As anticipated, beginning in early May, the U.S. Department of Justice (DOJ) began prosecuting individuals for fraudulently seeking forgivable loans guaranteed by the Small Business Administration (SBA) through the new Paycheck Protection Program (PPP). During the first month of enforcement, DOJ brought seven cases charging a total of eight defendants who sought loans ranging from approximately $105,000 to more than $6 million. Had those defendants been successful, they would have borrowed a total of $40 million. This first wave of criminal actions demonstrates DOJ's intent to send an early message that it will aggressively pursue bad actors seeking to profit off of emergency lending programs. For financial institutions, these are significant for an entirely different reason.
As more than 5,000 bank and nonbank lenders throughout the country rush to disburse $660 billion in PPP funds and inject much needed capital into small businesses and the economy, many lenders remain wary of the scrutiny that they may receive from DOJ, their regulators, and other government agencies. In particular, such scrutiny would likely focus on perceived lapses in anti-money laundering compliance, failures to conduct adequate customer due diligence on borrowers, or the extent to which lenders failed to monitor or report suspicious activity in connection with applications for loans or for forgiveness. A closer look at the charging documents in the first DOJ actions reveals extensive lender involvement in the investigations, provides examples of monitoring and reporting that have proven valuable to prosecutors, and may be informative for lenders and their compliance departments as they tailor their AML programs to assure that they are reasonably designed to address the risks presented by lenders' involvement in the PPP. For example:
- In U.S. v. Fayne, a reality television personality allegedly submitted a fraudulent loan application to a bank seeking more than $2 million in PPP funds to support the 107-employee payroll of his company, Flame Trucking. In fact, after the loan proceeds were disbursed, the defendant transferred $350,000 to an individual at another bank. According to the affidavit in support of the complaint, an investigator at the receiving bank questioned the recipient about the wire transfer, who explained that she was not an employee of Flame Trucking and that the originating party was her brother. She also confessed to the bank's investigator that she had sent $84,000 of the funds to a jewelry store and another $40,000 to an individual for "child support services," both at the defendant's direction.
- In U.S. v. Rai, a Texas-based engineer was charged with allegedly filing multiple loan applications fraudulently seeking more than $10 million in PPP funds to fund a payroll of 250 employees, when, in fact, he had no employees working for his business. According to the affidavit in support of the complaint, during a review of the application for PPP funds, a senior vice president in the lender's regulatory compliance department noticed multiple discrepancies in the company's employment information and concluded that the application might be fraudulent. After the lender then denied the application, law enforcement agents sought financial records from two other lenders that received applications, and requested that a representative from one of those lenders record a telephone conversation with the defendant. During that call, the defendant confirmed the false information listed on his company's PPP loan application.
- In U.S. v Staveley, two individuals were charged with conspiring to seek forgivable loans guaranteed by the SBA, after they claimed to have dozens of employees earning wages at four different restaurants. In fact, there were no employees working for any of the businesses. According to the affidavit in support of the complaint, one of the lenders that received a loan application from the defendants had prepared an "EDD Review Analysis" memorializing that the due diligence had led the lender to conclude that the business was not legitimate. Specifically, the EDD Review Analysis detailed that the restaurant business had closed in November 2018, that the local government's tax assessment database indicated that the property of the business had been purchased by another company in January 2020, and that a drive-by of the property by the lender's BSA Officer indicated that the property was "currently in disrepair. There were dumpsters on-site and large red/orangey [sic] notices indicating 'Stop Work' posted on door and windows of property. The Restaurant has not been functional since it closed in 11/2018."
The speed with which DOJ brought these actions—the initial round of the PPP launched in early April—is also a credit to many lenders that participated in the various investigations, including by identifying red flags, reporting information to the FBI and DOJ, and cooperating with agents and prosecutors. Indeed, these actions demonstrate how several financial institutions, including both primary lenders and counterparty institutions receiving proceeds of PPP loans, have been successful in identifying red flags and alerting law enforcement of their findings. Importantly, lenders should continually evaluate trends that are described in public resources (e.g., enforcement actions, agency releases, SBA FAQs), as well as those they observe while monitoring of PPP applications. Lenders should document and communicate these red flags to those responsible for their business lines and compliance functions. They should also establish policies and procedures for monitoring and reporting suspicious activity relating to both loan and forgiveness applications in order to set clear standards for compliance staff and to develop records for supervisory examination. PPP lenders that design and implement AML programs to identify irregularities and discrepancies in loan applications and transaction activity, and diligently memorialize their program procedures and customer due diligence findings, will be well positioned to withstand governmental scrutiny if and when the agencies turn their focus from the applicants to the intermediary financial institutions that are disbursing the stimulus funds.
Finally, although DOJ brought the actions detailed above, adding an extra degree of scrutiny to the distribution of stimulus funds is the recent appointment of the Special Inspector General for Pandemic Recovery (SIGPR). On June 2nd, the Senate confirmed Brian D. Miller as the first SIGPR, who, pursuant to the CARES Act, will have the authority to conduct, supervise, and coordinate audits and investigations of "the making, purchase, management, and sale of loans, loan guarantees, and other investments" made by the Secretary of the Treasury, including PPP Loans—as well as a $25 million fund backing his efforts. The SIGPR is directed to maintain current lists of businesses receiving assistance and total amounts outstanding, and will also be required to submit quarterly reports to Congress on such information. If history is an indication, the SIGPR will have an outsized enforcement role. In the wake of the 2008 financial crisis, the Special Inspector General for the Troubled Asset Relief Program, tasked as the watchdog for $425 billion in financial commitments, emerged as an active investigator and law enforcement agency, the investigations of which resulted in convictions of or penalties against 380 defendants.
PPP lenders interested in assistance with reviewing and enhancing their BSA/AML compliance programs or cooperating with law enforcement requests may contact any of the authors of this Advisory or their usual Arnold & Porter contact. The firm's Financial Services and White Collar Defense & Investigations teams would be pleased to assist with any questions relating these matters or BSA/AML compliance more broadly.
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