What Were the Requirements of the PPP Loans?
PPP loans enabled all businesses with 500 employees or fewer to apply for loans to mitigate the impact of COVID-19, including corporations, limited liability companies, nonprofits, and sole proprietorships. The terms and conditions of PPP (Paycheck Protection Program) loans were the same for every company or business.
Businesses that received PPP funds could pursue loan forgiveness if they met two requirements. First, within eight weeks of receiving the loan, the proceeds must have been used for payroll costs, mortgage loan interest, rent, or utilities. Second, the businesses must have maintained their existing levels of employee compensation.
Additionally, it is estimated that payroll costs should have represented at least 75 percent of proceeds used to qualify for full loan forgiveness. But even if a business failed to qualify for loan forgiveness, payments on PPP (Paycheck Protection Program) loans were deferred for at least six months.
What Qualified as Payroll Costs Under the PPP?
In the context of the PPP (Paycheck Protection Program), there is a specific definition of what qualified as a payroll cost. This is vitally important, as using PPP funds for payroll costs led to full loan forgiveness. Payroll costs include
- Salary, wages, commissions, or tips (with an annual maximum of $100,000 per person);
- Employee benefits, such as medical, vacation, leave, retirement, or separation benefits;
- Compensation taxes assessed at the local or state levels; and
- Wages, commissions, income, or net earnings for sole proprietors or independent contractors (with an annual maximum of $100,000 per person).
PPP Loan Fraud Penalties & Sentencing
A conviction under Section 1346 carries a maximum sentence of 20 years in prison and fines of up to $250,000.
However, the prison sentence can increase to 30 years and the fine to $1,000,000, if the Section 1346 violation:
- occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency (as defined by the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122)), or
- affects a financial institution.
Although penalties for a conviction under Section 1346 include imprisonment for not more than 30 years, a fine for as much as $1,000,000, or both, the role a defendant plays in the offense and the specific characteristics of the offense may impact their penalty if convicted. A common sentencing enhancement, or increase, is considered if the defendant was an organizer or leader in the alleged honest services loan fraud. Additional factors may result in a further increase to the sentence may be imposed, including: the amount of loss, the number of victims, the number of victims who sustained substantial financial hardship, the presence of a conscious or reckless risk of death or serious bodily injury, and other factors. Conversely, defendants who played a minor or minimal role may qualify for a mitigating adjustment, or a decrease in their penalty. However, the defendant bears the burden of proof in qualifying for a mitigating role reduction.
What Happens if Someone Lied on a PPP Application or Misuses PPP Loan Money?
Any person who lied on a PPP (Paycheck Protection Program) application or misused PPP funds will likely face federal criminal charges. To put it bluntly, the U.S. government is monitoring the PPP process very carefully. And even though this program is relatively new, the Department of Justice (DoJ) has already filed criminal charges related to loan fraud and the PPP (Paycheck Protection Program).
On May 5, 2020, the U.S. government filed the first criminal charges related to the PPP. In this case, two Rhode Island businessmen face various federal charges – including making false statements and bank fraud – after applying for a PPP or Paycheck Protection Program loan. These businessmen claimed to have numerous employees working for multiple corporate entities when they actually had zero employees.
On May 13, 2020, the United States government filed criminal charges against a reality TV personality from Atlanta. This person faces federal charges for bank fraud after misappropriating PPP finds. After receiving approximately $2 million in PPP loans for his business, this man spent more than $1.5 million on jewelry and child support.
Also on May 13, 2020, the United States government filed criminal charges against an engineer from Texas. This person faces federal charges for making false statements, wire fraud, and bank fraud after misrepresenting his number of employees. After applying to several banks for PPP loans claiming to have more than 250 employees, evidence indicated that this man’s company had zero employees.
In all three of the aforementioned criminal cases, the defendants face federal criminal charges for fraudulent activities related to the PPP.
To understand exactly why these defendants are facing criminal charges, it will be helpful to review United States federal laws together with a criminal defense lawyer governing false statements, wire fraud, and bank fraud.
What are the Federal Laws Against Making False Statements (18 U.S.C § 1014)?
18 U.S. Code Section 1014 prohibits any person from making false statements in connection with applications for federal loans or credit. This section also makes it unlawful to willfully overvalue property in order to obtain loans or credit.
If a person knowingly lies on an application for loans or credit from a federal financial institution – with includes FDIC-insured banks, federal government agencies, and various other entities – it is a federal crime in the United States. Concerning the PPP or Paycheck Protection Program, specifically, any person who knowingly lies or willfully misrepresents information on the application will face federal criminal charges.
The penalty for making false statements in violation of Section 1014 is a maximum sentence of 30 years in federal prison and up to $1 million in criminal fines.
What are the Federal Laws Against Wire Fraud (18 U.S.C § 1343)?
18 U.S. Code Section 1343 makes it illegal to commit federal fraud using wire, radio, or television signals. If the wire transmissions in question involve foreign or interstate commerce – and attempt to perpetrate fraudulent pretenses for money or property – then it qualifies as a federal crime.
If a person fraudulently receives a disbursem*nt or similar benefit from a federal financial institution, it qualifies as wire fraud under Section 1343. In the case of the PPP, this means that any person who receives a loan disbursem*nt and misappropriates the funds can face federal charges for wire fraud.
The penalty for committing wire fraud against a financial institution in violation of Section 1343 is a maximum sentence of 30 years in federal prison and up to $1 million in criminal fines.
What are the Federal Laws Against Bank Fraud (18 U.S.C § 1344)?
18 U.S. Code Section 1344 makes it unlawful to commit fraud against a federal financial institution, including many banks. Federal bank fraud crimes include attempts to defraud financial institutions and also efforts to attempt credit, loans, or similar benefits under fraudulent pretenses.
Taken as a whole, any person who commits fraud such as PPP loan fraud, or attempts to commit loan fraud related to the PPP will likely face federal bank fraud charges.
The penalty for committing bank fraud in violation of Section 1344 is a maximum sentence of 30 years in federal prison and up to $1 million in criminal fines.
