The Lamborghinis, Gucci, and jewelry individuals allegedly bought using pandemic business relief funds underscore the work ahead for law enforcement as Democrats ready another stimulus bill.
Already, the Department of Justice has cracked down on dozens of alleged high-dollar schemes that it says cost the government $142 million. The number of cases is only expected to grow because lawmakers opted for speed with a teetering economy. That means oversight has to play catch-up.
“I do not think anyone would dispute that the relief funds were necessary and it was critical to get the funds distributed quickly,” said Sarah Walters, a partner at McDermott Will & Emery who is advising recipients of PPP funds on compliance issues. From the outset, there was an expectation that there would be fraud and the need for enforcement, she said in an email.
Lessons learned from how fraud occurred with PPP loans may help government officials plug any leaks in the system, said Mark Matthews, a member at Caplin & Drysdale and former official with the IRS and the Justice Department’s Tax Division.
“Between enforcement and program changes, you generally start to bring the rate of fraud down,” he said.
The Justice Department touted several developments in recent days, including a guilty plea from a Virginia-based CEO on Feb. 3 for fraudulently obtaining Paycheck Protection Program loans for his business and two new indictments charging seven individuals with committing fraud when they sought the government-backed, forgivable loans on behalf of other businesses or as a purported business owner.
Those cases fit into a trend of fraud allegations stemming from the PPP. The first iteration of the program began in April with the CARES Act (Public Law 116-136). It restarted in January with $248 billion in new funding from the latest congressional relief law. The program was designed to keep workers employed at businesses that saw significant decreases in revenue.
Nicholas L. McQuaid, acting assistant attorney general for the Justice Department’s Criminal Division, said in a statement that the department “will continue to investigate and, where appropriate, prosecute criminal fraud schemes relating to COVID-19 relief programs, as well as any criminal schemes which target Americans and seek to exploit or take advantage of the legitimate fears and uncertainties arising from the global pandemic.”
What’s to Come
The cases dealing with PPP assistance reflect that—facing a flurry of interest and a teetering economy—the government focused most on getting money out the door, said Stu Bassin, founder of the Bassin Law Firm PLLC and former Justice Department Tax Division litigator.
“There’s an inverse relationship between how fast it gets out the door and how carefully it is checked,” he said.
The government seemed to anticipate—and try to prepare for—issues when it created a watchdog to oversee how funds were spent, Walters said. That watchdog sent nearly 70 leads for potential fraud to law enforcement, according to a recent report.
The government itself has also faced lawsuits over how it implemented pandemic relief legislation—particularly over populations it initially blocked from receiving economic impact payments, such as incarcerated people and spouses of people who are undocumented immigrants.
The number of fraud cases will probably go up over time because the government is likely to get new information about recipients, said Usman Mohammad, counsel at Kostelanetz & Fink LLP whose practice areas include tax controversy and federal criminal litigation. He pointed to potential information from loan forgiveness applications, suspicious activity reports from banks, and whistleblower activity.
House Democrats are in the process of figuring out the details of another pandemic aid package. Biden’s proposed plan includes $35 billion for financing programs for small businesses.
In one alleged scheme involving former NFL player Joshua Bellamy, who was cut from the New York Jets last fall, a group submitted dozens of fraudulent PPP applications to apply for more than $24 million. Bellamy himself allegedly got a loan for more than $1.2 million, spending some of the money on luxury goods or at the Seminole Hard Rock Hotel and Casino.
To date, most of the fraud cases being brought involve defendants who are alleged to have blatantly lied about their eligibility or submitted false documents, Walters said.
More aggressive prosecution could raise questions, she said. The government was still issuing guidance after some loan recipients received the funds, which added to the confusion for businesses and lenders.
“The government will need to proceed cautiously in questioning recipients’ good faith judgments about their eligibility at the time they applied for, and received, the funding,” Walters said.
There’s also the risk that the Justice Department, while working to protect the program’s integrity, may contribute to de-legitimizing the program if the only message the public hears is about fraud. That could make it harder to enact similar programs, said Brian Galle, a Georgetown Law Professor who formerly worked in the Justice Department’s Tax Division.
He wished that the announcements came with context, saying for example, “‘We caught these bad guys, they tried to take $100 million, but we caught them, and we delivered $100 billion that wasn’t fraudulent as far as we can tell.’”
—With assistance from David Hood.