New legislation to extend the clock on CARES Act anti-fraud prosecutions will soon be enacted, having passed the House 421-0 and the Senate by voice vote. It was presented to the President on Tuesday, August 2nd. Under H.R. 7352 and H.R. 7334, the statute of limitations for any fraud committed under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) administered by the Small Business Administration would be subject to a ten-year limitations period. Small Business Committee Chair Nydia M. Velazquez (D-NY) and Ranking Member Blaine Luetkemeyer (R-MO), the two lead sponsors of H.R. 7352, indicated that the bill primarily is meant to provide investigators and prosecutors additional time to bring criminal and civil fraud cases arising out of lending by financial technology ("fintech") companies (as opposed to traditional banks or credit unions).
Both the PPP, which ended in May of 2021, and the EIDL, which ended December of 2021, are products of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The PPP offered forgivable loans to small businesses and certain larger businesses for up to eight weeks of payroll expenses, so long as employees were not laid off during that same period. The EIDL, distinct from other disaster loans, allowed businesses to receive emergency loans to meet daily business operation goals.
The extended statute of limitations created by the legislation would provide prosecutors additional time to investigate and bring cases involving fintech-originated PPP fraud in particular, which SBA OIG analysts have zeroed in on. Recent reports noted that approximately 75% of alleged PPP fraud was committed through a fintech lender, despite such lenders only processing 15% of PPP applications. According to the House's Small Business Committee, the overrepresentation of the fintech industry in PPP loan processing created a prosecutorial issue, as frauds in these CARES Act applications were prosecuted as wire fraud, which they believed carried a statutory limit of five years. This differed from the bulk of PPP-related fraud, which is often prosecuted as bank fraud, which has a ten-year statutory limit. It is unclear whether prosecution in these criminal cases under the federal wire fraud statute, instead of as bank fraud, was the result of prosecutorial discretion or some perception that the bank fraud statute was inapplicable. From our perspective, most of these cases could be prosecuted under either statute because under 18 U.S.C. 3293 the statute of limitations for wire frauds effecting a financial institution is 10 years and "financial institution" arguably covers a fintech lender extending a PPP loan.1 DOJ has also pursued several PPP borrowers based on False Claims Act allegations related to improper PPP loans, which carries a six year statutory limit.
The extended period to bring both criminal and civil cases also may indeed have implications for fintech lenders. In late 2021, the House Select Subcommittee on the Coronavirus Crisis indicated its intentions to expand investigations into the role of fintech lenders in PPP-related fraud. At the time, reports alleged failures by fintech lenders to adequately screen applicants for fraud. If the government pursued such cases, and depending on the specific facts, it could seek to charge lenders for violations of a variety of statutes, including bank fraud, wire fraud, and the Bank Secrecy Act.
H.R. 7352 and H.R. 7334 will assist the government's efforts in pursuing CARES Act fraud as prosecutors have their eyes on recouping an estimated $4.6 billion of potentially fraudulent PPP loans. Ultimately, the viability of a return of anywhere near that amount remains to be seen. In the meantime, you can track DOJ's CARES Act-related fraud prosecutions thus far using Arnold & Porter's CARES Act Fraud Tracker.
*Maya Kouassi contributed to this blog post. Ms. Kouassi is a graduate of the City University of New York Law School and is employed at Arnold & Porter's New York office. She is not admitted to the practice of law.
Footnote
1 Under 18 U.S.C. § 20(10), a "financial institution" is defined as a mortgage lending business (as defined in section 27 of title 18) or any person or entity that makes in whole or in part a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974 (RESPA). Section 3(1)(B)(ii) of RESPA defines "federally related mortgage" as a loan which "is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary or any other officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary or a housing or related program administered by any other such officer or agency."
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