Breaking Down the Latest Federal Criminal Defense Developments


CARES Act Fraud Investigation & Prosecution

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is a federal law that was passed by Congress in the spring of 2020 in response to the COVID-19 pandemic. The CARES Act was designed to provide emergency financial assistance to Americans suffering economic hardship as a result of the pandemic. The relief programs created under the CARES Act were aimed to assist businesses quickly—the loan application processes were simple and little oversight was involved. Currently, the federal government is busy scrutinizing the CARES Act program for potential fraud and prosecuting both individuals and financial institutions. This article provides an update into CARES Act fraud investigations and prosecution.

Background: CARES Act Programs

  • Payroll Protection Program (“PPP”)

One major form of relief provided by the CARES Act was the Payroll Protection Program (“PPP”). The PPP authorized potentially forgivable loans to small businesses for payroll and certain non-payroll costs (interest on mortgages, rent, and utilities, for example). The purpose of the loans issued under the PPP was to allow small businesses suffering from economic losses due to the pandemic to continue to pay salaries or wages to their employees. The proceeds of a PPP loan were not to be used to purchase consumer goods, personal investments, or to fund the borrower’s ordinary living expenses unrelated to the specified authorized expenses.

In the early days of the pandemic, the PPP was created quickly to prevent businesses from collapsing. Accordingly, the program’s loan application was simple and not highly scrutinized. The PPP was administered by the Small Business Administration (“SBA”). Eligible businesses seeking relief under the PPP could apply for assistance through a federal insured depository institution. The PPP loan application required the business (through an authorized representative) to acknowledge the program rules and state its average monthly payroll expenses, number of employees, and provide some documentation.

If the PPP loan application was approved, the participating lender funded the PPP loan using its own monies, guaranteed by the SBA. Data from the loan application was then transmitted to the SBA. The PPP allowed the interest and principal on the loan to be forgiven if the business spent the loan appropriately within a designated period of time and used a certain amount on payroll.

  • Economic Injury Disaster Loan (“EIDL”)

The Economic Injury Disaster Loan (“EIDL”) program is an SBA program that provides low-interest, fixed-rate, long-term loans to small businesses, renters and homeowners in regions affected by national disasters. The CARES Act also authorized the SBA to provide EIDL’s of up to $2 million to eligible small businesses to help overcome the effects of the pandemic by providing working capital to meet operating expenses. The CARES Act authorized the SBA to issue advances of up to $10,000 to small businesses within three days of applying for an EIDL.

To apply for an EIDL under the CARES Act, a business was required to submit an application to the SBA and provide information about its operations, to include its number of employees, revenue for 12-month period prior to the disaster, and the cost of goods sold for 12-month period prior to disaster. To be eligible for an EIDL, the business must have been in


operation before February 1, 2020. Applicants for EIDL loans were required to certify that the information in the application was true and correct to the best of their knowledge.

EIDL loans were submitted directly to the SBA and processed by the agency with support from a government contractor. Upon approval, the SBA disbursed the funds. EIDL loans were permitted to be used for operating expenses (including payroll), utilities, sick leave, production costs, and business obligations, such as debts, rent, and mortgage payments.

CARES Act Fraud

Through the PPP and the EIDL, the Small Business Administration has made or guaranteed about 18.7 million loans and grants. This has provided about $968 billion to small businesses affected by COVID-19. The SBA streamlined and simplified the programs to speed distribution. Ultimately, this resulted in less oversight and left the programs more susceptible to fraud.

With regard to the PPP specifically, it is estimated that over 8.5 million employers applied for and received PPP loans to cover payroll and certain nonpayroll costs during the pandemic. The Office of the Inspector General (OIG) reported in May that more than 70,000 loans totaling over $4.6 billion were potentially fraudulent. The OIG reported that the SBA lacked the necessary structure to prevent and detect PPP fraud. Also, the OIG reported that the SBA did not provide sufficient guidance to lenders to combat PPP fraud. During this review, the




OIG created the Fraud Risk Management Board to coordinate fraud risk prevention and response.

Fraud Investigation & Prosecution – Updates

  • Federal Investigation & Prosecution of CARES Act Fraud is Growing

As of April 2022, Justice Department Inspector General Michael Horowitz, who chairs the Pandemic Response Accountability Committee, estimated that the Justice Department has issued over 1200 indictments, 900 arrests and 500 convictions. These efforts have resulted in criminal charges against over 1,000 defendants with alleged losses exceeding $1.1 billion and over 240 civil investigations into more than 1,800 individuals and entities for alleged misconduct in connection with pandemic relief loans totaling more than $6 billion. As of January 2023, the United States Justice Department has recovered $1.2 million of the stolen funds.

  • New Ten-Year Statute of Limitations for CARES Act Fraud

Recently, President Biden signed the PPP and Bank Fraud Enforcement and Harmonization Act of 2022 [HR7352] that establishes a ten-year statute of limitations for criminal charges and civil enforcement against borrowers who engage in PPP fraud. Bank-related fraud generally has a statute of limitations of ten years, but multiple reports have indicated that





financial technology (fintech) companies (discussed below) and their lending partners handled a majority of the loans connected to fraud by the DOJ. And, fintech original loan fraud has a five-year statute of limitations. The bill’s sponsor, Congresswoman Nyida M. Velazquez (D-NY-7), explained that the ten-year statute of limitations was needed to clear up this discrepancy and allow ample time to prosecute.

  • Financial Tech – Fintech – Federal Investigations Ongoing

Financial Tech or “Fintech” companies were formed to assist people in obtaining CARES Act loans and collected a large amount of fees to do so. A recent report from the House Select Committee on the Coronavirus Crisis revealed that some non-bank fintech companies exploited gaps in CARES Act oversight. According to this committee, fintech lenders processed 15% of PPP loans, but were associated with 75% of loans suspected of fraud. Some fintech leaders allegedly approved loans in “as little as an hour,” often with little or no human review.

The congressional report is especially critical of two companies, Womply and Blueacorn. Both companies set up systems to help lenders process applications at a huge scale. For their work, Womply collected fees exceeding $2 billion and Blueacorn took in fees in excess of $1 billion.

In addition to lax internal oversight, Blueacorn gave priority (and less scrutiny) to high-dollar loans which generated larger fees for the company and its partners. So, in addition to enabling others to engage in PPP fraud, some company insiders received PPP loans for varieties of companies they owned themselves. Federal investigations into these companies are pending.



The recent congressional report includes specific recommendations for various governmental bodies to better safeguard future aid programs and urges the SBA to analyze the role of non-bank companies like fintechs (which face fewer regulatory constraints than banks) in its lending programs. The SBA inspector general’s office wrote in a statement: “A balance between speed and internal controls is achievable and necessary to ensure timely governmental assistance to disaster victims. The report shines light on a significant aspect of the emerging fraud landscape in the P.P.P., which is an O.I.G. oversight priority.”

One person facing current charges related to fintech PPP fraud is Rafael Martinez, CEO of MBE Capital Partners. Prosecutors claim that Martinez falsified documents by inflating his number of employees and payroll to secure a PPP loan of $280,000. Prosecutors also claim that Martinez used those falsified documents to become a PPP lender in April 2020. Like other fintechs in the news, MBE’s processing fees were high – MBE earned about $71 million in fees from originating $823 million in PPP loans to roughly 36,000 businesses. Federal prosecutors have charged Martinez with bank and wire fraud and with making false statements to a bank.

  • Banks/Conventional Lenders—Settlements & Fines

More conventional lenders are also facing scrutiny over their processing of PPP loans. As the number of investigations into PPP fraud grows, penalties are beginning to be levied against banks as well.

  • Prosperity Bank – False Claims Act Settlement

For example, Houston-based Prosperity Bank reached a False Claims Act settlement with federal prosecutors in September of 2022. This was the first Department of Justice settlement of



its kind with a PPP lender. The Prosperity Bank settlement reveals that PPP lenders can face FCA liability for borrower fraud.

This FCA settlement has alarmed the banking industry as guidance from the SBA had permitted PPP lenders to rely on borrowers’ certifications (to encourage lenders to participate while also allowing for quick and simple access to loans). More specifically, in an interim final rule issued in April 2020, the SBA allowed “lenders to rely on specified documents provided by the borrower to determine the qualifying loan amount and eligibility for loan forgiveness.” So long as lenders gathered required information from borrowers, they would be “held harmless for borrowers’ failure to comply with program criteria.”

In the Prosperity Bank case, Prosperity Bank approved a $213,400 PPP loan to Woodlands Pain Institute. That business’s owner falsely certified that he was not facing criminal charges, which would have made his business ineligible for the loan. Although Prosperity Bank seemingly could rely on that certification under SBA’s interim final rule, the DOJ still pursued an FCA claim, alleging that “Prosperity Bank employees knew [the owner] was facing charges.” The parties then settled for $18,673, nearly double the 5% processing fee that Prosperity Bank received for the loan. The settlement indicates that DOJ will not always hold banks harmless for a borrower’s failure to comply with PPP requirements.

  • Popular Bank – Federal Reserve Board Fine




On January 24, 2023, the Federal Reserve Board announced that it fined Popular Bank $2.3 million for processing six PPP loans despite having detected the loan applications contained indications of potential fraud and failing to report the potential fraud in a timely manner. The six loans totaled approximately $1.1 million. According to the Federal Reserve Board, Popular Bank was an SBA approved lender and was required to follow their anti-money laundering policies, but failed to do so in processing these six PPP loans.

  • Tennessee Federal Criminal Investigation & Prosecution Update

As of January 2023, several CARES Act fraud cases have been working their way through Tennessee district courts. So far, ten defendants have been sentenced and three defendants have pled guilty and are awaiting sentencing. Most defendants sentenced for CARES Act fraud in Tennessee have received prison sentences. Though the facts of their cases differ dramatically, of the ten individuals sentenced in Tennessee so far, six have been given prison sentences – ranging from 18 to 57 months.

In other recent Tennessee developments, five current or former IRS employees were charged in Memphis in October of 2022. According to court documents, the defendants allegedly obtained funds under the PPP and EIDL by submitting false and fraudulent loan applications that collectively sought over $1 million. They then used the loan funds for purposes not authorized by the PPP or EIDL Program, but instead for cars, luxury goods, and personal travel, including trips to Las Vegas. These cases were brought as part of an interagency effort between the Treasury



Inspector General for Tax Administration (TIGTA) and the SBA-OIG to combat and prevent CARES Act fraud by federal employees.


To date, the federal government is busy scrutinizing CARES Act programs for potential fraud and prosecuting both individuals and financial institutions for alleged fraud. Though CARES Act loans were often easy to obtain, the defense of these cases is complicated. With decades of experience in white collar criminal defense, and federal criminal defense, the legal team at Davis & Hoss is ready to help both individuals and institutions with all manner of issues arising under the PPP and other CARES Act programs. Contact Attorney Lee Davis at or by phone at 423-266-0605 for more information.