Significant events in the life of the United States somehow seem to always make it into the courts of the United States. Over 900 individuals have been arrested for the January 6th, 2020, riot at the Capitol, and those cases are now playing out in the U.S. District Court for the District of Columbia. At the same time, however, allegations of massive fraud involving relief offered during the COVID-19 pandemic are now making there way into the courts of the United States. Within just the past 30 days, the Department of Justice (DOJ) has issued at least 30 press releases involving COVID-19 fraud (source). The number of active investigations, however, has been reported to be in the hundreds, and some reports indicate that over $100 billion in loan proceeds guaranteed by the government have gone to fraudsters (source). If these figures turn out to be true, the scope of the fraud would indeed be historic.
The cases now being filed, however, are likely the vanguard of many more cases to come. In most cases, the charges involve Wire Fraud, but what is most striking are the people being charged. In one case out of Georgia, a former city attorney and a former police officer were charged with a seven-million-dollar Paycheck Protection Program loan scam (source). In another case, five current or former members of the Internal Revenue Service were charged with COVID-19 related fraud (source). In yet another case, two pastors in Houston, Texas, have been charged with COVID-19 fraud (source). These cases and others like them seem to indicate that individuals charged in these frauds are not people typically thought of as fraudsters.
Understanding COVID-19 Fraud
The government and the media use the terms COVID-19 Fraud, PPP Fraud, PPE Fraud, CARES Act Fraud, etc. interchangeably to describe a variety of fraudulent conduct associated with several government programs created to address the financial collapse caused by the pandemic. In reality, however, the conduct alleged to be criminal is charged as banking fraud (source), mail fraud (source), wire fraud (source), False Claims Act (source) and/or conspiracy (source). These statutes are among the most common violations charged by the federal government, and they are not limited to COVID-19 Fraud.
There is a distinction to be drawn between PPP Fraud and PPE Fraud. PPP Fraud—the Paycheck Protection Program—involves primarily the theft of funds intended to fund businesses during the pandemic and implicates bank fraud, mail fraud, and wire fraud statutes. PPE Fraud—Personal Protective Equipment—involved providing the government and other entities with defective or ineffective equipment that did not provide protection against COVID-19 as it was supposed to. PPE Fraud implicates the False Claims Act as well as the mail fraud and wire fraud statutes (source).
First, let’s examine PPP Fraud.
Bank fraud is defined as: “knowingly executing or attempting a scheme or artifice to defraud a financial institution, or to obtain financial institution money, funds, credit, assets, securities, or other property by false or fraudulent pretenses, representations, or promises.” The “scheme or artifice to defraud” language is the same as in wire fraud statute, the primary difference being the victim. For banking fraud, the victim must be a financial institution. For the wire fraud statute, the victim can be anyone (including a financial institution).
It is important to note that banking fraud, wire fraud, and conspiracy to defraud in this context all require an “intent to defraud.” This intent element places a high burden on the government when it comes to the criminal prosecution of individuals who are suspected of or charged with COVID-19 fraud. There are undoubtedly lots of companies and individuals who received PPP loans who should not have, but this does not mean they are guilty of a criminal offense.
The severity of the pandemic and the desire of the federal government to push as much money into the economy to stave off an economic collapse are significant factors in understanding the motivations of people who applied for and accepted PPP loans. Often times in banking fraud cases, loan documents will be wrong. Applications for loans can be long, complex documents. Typically, the borrower supplies information to a loan agent or sometimes an intermediary acting as a broker. It is not unusual for information to be recorded improperly. Sometimes, estimates of the value of collateral may be wrong. Although everyone should read everything they sign before signing, in the real world, many people are trusting, or simply miss an incorrect number, and as a result, many people will simply sign whatever is placed before them. If this is the scenario, it would be difficult to say that there was an intent to defraud. Any false statement would simply be a mistake.
It is also important to note that during the time of the pandemic, there were other stresses in society that impacted people’s normal thought process. In the United States, over 1,100,000 people died of COVID (source), with millions more suffering serious consequences from the disease. The economies of nearly every state shut down for varying lengths of time. Businesses closed, people were laid off, and for nearly a year, no one was sure when it would end. Obtaining a loan during these times was not the same as obtaining a loan in a normal business environment, and it makes sense that people were not paying attention to details as they might otherwise. For many businesses and employees, the PPP program was a lifeline in very uncertain times.
It is easy to examine events after the fact with a microscope to find fraud, but the realities of those times should not be forgotten.
The cases DOJ is pursuing now focus upon the loan application process which is where most banking fraud occurs. Loans made under the CARES Act, however, are not, strictly speaking, loans, because they are forgivable under certain circumstances. If a person were to submit false documents or a false statement in an application to have a loan forgiven, that to constitute fraud.
PPE Fraud is different. PPE is premised upon supplying the government or others with protective equipment that did not provide the protection either the government or a private purchaser contracted for. Providing the government with detective equipment constitutes a violation of the False Claims Act. The same conduct directed at a private individual constitutes wire fraud. There is a significant difference between a breach of contract for failing to provide the contracted goods and a criminal allegation for violation of the False Claims Act or wire fraud. This difference is reflected in an intent to defraud.
Just as the government was attempting to force as much money as possible into the economy and thereby fueling PPP Fraud, so too was it attempting to obtain as much personal protective equipment as possible thereby fueling PPE Fraud. However, it is important to understand that demand for PPE brought a lot of new actors into the market, many of whom did not understand the medical supply industry. Often times, the supply of defective equipment flowed from an ignorance as to industry standards rather than any criminal intent. In addition, many of the “suppliers” were middle-men who were themselves victims of the ultimate supplier who was frequently an off-shore entity.
There are defenses to allegations of bank fraud, wire fraud, The False Claims Act, and conspiracy. Books and articles have been written explaining various defenses, and a detailed examination of potential defenses is beyond the scope of this article; however, it is important to emphasize that there are steps that can be taken to defend someone against an allegation of banking fraud or wire fraud.
See, e.g., Dennis E. Boyle, Understanding Mail Fraud and Wire Fraud: A Nonattorney’s Guide (Page Publishing 2022) available from Amazon or Barnes and Noble. This book, written by the author of this article, provide a much more detailed explanation of mail fraud and wire fraud, including defenses that may be applicable.
What Can be Done if one Suspects COVID-19 Related Fraud?
There is a lot that can be done to avoid or mitigate the damages associated with pandemic related fraud, but the starting point is retaining an experienced white-collar defense lawyer. Retaining the right lawyer can be the difference between resolving a matter with the government quickly and quietly and going to prison. As a general rule, the sooner that some who may have committed fraud contact counsel, the more likely a favorable outcome can be obtained. Ideally, it is best to contact counsel before the government has begun an investigation.
All cases are different, but if circumstances permit, an experienced white-collar defense attorney would most likely want to investigate to determine the facts and circumstances surrounding the suspect transaction and determine if fraud, in fact, occurred. If it did, there is a process typically followed that involves mitigating the damage, usually by paying back any unlawfully obtained funds, and then taking remedial action to ensure such an action never occurs in the future. This sounds easier than it actually is, but it may be possible to avoid criminal prosecution.
The worst course of action anyone can take is to ignore the problem and hope the government never comes calling. It is noteworthy that DOJ has established a COVID-19 Fraud Task Force source). This Task Force brings together the various investigative agencies of the federal government to root out and prosecute fraud. Many, if not most, U.S. Attorney’s Offices have established departments or divisions to focus specifically on this type of fraud. While it is possible that some criminal activity may go undetected, playing ostrich is rarely a successful strategy.
Not everyone, however, is going to be able to investigate and self-report before the federal government initiates an investigation. The representation of an individual in a federal investigation is a complex matter requiring experienced and capable counsel. The target of a federal investigation should never attempt to deal with the F.B.I. or one of the other investigative agencies without an attorney. People who attempt to do so are frequently referred to as “convicts”. Ignoring the matter when investigators come calling in the hope that they will simply go away is just as foolhardy. The best action one can take when approached by a federal investigator is retain an attorney.
White-collar defense lawyers frequently represent clients under investigation. In fact, it is in this pre-indictment phase of a case that the defense attorney can be most effective whether by helping the client to understand the charges he or she faces and assisting in the martialing of evidence to convince the government of innocence or in cooperating with the government to reduce the severity of any consequences. The right attorney can make a significant difference.
Pandemic fraud or COVID-19 fraud will be with us for the next several years as federal investigators and prosecutors work their way through the millions of transactions the CARES Act has spawned. We have written before about Understanding COVID-19 Fraud and How to Prepare for Government Investigations in October of 2020 and Identity Theft in the PPP Loan Program in August of 2021, but it is important to revisit this issue one more time. The government’s investigative efforts have accelerated in 2022 and are most likely going to increase yet again this year and next year. This is a window to resolve this cases favorably, but, at some point, that window will close.