The Justice Department’s Response to Fraud in COVID-19 Funds
By: Adam B. McDonald
The COVID-19 pandemic caused physical and financial hardship for millions of people in the United States. As a result, the United States issued loans to small businesses in order to alleviate some financial burdens. These loans, often known as Paycheck Protection Loans (“PPP loans”) or COVID-19 Economic Injury Disaster Loans (“EIDL”), were issued by the Small Business Administration (“SBA”).[1] Because of the need to disburse these loans at an unusually quick pace, the SBA loosened its vetting process for loan applicants.[2] Due to the relaxed vetting process, the SBA essentially created an “invitation to fraudsters.”[3] This invitation to fraudsters created what some have called the “[b]iggest fraud in a generation.”[4] In total, the SBA issued around $1.2 trillion worth of loans to businesses and individuals across the country.[5] Of the $1.2 trillion disbursed, the SBA estimates that around $200 billion worth of loans were awarded fraudulently.[6] To put that number in perspective, the state of Tennessee’s annual budget for the fiscal year 2024 is only $56.2 billion.[7] Thus, the SBA estimates that they disbursed loans to fraudulent applicants in an amount around four times the annual budget of the state of Tennessee. In addition to the SBA loans, the Department of Labor (“DOL”) also distributed additional unemployment benefits due to COVID-19.[8] Not surprisingly, the DOL’s unemployment benefits were also ripe with fraud.[9] This combined amount of fraud is not only staggering, but can have lasting consequences on the United States if the wrongly disbursed funds are not clawed back.
However, the good news (or bad news if you are one of the fraudsters) is that the United States is slowly clawing back some of the funds. In October of 2023, six people were sentenced for defrauding the United States of a combined $20 million in fraudulent COVID-19 loans,[10] three were charged in January of 2024 for $7 million worth of COVID-19 loan fraud,[11] a Baton Rouge woman was sentenced for over $1 million of COVID-19 loan fraud in December of 2023,[12] and the list goes on. In the Fall of 2023, the United States Justice Department “announced 700 new enforcement actions . . . for more than $836 million in alleged fraud.”[13]
The Justice Department has many avenues of law to choose from in order to chase after COVID-19 fraudsters. For instance, the False Claims Act (“FCA”) allows private citizens to initiate suits on behalf of the United States (known as qui tam actions) when the citizen uncovers instances of fraud against the government.[14] In order to successfully bring an FCA claim, the plaintiff must prove the claim or record submitted to the government was “false or fraudulent,” and the person who submitted the claim acted “knowingly.”[15] A person will be found to have knowingly committed an act if he or she acts with “actual knowledge,” “deliberate ignorance,” or “reckless disregard of the truth or falsity of the information.”[16] The Supreme Court added that knowingly is defined as what the defendant knew at the time of making the claim to the government, “not on post hoc interpretations.”[17] Thus, knowledge is essential to a successful FCA claim.[18] If the False Claims Act suit is successful, the defendant is liable for triple damages, attorneys’ fees, and a civil penalty to the United States between $5,000 and $10,000.[19] However, damages may be reduced to double damages if the defendant cooperates. [20]
Knowledge may be hard to prove in COVID-19 fraud claims due to the ambiguity of the statutes. As an alternative to FCA actions, the United States has pursued criminal conspiracy charges against COVID-19 loan fraudsters. For instance, in U.S. v. Stavely, the United States charged an individual under 18 U.S.C. § 371 for conspiring to make false statements to influence the Small Business Administration when he submitted false and fraudulent PPP loan applications.[21] The statute creates a criminal offense to conspire to commit an offense to defraud the United States.[22] Similarly, 18 U.S.C. § 1349 makes the attempt or conspiracy to commit an offense under Chapter 63 of the U.S. Code (offenses such as mail fraud and bank fraud) a criminal offense.[23] In U.S. v. Dadyan, the U.S. charged defendants under this statute for swindling the U.S. out of millions of dollars in COVID relief funds, and succeeded.[24] Another avenue the U.S. could pursue is 18 U.S.C. § 1031.[25] § 1031 applies to people who defraud the U.S. by $1 million or more.[26] The U.S. utilized this statute in a case where the PPP fraud eclipsed $1 million in U.S. v. Ilori.[27]
While COVID-19 loan fraud ran rampant during the pandemic, fraudsters are now facing the wrath of the United States in clawing it back by various laws.
[1] COVID-19 Pandemic EIDL and PPP Loan Fraud Landscape, U.S. Small Business Ass. (June 27, 2023), https://www.sba.gov/document/report-23-09-covid-19-pandemic-eidl-ppp-loan-fraud-landscape [hereinafter SBA].
[2] Id.
[3] Ken Dilanian & Laura Strickler, ‘Biggest Fraud in a Generation’: The Looting of the Covid Relief Plan Known as PPP, NBC News (Mar. 28, 2022, 2:59 PM), https://www.nbcnews.com/politics/justice-department/biggest-fraud-generation-looting-covid-relief-program-known-ppp-n1279664.
[4] Id.
[5] SBA, supra note 1.
[6] Id. Many fraudsters used this taxpayer money to go on luxurious spending sprees, such as: buying cars costing six figures, purchasing mansions, and taking vacations. Dilanian & Strickler, supra note 3.
[7] Vivian Jones, Tennessee Lawmakers Pass $56.2B Budget for 2024. Here’s What’s in the Spending Plan, Tennessean (Apr. 21, 2023, 4:37 PM), https://www.tennessean.com/story/news/politics/2023/04/20/tennessee-lawmakers-pass-56-2b-spending-plan-for-2024-heres-whats-in-it/70136364007/.
[8] More Fraud Has Been Found in Federal COVID Funding—How Much Was Lost Under Unemployment Insurance Programs, U.S. Gov. Accountability Off. (Sep. 13, 2023), https://www.gao.gov/blog/more-fraud-has-been-found-federal-covid-funding-how-much-was-lost-under-unemployment-insurance-programs [hereinafter GAO].
[9] Id.
[10] Leader of $20M COVID-19 Relief Fraud Ring Sentenced to 15 Years, U.S. DOJ Office of Pub. Affs. (Oct. 3, 2023), https://www.justice.gov/opa/pr/leader-20m-covid-19-relief-fraud-ring-sentenced-15-years.
[11] Nick Stoico, Three Mass. Residents Charged in COVID-era $7 million-plus Payroll Loan Fraud Scheme, US Attorney’s Office Says, Boston Globe (Jan. 16, 2024, 10:44 PM), https://www.bostonglobe.com/2024/01/16/metro/three-mass-residents-charged-covid-era-7-million-plus-payroll-loan-fraud-scheme-us-attorneys-office-says/.
[12] Baton Rouge Woman Sentenced to 48 Months in Federal Prison for Defrauding the PPP and EIDL Loan Programs and Laundering the Fraudulent Proceeds, U.S. Atty’s Office M. D. LA. (Dec. 1, 2023), https://www.justice.gov/usao-mdla/pr/baton-rouge-woman-sentenced-48-months-federal-prison-defrauding-ppp-and-eidl-loan.
[14] See 31 U.S.C.§ 3729; see also United States, ex rel. Polansky v. Exec. Health Res., Inc., 599 U.S. 419, 423 (2023).
[15] See 31 U.S.C.§ 3729.
[16] U.S. ex rel. Augustine v. Century Health Servs., 289 F.3d 409, 413 (6th Cir. 2002).
[17] U.S. ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391, 1401 (2023).
[18] See U.S ex rel. Hagood v. Sonoma Cnty Water Agency, 929 F.2d 1416, 1420 (9th Cir. 1991).
[19] 31 U.S.C. § 3729(a)(1)(C).
[20] Id. at (a)(2).
[21] U.S. v. Stavely, 43 F.4th 9, 11 (1st Cir. 2022); 18 U.S.C. § 371.
[22] 18 U.S.C. § 371.
[23] 18 U.S.C. § 1349.
[24] 76 F.4th 955 (9th Cir. 2023).
[25] 18 U.S.C. § 1031.
[26] Id. at (a)(2).
[27] U.S. v. Ilori, 2022 U.S. Dist. LEXIS 118185 (S.D.N.Y. 2022).
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