Prosecutions Of Covid-19 Fraud In South Florida

Dmitriy Smirnov

August 20, 2024

Firm News

When the federal government launched financial aid programs during the COVID-19 pandemic such as the Paycheck Protection Program  (“PPP”) and the Economic Injury Disaster Loan Program (“EIDL”), many in the blogosphere and media predicted that South Florida, with its rich history of healthcare and many other fraudulent “get-rich-quick” schemes, would soon become the epicenter of COVID-19 fraud.  In 2022, the federal Government launched three national COVID-19 Fraud Strike Force Teams to investigate and prosecute both PPP loan fraud and EIDL loan fraud, and sure enough, South Florida was home to one of the strike force teams. Prosecutors in the Southern District of Florida, working alongside counterparts from the Fraud Section of the Department of Justice, have brought dozens of cases in federal court in South Florida accusing individuals of violating several federal laws in taking COVID-19 relief money to which they were not entitled. And after conviction by either guilty plea or trial verdict, individuals have been sentenced to long prison sentences and forced to either forfeit the relief funds they took, or in some cases, even provide restitution for relief funds provided to others.  Recent trends in the law, coupled with public statements warning that the Government intends to keep investigating and prosecuting such cases for the foreseeable future, suggest that PPP loan fraud and EIDL loan fraud will be the focus of many federal cases to come. 

BACKGROUND

In the throes of the global COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to help ease the financial pressure of temporary business shutdowns. The CARES Act authorized an arm of the Federal Government, the Small Business Administration (“SBA”) to guarantee loans provided by financial institutions to small businesses affected by the pandemic so long as the recipient of the loan used the funds for certain enumerated purposes, such as payment of employee salaries, rent, utilities, and other specified costs and expenses. Soon after passage of the CARES Act, the SBA provided an Interim Final Rule that provided specific guidance on what the loans proceeds under the PPP could be used for. The Interim Final Rule also required PPP loan applicants to submit a “good faith certification” stating that the funds would be used to retain workers, maintain payroll, or one of the other enumerated purposes with the understanding that if the funds were in fact used for an unauthorized purpose, the Federal Government could hold the applicant legally liable.  

The CARES Act also increased eligibility for economic injury disaster loans (EIDL) and established an emergency EIDL grant program.  The law expanded eligibility for EIDL loans to businesses with 500 or fewer employees, sole proprietorships, and even independent contractors, and allowed the emergency grant program to provide advance payments of up to $10,000, which were not required to be repaid even if the borrower ultimately was denied the EIDL. Entities could use EIDLs to pay for expenses, such as fixed debt, payroll, or other operating expenses, that could have been met had the disaster not occurred, and entities could apply for both EIDLs and PPP loans.

Loan applications for PPP and EIDL funds flooded banks across the country in 2020. According to SBA data, as of October 2023, $792.6 billion dollars was loaned to about 11.5 million applicants, but approximately $20.5 billion, or 2.6 percent of the national total, went to applicants in Miami-Dade, Broward, and Palm Beach Counties. South Florida’s population is about 1.8 percent of the total national population, so the percentage of PPP proceeds provided to South Florida applicants was disproportionately high. But higher still was the number of loans approved in South Florida. Over 445,000 PPP loans were provided to South Florida applicants, over 4.2 % of the number of loans approved across the nation.  Given the high number of loans provided to South Florida applicants, it was hardly surprising that the Department of Justice would establish one of the COVID-19 fraud task forces here.

GOVERNMENT APPROACHES TO PROSECUTING COVID-19 FRAUD

The Government has taken an aggressive approach in investigating and prosecuting PPP loan fraud and EIDL loan fraud, including by publicly touting an anonymous tip line in press releases and providing financial incentives to whistleblowers. The federal False Claims Act, which imposes civil penalties on individuals and entities that obtain funds from the federal government through fraud, also provides a share of recovery of fraudulently obtained funds to individuals who bring the fraud to the Government’s attention. Specifically, individuals who have knowledge of fraud against the federal government can bring qui tam complaints on behalf of the United States with the assistance of a qualified attorney, and, if such complaints are ultimately successful, can typically receive 15-30% of the recovery.   The Government often publicizes the success of qui tam actions to recover the proceeds of PPP fraud to encourage individuals with knowledge of fraud to come forward; recently, the Department of Justice touted a $9 million recovery to settle a qui tam action filed in the Northern District of Texas alleging PPP loan fraud.

In addition to civil suits, the Government often brings criminal actions in federal court alleging the violation of several federal statutes.  The most common statutes contained in PPP fraud and EIDL fraud indictments include:

• Wire Fraud (18 U.S.C. § 1343) – this statute makes it a federal crime to transmit a message by wire (text messages and emails count) to help execute a scheme to defraud or obtain funds by means of false representations or promises. The Government typically attempts to prove wire fraud by introducing evidence of emails or text messages sent by a defendant to assist a PPP loan fraud or EIDL loan fraud scheme. It’s important to note that the Government doesn’t need to show that the emails or texts contain any false statements so long as they can show the sender’s intent to engage in fraud. It’s also important to note that the Government also doesn’t need to show that the PPP or EIDL loan was in fact approved so long as they can show the defendant’s intent to defraud. 

The Government must bring alleged violations of the wire fraud statute within five years of the alleged scheme to defraud.  The maximum penalty for violating this statute is normally 20 years’ imprisonment, but as PPP fraud typically affects a financial institution, and as EIDL fraud typically involves a presidentially declared major disaster or emergency, the maximum sentence is raised to 30 years’ imprisonment and a fine of up to $1,000,000. 

• Bank Fraud (18 U.S.C. § 1344) – this statute makes it a federal crime to execute a scheme to defraud a federally-insured financial institution (such as a bank) or to obtain funds in the institution’s control.  The Government typically attempts to prove bank fraud by introducing evidence of false statements by the loan applicant about the need for, and the purpose of, a PPP loan, then demonstrating what the proceeds were actually used to buy or fund. 

The bank fraud statute has an extended statute of limitations: rather than requiring the Government to bring charges five years after the alleged misconduct, the Government can bring charges up to ten years after the alleged misconduct.  The maximum penalty for violating this statute is 30 years’ imprisonment and a fine of up to $1,000,000. 

False Statement to Bank (18 U.S.C. § 1014) – this statute makes it a federal crime to make a false statement to a financial institution in a loan or mortgage application. Generally speaking, in the context of PPP loan fraud, the same evidence that supports bank fraud and wire fraud charges typically also supports a violation of this statute as well.  Like the bank fraud statute, the false statement to bank statute also provides an extended 10-year statute of limitations and a 30 year / $1,000,000 maximum prison sentence and fine. 

Money Laundering (18 U.S.C. §§ 1956 and 1957) – these statutes make it a federal crime to transfer the proceeds of another federal crime (such as bank fraud, false statements to banks, or wire fraud) from one bank account to another, either to hide or conceal the source of the funds or simply to spend the fraudulent proceeds.  The Government typically attempts to prove these cases with either witness testimony or bank records showing the movement of the proceeds they must prove were fraudulently obtained. The Government frequently uses these statutes to charge individuals who may not have made false statements to a financial institution but knew that others made the false statements and helped to move the loan proceeds. The Government frequently targets such individuals early in an investigation and attempt to get them to cooperate against the people who made the alleged false representations to the bank.

Hiding or concealing the source of the proceeds carries a ten-year statutory maximum, while spending the proceeds carries a five-year maximum. The Government must bring allegations of money laundering within five years of the conduct.

Conspiracy—The Government often charges individuals with agreeing with others to commit a crime. This agreement – called “conspiracy” – is itself a criminal violation that often carries the same penalty as the commission of the illegal act itself. 

A recent trend in PPP loan fraud cases shows that the Government aggressively uses conspiracy charges not only to encourage cooperation, but also to increase potential sentences and recoveries from convicted defendants. Defendants convicted of PPP fraud are not only subject to a fine as described above but are ordered by the Court to pay back ill-begotten gains, typically through a process called restitution. In the case of a charged conspiracy, a defendant is not only responsible for paying back money he or she obtained as a result of PPP loan fraud but is also ordered to pay back money that co-conspirators received as well.  For example, when an individual who engaged in PPP loan fraud is found to have helped others defraud the PPP program, the individual is held accountable for the loan amount received by the individuals he or she assisted. In one recent case, an individual named Keyaira Bostic was held responsible not only for the $84,515 that her own company received in PPP proceeds but also for another $3.3 million in loans received by others she assisted. 

The Government is also aggressively pursuing insiders in the PPP program.  The Department of Justice recently announced charges of PPP and EIDL fraud brought in the Southern District of Florida against a former employee of the Small Business Administration. The charging document alleged that this SBA employee conspired with others to submit false and fraudulent PPP and EIDL loan applications. 

TAKEAWAY

The Federal Government has devoted significant resources and energy to uncovering and prosecuting PPP fraud and EIDL fraud. If you are aware of PPP loan fraud or have concerns about a potential investigation involving a PPP or EIDL application, you should immediately contact a attorney for guidance. Call our law firm at 305-569-7701 or email us at afels@ffslawfirm.com for a free confidential consultation.