PRINT PAGEPPP Fraud and Emerging Enforcement Issues: What Attorneys Need to Know
The CARES Act was enacted in March 2020 to provide emergency financial assistance to people enduring economic hardship from the COVID-19 pandemic. The act created new programs and expanded existing programs administered by the Small Business Administration.
On Aug. 5, President Joe Biden signed into law two bills, extending the statute of limitations for the government to file civil enforcement actions and criminal charges for fraud in obtaining pandemic-related financial assistance under these programs. The two pieces of legislation—the COVID-19 EIDL Fraud Statute of Limitations Act and the PPP and Bank Fraud Enforcement Harmonization Act—extend the statute of limitations to 10 years, aligning with the existing 10-year statute of limitations for prosecuting bank fraud under 18 U.S.C. Section 1344, and mail and wire fraud affecting a financial institution under 18 U.S.C. Sections 1341 and 1343.
The liaison of the Department of Justice with various agencies, including the Secret Service, the FBI, the Office of the Inspector General, the Small Business Association, and even with Congressional Representatives, has led to an unprecedented rise in criminal prosecutions and forfeiture of assets for pandemic-related fraud. According to DOJ press releases, as of March 2021, prosecutors had charged just over 100 defendants with crimes in connection with pandemic relief programs. By March 2022, that number had exploded, with DOJ reporting over 1,000 defendants charged and the seizure of more than $1 billion in assets. The fraud charges usually involve allegations of lies and misrepresentations in applications, using multiple (false) identities to apply for multiple benefits, applying for benefits for nonexistent businesses, using benefits proceeds for unauthorized purposes (for example, to buy real estate, jewelry or take vacations), and perpetuating the fraud by lying during audits or investigations.
The Department of Justice has also aggressively pursued forfeiture of assets, having at its disposal harsh forfeiture laws that can cause economic ruin to individuals and businesses. Most recently, in a case alleging that a defendant committed bank fraud and money laundering by making misrepresentations to procure a line of credit and then “laundering” the funds by timely repaying the debt with interest, the U.S. Court of Appeals for the Eleventh Circuit upheld the forfeiture of the defendant’s assets equal to the total amount of funds laundered. Although the bank suffered zero loss, the court of appeals ruled that the defendant was still required to forfeit to the U.S. government the full amount of the funds that were returned to the bank. See United States v. Waked Hatum, 969 F.3d 1156 (11th Cir. 2020), cert. denied, 142 S. Ct. 72 (2021).
The government’s pandemic-related fraud enforcement campaign has also expanded into the civil arena. The civil fraud section of the Department of Justice has filed cases under the Financial Institutions Reform, Recovery, and Enforcement Act and the False Claims Act, having recently reported that the department has proceeded civilly against more than 1,000 defendants.
Individual borrowers are not the only ones at risk. Lenders have also fallen in the government’s crosshairs, with the Department of Justice aggressively pursuing alleged violations of banking and other regulations. The Secret Service, the Office of the Inspector General, and the Congressional Subcommittee on the Coronavirus Crisis have turned their attention to certain FinTech lenders and their banking partners, alleging that these companies are linked to a disproportionate number of PPP loan activity or other “red flags.” In reality, because pandemic relief programs were fast-paced and intended to be deployed quickly under emergency conditions, these lenders may very well have acted in good faith and may have been the victims of fraud perpetrated by others—for example, by unwittingly approving loans based on false applications or forged documents, without having had the time and opportunity to implement robust fraud and anti-money laundering controls.
The government has made it clear that the force and pace of these investigations will not abate any time soon, so it’s important that individuals gather all documents and evidence to show that they acted in good faith. In a federal criminal fraud case, the government must prove that the defendant acted with the intent to defraud. Acting in good faith is therefore a complete defense to a fraud charge. Acting in good faith simply means that the defendant acted based on a belief or opinion that she honestly held, even if that belief or opinion turned out to be wrong and even if others were injured by her conduct. Importantly, a defendant charged with fraud does not have to prove that she acted in good faith; it’s the government’s burden to prove that the defendant acted with intent to defraud. And a defendant who is on trial for fraud is entitled to ask the judge to instruct the jury that good faith is a complete defense to the charges.
Also, good faith reliance on the advice of a lawyer can be a defense to a fraud charge because a person who acts in good faith, based on the advice she received from a lawyer, is not acting with an intent to defraud. For similar reasons, good faith reliance on the advice of a qualified accountant can be a defense to willfulness in a tax fraud case. Someone who disclosed all material facts to a lawyer or accountant, and in good faith relied on the advice she received, is entitled to present evidence of that defense to the jury and request a corresponding jury instruction. Although the defendant does bear an evidentiary burden with the defenses of good faith reliance on a lawyer or other professional, the burden to get a jury instructions on these defenses is low and any foundation in the evidence is sufficient to justify the instruction, even if the court believes the defense evidence is doubtful, unbelievable or weak.
The CARES Act provided a safety net to millions of people during unparalleled and scary times. Fast-tracking benefit payments was critical, as we heard daily accounts of friends, family members, neighbors, or co-workers depleting their emergency savings and suffering food insecurity, eviction, and other significant financial hardships. The government lacked much of the robust anti-fraud controls and infrastructure needed to administer these programs expeditiously under the emergency conditions we were suffering at the time, which is understandable. Borrowers and lenders who acted in good faith should not now be held responsible for the shortcomings of these programs, nor should lenders be held to a standard of due diligence that could not have been implemented and deployed in short order during the crisis the country was suffering.
—Law clerks Alyssa Vincent and Brandon Shinder from the University of Miami School of Law contributed to this article.
Jackie Perczek is a partner at Black Srebnick in Miami. Her practice focuses on all phases of white-collar and criminal defense litigation, including investigations, trials and appeals.
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