It has been two years since the COVID-19 pandemic began and nearly two years since the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Since its passage and creation of a number of different financial assistance programs to support those whose economic well-being was most effected by the pandemic and related shutdowns, there has been an ongoing issue of rampant fraud in filings to claim these assistance funds.
To date, the Department of Justice (DOJ) has brought criminal charges against over 1,000 individual defendants in connection with over $1 billion in pandemic relief funds that these individuals obtained through fraudulent means.
Now, Congress and the DOJ are turning their focus to institutions and lenders in their crack down on CARES Act and paycheck protection program (PPP) misconduct. This shift signals a major shift away from borrowers’ fraud and toward lenders that facilitated fraudulent borrowing.
Throughout 2021, the House Select Committee on the Coronavirus Crisis, headed by Rep. James Clyburn, has made several indications that these investigations were coming and that they expected them to bare fruit with DOJ enforcement. In March 2021, the committee began questioning the methodology lenders were using to provide PPP loans to customers amidst concern that lenders were prioritizing their existing customers over non-customers and that the lenders had failed to implement adequate safeguards to prevent the fraudulent borrowing the DOJ had already shown to be occurring.
A few months later, the committee expanded that investigation to examine fintech firms and their banking partners in the roles they played in PPP lending. Specifically, there was evidence that fintech firms had originated a disproportionate number of fraudulent PPP loans. The committee began requesting specific anti-money laundering (AML) and know-your-customer (KYC) compliance policies and protocols from some of the larger fintech firms.
Last month, DOJ enter the fray in targeting lenders for fraudulent PPP practices. First was the arrest of Rafael Martinez, CEO of MBE Capital, who was arrested in connection with the issuance of fraudulent PPP loans which netted over $70 million in lender fees for his company. This was followed by the appointment of a Associate Deputy Attorney General Kevin Chambers as director for DOJ COVID-19 Fraud Enforcement.
“The Justice Department remains committed to using every available federal tool — including criminal, civil, and administrative actions — to combat and prevent COVID-19 related fraud,” Attorney General Merrick B. Garland said in the announcement of Chambers appointment. “We will continue to hold accountable those who seek to exploit the pandemic for personal gain, to protect vulnerable populations, and to safeguard the integrity of taxpayer-funded programs.”
It is clear that the government’s investigations into PPP lenders’ activities is just beginning and more significant criminal charges will likely be seen in the near future as focus shifts from borrowers to lenders.