Client Notice of Litigation: PPP, EIDL and UI Loan Fraud – What You Need to Know About Financial Crimes Under CARES | Kaufman and Canoles



Federal prosecution across the country continues to escalate against businesses and individuals accused of fraud under the Coronavirus Relief, Relief and Economic Security (CARES) Act. In March, Ministry of Justice announced introducing new tools to detect and prosecute fraud associated with COVID-19 financial assistance programs. With losses associated with the use of CARES Act programs reported to exceed $ 569 million, Attorney General Merrick B. Garland said the criminal and civil divisions are specifically focused on combating fraud in the following areas:

  • Payroll Protection Program (PPP) Fraud;
  • Disaster Injury Loan Fraud (EIDL); and
  • Unemployment Insurance (UI) scam.

To help investigate and prosecute fraud under the CARES Act, the Department of Justice relies on the International Computer Hacking and Intellectual Property System (ICHIP), which tracks cybercrimes around the world.

Payroll Protection Program (PPP) and Disaster Injury Loan Fraud (EIDL): Banks Caution!

The PPP was designed to help businesses going through the worst of the COVID-19 economic crisis with forgiven loans for businesses that met all the necessary criteria to protect jobs and pay overheads. The EIDL program provides assistance to small businesses experiencing temporary loss of income when the proceeds can be used to cover a wide range of working capital and normal operating expenses. An applicant receiving a PPP loan cannot use EIDL funds for the same purposes as PPP funds.

As anticipated when these assistance programs were launched in 2020, the application system is ripe for abuse. Currently, PPP and EIDL fraud cases are pending nationwide, including in all three North Carolina counties, with many of the accused already convicted. The initial prosecution for PPP abuse primarily focused on those who were allegedly fraudulently obtaining PPP loans through the Small Business Administration (SBA) or used legitimate funds for inappropriate purposes. Also, however, The Ministry of Justice also reported that the False Claims Act (FCA) can also be used as a prosecution tool to recover illegally obtained PPP loans, even if the borrower has not applied for a loan forgiveness.

In North Carolina, federal prosecutions have demonstrated that investigations are not necessarily limited to the amount of damages. Charlotte’s woman recently pleaded guilty for electronic fraud under the EIDL fraud scheme in the amount of USD 150,000 in improperly obtained loans. In the same federal district, indictments were filed in April stating that North Carolina resident accused of filing fake PPP loan applications

Banks also need to be aware of the potential for criminal exposure. Although the program was administered through the SBA, financial institutions are responsible for disbursing funds and processing forgiveness applications. As the Department of Justice investigates fraudulent activities of borrowers, banks regularly respond to subpoenas requiring filing of records and interviews with agents.

While banks’ criminal liability can include aiding or complacent in continuing fraud on the part of borrowers, there are also compliance risks to consider, including violations of application rules, filing requirements, undue prejudice to minorities and women. owned by the business, and knowledge of their customer (KYC) violations. A review of the initial cases suggests that it would be prudent for financial institutions to consult with a lawyer to determine the required reporting requirements and to take appropriate action in the event of red flags.

The urgent response required to quickly implement these loan programs has raised a number of questions for legitimate borrowers, as well as opportunities for those wishing to take advantage of the benefits. Those involved in outright fraud have good reason to be concerned, but legitimate borrowers must also assess their situation. CARES criminalizes 15 USC § 645 if a false statement is made in order to obtain an SBA loan. A false statement occurs when the statement is known to be false and there is an intent to use that statement to obtain a loan. Further criminal exposure may take place through general electronic fraud, mail fraud and bank fraud laws. The Justice Department has announced its intention to focus resources on investigating and prosecuting fraud, and borrowers and lenders can count on being targeted.

Unemployment Insurance Fraud (UI)

Despite the underreporting of unemployment insurance fraud compared to PPP and EIDL abuse, there has been an explosive growth during the COVID-19 pandemic. IN The Office of the Inspector General (OIG) reported Potential billion dollar user interface scam identified. The CARES Unemployment Benefit Expansion includes three programs that will be subject to increased law enforcement scrutiny: the Pandemic Unemployment Assistance Program, the Federal Unemployment Compensation Program, and the Pandemic Emergency Unemployment Compensation Program.

The management of these programs has been delegated to the states, and in North Carolina, benefits are administered by the US Department of Commerce’s Employment Security Division (NCDES). More than 17,000 complaints and investigations of inadequate unemployment benefits were reportedly received, and more than 90,000 complaints were received through National Center for Disaster Fraud which are under consideration. UI fraud investigations are reported to account for 87% of OIG investigations, up from 12% before the COVID pandemic.

A common user interface fraud scheme involves an individual or a group of individuals (including international organized crime) who illegally use the personal information of third parties, including the deceased, the elderly or in prison, to apply for benefits from unemployment and its receipt. In response, the Ministry of Justice developed National Task Force on Combating User Interface Fraud, hired additional investigators, appointed 12 specially appointed assistant US attorneys to prosecute cases, and took intensified action, indicative of a long-term focus on tackling user interface fraud. Following a recent OIG investigation that predicted the expected trend, Virginia woman sentenced to nine years in prison was in prison and was sentenced to pay more than $ 455,000 in restitution after pleading guilty to fraud for filing UI claims using the identity of at least 37 people. As with other financial crime prosecutions under the CARES Act, higher unemployment insurance fees can be expected as federal and state agencies focus their investigative resources on widespread abuse.

Define a proactive response strategy now

Borrowers and lenders are encouraged to immediately seek the assistance of an experienced counselor in addressing compliance or fraud issues related to CARES Act assistance programs. Favorable resolution options will be highest if problems are resolved before they escalate into problems, or if a law enforcement investigation begins.


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