criminalization. Not every hard-working but struggling business owner should face asset freezes and criminal prosecution just because, for example, they made a simple accounting error. To be clear, the vast majority of clients did not buy a new boat or a luxury car from loan money; they simply miscalculated the correct loan amount at a time when even their own CPA was understandably unfamiliar with the qualifying requirements.

Recognizing the dilemma, Assistant United States Attorney Matthew R. Belz from the Eastern District of California promulgated a sound solution that punishes the applicant for the mistake while redistributing the monies plus penalties back to the government.

First Nationwide Civil Settlement of PPP Loan Fraud

The U.S. Department of Justice (DOJ) just announced that it has entered into the first civil settlement arising out of fraud allegations under the federal Paycheck Protection Program (PPP). The case involved SlideBelts Inc. and its CEO, Brigham Taylor. SlideBelts Inc. had obtained a $350,000 loan under the PPP.

The DOJ’s decision to enter into a civil settlement represents a reasoned approach to resolving many PPP loan fraud investigations. While some cases of fraud under the PPP warrant criminal prosecution, it is equally clear that many do not. In many cases, companies and their executives unknowingly violated the hastily drafted and difficult-to-interpret terms of the PPP. Additionally, many companies, including SlideBelts Inc., have cooperated with the DOJ and returned their PPP loan funds upon facing investigations, and resolving these types of cases through civil settlement allows for an efficient resolution with appropriate outcomes for the company, the federal government, and the PPP lender.

Civil Settlement Results in Return of $350,000 PPP Loan, Payment of $100,000 in Damages and Penalties

SlideBelts Inc. is an internet retail company that sells belts, wallets, watches, and other personal accessories. After filing for bankruptcy, SlideBelts Inc. applied for a PPP loan from multiple banks during the COVID-19 pandemic. In the company’s PPP loan applications, SlideBelts Inc. and Taylor misrepresented that the company was not in bankruptcy, “in order to influence [] banks to approve, and the Small Business Administration (SBA) to guarantee,” a PPP loan. SlideBelts Inc. eventually obtained a PPP loan of $350,000.

According to the DOJ, SlideBelts Inc. returned the loan, “in response to demands by the United States.” During the DOJ’s investigation, SlideBelts Inc. and Taylor admitted to making false statements on the company’s PPP loan applications in violation of the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Rather than pursuing criminal charges under the False Claims Act, the DOJ opted to pursue a civil settlement that fully resolved the allegations against SlideBelts Inc. and Taylor. Besides returning the $350,000 PPP loan, as part of the settlement SlideBelts Inc. and Taylor agreed to pay a combined $100,000 in damages and penalties.

Civil Settlement is the Right Approach for Many PPP Loan Fraud Investigations

A civil settlement is the right outcome in this type of case. While SlideBelts Inc. and Taylor admitted to making false statements to multiple banks 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 reference intent, but criminal charges were not warranted under the circumstances presented.

“While criminal fraud under the PPP is indeed a very real issue, many cases of PPP fraud do not warrant criminal prosecution. In particular, struggling small businesses that made mistakes—and that can correct those mistakes by repaying their PPP loans or through other means—deserve to be spared from the extreme costs and risks of going to trial on federal criminal charges.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Not only does the DOJ’s civil settlement allow for the PPP lender to recoup its loan and the federal government to cover the costs of its investigation, but it also gives SlideBelts Inc. – a small business that was struggling during the COVID-19 pandemic – another chance to succeed. By using civil settlements to efficiently resolve PPP loan fraud cases that require attention but do not justify devotion of the resources necessary to pursue criminal prosecution, the DOJ can fulfill its mission while adequately serving the interests of all parties involved.

Understanding Fraud Allegations Under the PPP

When it was first announced, the PPP represented an essential lifeline for small businesses that were struggling because of shutdowns and other economic impacts of the COVID-19 pandemic. Established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP offered forgivable, low-interest loans to struggling businesses from banks that received guarantees from the U.S. Small Business Administration (SBA). To get PPP loan funds into businesses’ bank accounts as quickly as possible, the SBA outlined the parameters of the program, but its guidance still left many questions unanswered.

As a result, when the PPP opened and applications flooded in, many of these applications contained errors and omissions. Under federal laws including the False Claims Act and FIRREA, these errors and omissions are cast as fraud. For example, some of the more-common mistakes (made both intentionally and unintentionally) on PPP loan applications included:

• Misrepresenting that the company qualified as a “small business concern.”

• Misrepresenting that “the uncertainty of current economic conditions make necessary the loan request to support the ongoing operations of the eligible recipient.”

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

• Misrepresenting that loan proceeds would be used only for payroll and other qualifying expenses under the PPP.

• Trying to obtain (or actually obtaining) PPP loans from multiple lenders—a practice called “stacking.”

As questions about PPP eligibility and funding requirements continued to arise, the SBA updated its guidance (mainly its series of FAQs) to provide additional instructions to PPP loan applicants and recipients. Yet, uncertainty remained, and invalid applications continued to flow into banks throughout the second round of PPP funding.

Besides errors and omissions on PPP loan applications, many PPP loan recipients have made mistakes on the use of their loan proceeds as well. Loan certification fraud has also been a key focus for both the DOJ and the U.S. Department of the Treasury.

The purposes for which qualifying businesses could use PPP loan proceeds were limited. Specifically, the CARES Act allowed loan proceeds to be used only for (i) payroll expenses, (ii) interest and rent payments under pre-existing obligations, (iii) insurance premiums, and (iv) utilities. To have their loans forgiven, the CARES Act required loan recipients to certify that they had complied with the program’s requirements.

But many PPP loan recipients were unaware of, or did not fully understand, the limitations that applied to their use of PPP funds. Many recipients also did not know the steps required (i.e., establishing a separate account and carefully documenting all PPP loan expenditures) to show compliance. Relying on media coverage of the PPP’s “interest-free loans,” many small businesses assumed that certification was simply another formality in the PPP loan process. As a result, when it can time to certify, many small businesses either did not understand what was required, did not take the implications seriously, or were at a point where they needed forgiveness to survive.

Of course, not all loan applicants’ false statements resulted from confusion or lack of clarity on the PPP’s eligibility criteria and loan use requirements. Many PPP loan applicants knew (or at the very least suspected) that their applications were non-compliant. Even so, in many cases the rewards of criminal prosecution will still be outweighed by the efficiencies and practicalities of targeting a civil settlement so that the DOJ can focus its criminal law enforcement efforts elsewhere.

When (if Ever) is Criminal Prosecution Warranted in a PPP Loan Fraud Investigation?

To be clear, some PPP loan fraud cases do warrant criminal prosecution. Besides the SlideBelts Inc. civil settlement, the DOJ has also announced several criminal cases involving PPP loan fraud. These cases have involved allegations ranging from fabricating entire businesses to claiming that sole proprietorships have dozens of employees, and from submitting altered tax returns to certifying to PPP compliance after using loan proceeds to pay for luxury cars, swimming pools, and other personal expenses.

When individuals knowingly and intentionally defraud banks for their own personal benefit, this is a different scenario from a small business making a mistake that can be corrected. Criminal acts deserve to be prosecuted as such—especially when they seek to exploit programs designed to help those in need in times of crisis. Seeking substantial fines and prison time in these types of cases is well worth the DOJ’s resources, as it not only punishes the wrongdoer but also serves a deterrent effect for other would-be scam artists.

Still, when a civil settlement adequately serves the DOJ’s law enforcement goals, then a civil settlement is enough. Devoting federal resources to prosecuting small businesses that made mistakes and won’t make the same mistakes again isn’t worth it. Not only that, but the inefficiency of pursuing unnecessary criminal charges ultimately frustrates the DOJ’s purpose of enforcing the terms of the PPP and helping banks and the government recoup as much of their fraudulent losses as possible.

The DOJ’s efforts to enforce the PPP won’t be ending any time soon. As federal prosecutors continue to evaluate and pursue allegations in PPP loan 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 it will give the DOJ the greatest chance to favorably resolve as many PPP loan fraud cases as possible.