OR Men to be Charged in PPP Fraud

WEDNESDAY, JULY 14, 2021


According to the District of Oregon’s Department of Justice, two men have recently pleaded guilty to their role in a scheme to steal funds from the Small Business Administration’s Paycheck Protection Program.

The PPP is an integral part of the Coronavirus Aid, Relief, and Economic Security Act, which was passed back in March 2020 in wake of the COVID-19 pandemic to help small businesses.

What Happened

On May 1, 2020, Russell Anthony Schort, 39, of Myrtle Creek, Oregon, and his accomplice Andrew Aaron Lloyd, 51, of Lebanon, Oregon, submitted a PPP loan application under Schort’s business name, Schort Lee Construction, to U.S. Bank. The loan application included a false IRS form 944 listing 2019 wages paid of more than $3 million and a fake list of 56 employees and the wages reportedly paid to them as well.

Under false representations, U.S. Bank processed the loan and disbursed more than $600,000 into Schort’s bank account. Three days after the transaction, Schort transferred $307,000 to Lloyd’s bank account, who used the funds to purchase securities through an online brokerage account.

According to reports, however, the construction business front was just one of several applications Lloyd engineered starting in April 2020, having also utilized personally identifiable information of relatives and business associates without their consent, in addition to false business profiles.

In total, Lloyd submitted nine PPP loan applications, six of which were accepted, resulting in a payout of more than $3.4 million. Lloyd also applied for numerous Economic Injury Disaster Loans, of which one was accepted, resulting in an additional $160,000 in payments to Lloyd.

Lloyd then reportedly spent the funds received to purchase real estate and invest in various securities (which increased in value), with more than $1.8 million transferred to his E*TRADE Securities brokerage account.

In January, agents seized Lloyd's brokerage account, which included 15,740 shares of Tesla, Inc. In March, agents seized another account containing more than $660,000 in securities and cash. In total, the securities and cash seized from Lloyd's multiple accounts were valued at more than $11 million.

Charges

The U.S. Attorney's Office reported that Llyod has since accepted responsibility for his actions and was recommended a sentence of 61 months in federal prison. Llyod has also agreed to pay more than $3.6 million in restitution and to forfeit more than $11 million in cash and securities and 23 properties that were purchased with PPP funds.

On June 17, Lloyd pleaded guilty to bank fraud, money laundering and aggravated identity theft. His sentencing is slated for Sept. 9, before U.S. District Court Judge Michael J. McShane.

On Jan. 5, Schort was charged by criminal complaint with wire fraud, bank fraud and money laundering. On June 8, he was charged by superseding criminal information with bank fraud.

Schort faces a maximum sentence of 30 years in prison, a $1 million fine and five years of supervised release. As part of his plea agreement, Schort has also agreed to pay no less than $294,552 in restitution to the U.S. Treasury.

He will be sentenced on Oct. 21, also before McShane.

Acting U.S. Attorney Scott Erik Asphaug of the District of Oregon made the announcement.

This case was investigated by the FBI with assistance from the SBA Office of Inspector General and IRS Criminal Investigation. It is being prosecuted by Gavin W. Bruce, Assistant U.S. Attorney for the District of Oregon.

PPP Loan Background

In wake of the COVID-19 pandemic, in April 2020, the Small Business Administration released an interim final rule for the PPP, stating that to qualify, businesses must have 500 or fewer employees and fall below the agency’s small business size standards.

The standard in question revolves around small size standards (as defined in section 3 of the Small Business Act, 15 U.S.C. 632). For construction businesses, this is generally determined by an average annual income threshold, not a number of employees threshold.

The PPP officially opened on April 3.

By the end of the month, the SBA found that the first round of PPP reportedly saw the most money divvied out to the construction industry. The program allowed for a cap of $349 billion in loans to be given to small firms that qualified during the COVID-19 pandemic. The money ran out April 16.

The numbers indicate that the construction industry received 177,905 loan approvals, totaling about $45 billion and amounting to 13.12% of all loans—the majority when divided up into subsectors.

By the middle of May, the SBA released an 11-page application for lenders and small businesses to apply for PPP loan forgiveness. However, in June, the U.S. Senate unanimously approved a bill updating the PPP terms. H.R. 7010, or the “Paycheck Protection Program Flexibility Act of 2020,” included changes such as:

  • An extended cover period of the PPP loans from eight weeks to 24 weeks;
  • A change in the forgiveness requirement from 75% of payroll costs to 60% of payroll costs;
  • A space for employers to make a good fair effort to hire or rehire;
  • An extended maturity of the PPP loans from two to five years; and
  • An opportunity for loan recipients to defer payroll taxes through the end of 2020.

In addition to the changes in the amendment, the government issued an updated FAQ at the end of May dealing with the differences of loans above and below $2 million. In previous guidance, the Treasury Department had said that all PPP loans of $2 million or more (upon an application of forgiveness) would be audited with the possible implication of investigation and penalty enforcement.

However, the recent clarification states not only that loans less than $2 million would be “automatically deemed” to have acted in good faith, but that while loans at and above $2 million would still be reviewed, the party would be required to pay back the loan without penalty of enforcement action.

Also in May, The Washington Post, The New York Times, Bloomberg LP, Dow Jones and ProPublica issued a lawsuit under the Freedom of Information Act against the SBA for the access of government records detailing which companies have received loans under the PPP and the Economic Injury Disaster Loan program. The suit seeks not only the names of the companies, but the loan amounts and processing banks, to no avail.

The lawsuit arrived after the SBA temporarily boosted its Express lending limit from $350,000 to $1 million as part of the pandemic relief effort. According to reports, unlike the PPP program, SBA Express doesn’t offer loan forgiveness, nor does it require borrowers to spend 75% of the loan amount on payroll. SBA Express also allows lenders to use their own forms and procedures, apply in-house collateral standards and make the final credit decision. The guarantee amount, however, is 50% rather than the 75% that’s typical for SBA 7(a) loans.

At the time, SBA argued that releasing such information could violate their privacy, as PPP loans are tailored to the size of a business’s payroll.

In July, the SBA disclosed the names, addresses, ZIP codes, demographic data and industry codes of borrowers receiving PPP loans amounting to $150,000 or more. However, according to The Wall Street Journal roughly 4.5 million of the 5.2 million PPP loans issued (or less than 15%) were for $150,000 or less.

At the end of month, the SBA inspector general called for a closer oversight of the EIDL program after receiving over 5,000 complaints of suspected fraud from lenders.

In September, PaintSquare Daily News reported that businesses that received PPP loans during the pandemic could experience higher tax revenues. The concern arrived after the IRS ruled that businesses couldn’t write off tax reductions for wages and rent paid using the forgivable PPP loans as to prevent a “double tax benefit.”

According to the U.S. Chamber of Commerce, PPP loans can be forgiven as long as at least 60% of the funding was spent on employee payroll cost, while the other 40% should have been used for mortgage interest, rent and utility payments. Additionally, forgiveness is also based on an employers’ continuance to pay employees at normal levels over 24 weeks following the origination of the loan.

To apply for forgiveness, businesses who received a loan will have to file a PPP Loan Forgiveness Application with the Treasury Department through the private lender they obtained the loan from.

If the PPP is deemed forgiven, then the loan is tax-exempt. However, as aforementioned, the exemptions can in turn reduce the amount a business writes off on its taxes, meaning the company could owe more taxes than compared to previous years.

However, through the PPP Flexibility Act, employers can defer these taxes even after the PPP loan has been forgiven. If deferred, employers are required to pay 50% of the deferred taxes that accumulated in 2020 by Dec. 31, 2021, and the other 50% of the deferred amount would have to be paid by Dec. 31, 2022.

In October, the SBA—in consultation with the U.S. Treasury Department—released a simpler loan forgiveness application for PPP loans amounting to $50,000 or less. The new form arrived as an effort to ease the burden for lenders and small businesses. Approximately $62 billion of the $525 billion in PPP loans that have been issued total $50,000 or less.

Not only will the simplified PPP forgiveness process ease the burden on small businesses, but the SBA and Treasury report that the burden is also reduced for PPP lenders, allowing them to process forgiveness applications more swiftly.

However, while the streamlined forgiveness will affect 3.57 million of the 5.2 million loans originated under the program, some trade groups are calling for further action from Congress.

SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers on Oct. 2. SBA reports that it will continue to process all PPP forgiveness applications in an expeditious manner.

In November, Judge Boasberg of the U.S. District Court for the District of Columbia issued an order to the SBA to release the names and precise loan amounts of all Paycheck Protection Program and Economic Injury Disaster Loan borrower recipients.

Since the launch of PPP and EIDL programs in response to the COVID-19 pandemic, the SBA has processed an unprecedented $717 billion in loans. However, the SBA has reportedly lacked in providing transparency, withholding the precise amounts of all loans of $150,000 or more, as well as recipients’ identities for loans under that figure following a suit filed in July.

Thus far, investigations regarding the PPP and EIDL loans have revealed that the SBA referred more than 80,000 loans to law enforcement; more than 100 Wells Fargo employees were fired for making false representations on EIDL applications; the Financial Crimes Enforcement Network received 2,495 suspicious-activity reports involving September-filed business loans; and 73 defendants have already been charged by the Justice Department regarding PPP-related fraud cases, among other reports.

The public “maintains an urgent and immediate interest in assessing the results of SBA’s initial effort at administering a massive, small-business relief package and extracting lessons where possible—both to inform a critical, ongoing federal debate and to remedy failures in the loan-disbursement process moving forward,” Boasberg wrote in the order.

The Associated General Contractors of American also announced around that time that it filed a lawsuit against the SBA and the Office of Management and Budget in order to block a questionnaire that’s now being used to reassess whether companies were eligible for Paycheck Protection Program loans.

In addition to suggesting that the questionnaire is unlawful to begin with, the AGC is asking for the courts to restrict the use of the information that the questionnaire generates until the SBA makes it available to the public and publishes revisions.

The suit was filed Dec. 8 in the United States District Court for the District of Columbia.

At the beginning of December, the SBA released detailed loan information following a temporary stay U.S. Federal Judge James Boasberg granted to the SBA regarding its original Nov. 19 deadline.

According to The Post, of the more than 5 million loans released in response to a Freedom of Information Act request and lawsuit, more than half the money provided through the PPP program for small businesses went to just 5% of the recipients.

Previously, the SBA and Treasury Department officials argued that the program benefited small businesses, given that more than 87% of loans distributed were for less than $150,000. However, the newly released data reveals that more than half of the $522 billion of allotted funding went to bigger businesses, and only 28% of that amounted to less than $150,000.

The other 72% was distributed to about 600 mostly larger companies, including dozens of national chains, received the maximum amount allowed under the program of $10 million. In a diagram, the Post shows that the top 1% of borrowers received more than a quarter of the total loan value, while the top 5% of loans amount to more than half of the total loan value.

PPP loan data through Aug. 8, 2020, can be downloaded, here.

By the end of the month, former President Donald J. Trump signed a $900 billion COVID-19 relief package, allotting $10 billion for highway infrastructure programs. The package also includes authorization of the Water Resources Development Act, which supports water-related infrastructure such as ports, harbors and inland waterways.

In addition to the $10 billion allotted for highway infrastructure programs, the legislation also offers $284 billion for first and second PPP loans to support small businesses, expanded PPP eligibility for local newspapers, television and radio broadcasters and $15 billion for movie theaters and live venues.

In March, the SBA released new guidance regarding revisions made to the Paycheck Protection Program that intends to make access to the PPP loans more equitable. The final rule arrived after President Joe Biden announced that his administration would be giving businesses with fewer than 20 employees and sole proprietors exclusive access to the portal from Feb. 24 through March 9.

Two months later, businesses were reminded to apply for loan forgiveness, although PPP forgiveness is not a guarantee. Since being launched last spring to keep businesses afloat in wake of the COVID-19 pandemic, the Small Business Administration has disbursed $780 billion, including more than $13 billion to U.S. contractors and construction firms, ranging between less than $50,000 to $5 million.

   

Tagged categories: COVID-19; Ethics; Fraud; Funding; Government; Laws and litigation; Lawsuits; NA; North America; Program/Project Management; Small Business Administration

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