BEYOND FORGIVENESS

While SBA reviews PPP loans for compliance, the DOJ is left to mop up a flood of fraud.

Business owners misused Paycheck Protection Program funds to buy new homes, diamond jewelry, and luxury cars. The residue of fraud will linger for years to come.

PPP Loan Fraud

When Devron Brown applied for a Paycheck Protection Program loan in 2020, he received $937,500 for his Philadelphia business — and used the money to buy a new home in Florida, a motorcycle, an all-terrain vehicle, a luxury automobile, and diamond jewelry.

Not only did Brown use the federal aid for a personal spending spree rather than payroll and utilities, but he also obtained the loan by misrepresenting facts about his company, Just Us Construction, including the number of employees, the wages paid to them, and the payroll taxes paid on those wages.

In early 2021, he tried to do it again.

His second PPP application was denied, and Brown was arrested in June 2021 on two counts of bank fraud and nine counts of money laundering. He pleaded guilty to all charges six months later and was sentenced last April to six and a half years in prison and ordered to pay restitution.

Brown’s PPP fraud case was the first prosecuted by the U.S. Attorney’s Office for the Eastern District of Pennsylvania, but it certainly hasn’t been the last. The Department of Justice reported last September that it has criminally prosecuted 1,500 defendants for more than $1.1 billion in PPP fraud and initiated 1,800 civil investigations involving another $6 billion in losses. That includes several cases in the Philadelphia region.

The amount of fraud is most likely much higher than that, according to Samuel Kruger, an assistant professor of finance at the University of Texas at Austin. A paper Kruger co-authored estimates that $64 billion of the $793 billion in PPP loans issued show signs of fraud, such as suspiciously high payrolls, lack of proper business registration with the state, large discrepancies in the number of employees being reported, and multiple loans going to the same residential address.

Mitch Gerstein’s Insight

Mitchell Gerstein, an accountant at Isdaner & Co. in Bala Cynwyd, said normal internal controls and systems would allow the government to check payroll data with the Social Security Administration to quickly see if a business owner was telling the truth or not. It wasn’t until May 2021 that the DOJ started a Covid-19 fraud strike force to investigate and prosecute the growing number of cases that had arisen during the previous 14 months. In the meantime, billions of pandemic relief dollars that were spent in a fraudulent manner could have gone to needy business owners who were shut out of the program.

Additional Experts

Read the full Philadelphia Business Journal article, by Jeff Blumenthal, where seven experts chime in about this topic and its impact on Philadelphia businesses, including:

• Red flags
• Fintech’s PPP lending overview
• Pandemic fraud prosecutions and forgiveness by the numbers