Like millions of Americans, Robert Benlevi, a suburban Los Angeles man in his 50s, applied for the Paycheck Protection Program—Small Business Administration-backed loans meant to keep people working during the COVID-19 pandemic.
He appeared to show a fair amount of persistence.
Over a three-month period in 2020, the former pharmacist submitted 27 applications to four banks, according to government records. Applicants were required to certify the number of jobs their businesses would retain with the loans, which had amounts determined by applicant-submitted payroll data. Benlevi claimed to have eight different businesses with 100 employees each, according to the government, and he certified that each business had an average monthly payroll cost of $400,000.
The only problem was that, according to a May 2021 federal grand jury indictment, none of the businesses had any employees.
Furthermore, Benlevi was accused of fabricating and submitting false IRS forms with the loan applications.
At least one bank raised concerns about Benlevi and rejected him in May 2020, his sentencing memo states. But then, later in the month, he simply applied for six loans with a different lender and was successful. He ultimately obtained a total of $3 million in PPP funds based on fraudulent loan applications for three different companies, according to the U.S. Department of Justice.
In March 2022, a Los Angeles federal jury convicted Benlevi of bank fraud, money laundering and making false statements to a financial institution. In July, he was sentenced to more than 11 years in prison. Benlevi filed a notice of appeal the same day.
Fraudsters who had similarly far-fetched applications but sought five figures rather than seven might never be caught. Lawyers and academics interviewed by the ABA Journal say the application process for the $800 billion loan program, part of the 2020 coronavirus stimulus package known as the CARES Act, was fraught with fibbers. Many doubt that most of the bad actors will be arrested because the volume of fraud seems so high.
“There’s no way. Who has the time to go through all that stuff?” asks William Beggs, a University of San Diego finance professor who previously worked as a securities compliance examiner with the U.S. Securities and Exchange Commission.
Beggs co-authored an upcoming paper focused on investment advisers who received PPP loans. Advisers must annually report their number of employees with the SEC, and Beggs compared that data with what the investment advisers listed on their loan applications.
PPP loans were distributed in two rounds in April 2020, followed by another draw in March 2021. From a pool of 12,643 eligible investment advisers, Beggs’ data showed 2,999 received PPP loans during the first draw. Of those applications, 25% listed a larger number of employees than what was reported in SEC filings. Pulling out what he called “the most egregious 10% of the sample,” he found that $36 million in funds were overallocated to those 299 firms.
Beggs’ paper, “Fraud and Abuse in the Paycheck Protection Program? Evidence from Investment Advisory Firms,” is scheduled to be published in a special issue of the Journal of Banking and Finance focused on market impacts of the COVID-19 pandemic.
In order to qualify for loan forgiveness, businesses had to certify they used at least 60% of the loans to retain workers and maintain payroll. Using SBA data released in October, an NPR analysis found that 91% of the PPP loans were fully or partially forgiven. But that doesn’t mean borrowers are absolved. According to lawyers interviewed by the ABA Journal, some recipients may be audited after receiving forgiveness letters.
Some lawyers have observed a pattern of government investigations being focused on the number of employees reported, but they doubt there are enough resources to check all applications.
Also, the average first draw PPP loan size was $101,000, according to a 2020 SBA report, but it’s rare for some U.S. attorney’s offices to prosecute cases with damages that low.
“As a general rule, if you took a small amount of money, you will probably not find yourself in federal court,” says Jeffrey Cramer, a former assistant U.S. attorney for the Northern District of Illinois who now does corporate investigation work for Guidepost Solutions.
The federal government has acknowledged that the program had some problems. In May, the SBA’s inspector general released a report stating that data showed 70,000 loans totaling more than $4.6 billion had red flags. Indicators included duplicate loans and businesses created after Feb. 15, 2020, the cutoff date for program eligibility.
Under U.S. code, there’s a five-year statute of limitations for noncapital federal crimes unless provided by law. A few months after the report, President Joe Biden signed a bill that created a 10-year statute of limitations for federal prosecutions of PPP loan-related fraud charges.
“It’s going to take time to build these cases and track down the folks who are responsible. I think this amount of fraud is unprecedented and really hard to wrap your arms around,” says Daniel Suleiman, who previously served as the deputy chief of staff of the criminal division of the U.S. Justice Department.
Suleiman, now a Covington & Burling partner who co-chairs the firm’s aerospace, defense and national security industry group, says that under less urgent circumstances, the loan program would have been designed differently.
“This was shoveling enormous amounts of money out the door very quickly to deal with a completely unprecedented crisis. It was a bit of throwing everything at the wall and hoping something would stick,” he says.
In an email, the SBA told the ABA Journal it is working diligently to prevent fraud and remedy challenges experienced during the prior administration.
“We applaud the work that our law enforcement partners and the United States Secret Service have done to ensure fraudsters are held accountable,” said Peggy Delinois Hamilton, the SBA special counsel for enterprise risk.
Flags for potential loan fraud include the use of fictitious business names and not disclosing criminal or bankruptcy records, according to the SBA. Machine learning was deployed to enhance efficiency, and manual review is used for loans that seem to have a higher likelihood of fraud.
“To date, the SBA has conducted more than 65,000 manual loan reviews,” the agency reported to the Journal in November.
Paul Petruzzi, a Miami white-collar criminal defense lawyer, and his partner Beatriz Vazquez represent more than 30 federal defendants charged in various jurisdictions with fraud related to the PPP and COVID-19 Economic Injury Disaster Loans. He claims there was little to no government oversight when the money was distributed.
“Look—you’re advertising free money. All of this money got poured into the program to save the economy, and you know what? It actually happened. Our clients spent the money on paying bills, Mercedes-Benz G-Wagons, regular cars, a new food truck and Airbnbs,” Petruzzi says.
Marissel Descalzo, a white-collar criminal defense lawyer at Tache Bronis in Miami, thinks the floor for a PPP loan-related fraud case in the U.S. Attorney’s Office for the Southern District of Florida is around $400,000 unless someone did something really outrageous, such as use the money to buy a Ferrari. The office did not respond to an ABA Journal interview request.
Descalzo represented a client who received an investigation letter from the government related to two PPP loans he had totaling $299,800. She says the office did not pursue charges against her client.
“I convinced them because he agreed not to ask for forgiveness, and it was not a lot of money,” says Descalzo, a vice-chair at large with the ABA Criminal Justice Section.
A few months before the March 2021 draw, the government added a rule that people seeking additional PPP loans for over $150,000 had to show revenue reductions of more than 25% in 2020 relative to 2019. An August working paper by three University of Virginia professors found that the screening significantly reduced loan irregularities seen as red flag indicators. However, borrowers could “strategically evade” the revenue documentation requirements if they took out PPP loans for less than $150,000.
The paper is titled “Screen Now, Save Later? The Trade-Off Between Administrative Ordeals and Fraud.” Co-author Shan Aman-Rana, an economics professor, says lenders were responsible only for collecting the loan documents, not finding red flags.
“If we look at Section 1102 of the CARES Act, lenders were held harmless if they acted in good faith and all documents were complete. They were acting like a very expensive post office,” she says.
John Griffin, a finance professor at the University of Texas at Austin, co-wrote a forthcoming paper focused on nonbank lenders and the PPP loans they administered. His research found that the lenders, known as fintechs, broadened access to loans and processed them faster than traditional banks with fewer defaults. He also discovered that indicators of potential misreporting were consistently concentrated with certain fintech lenders. Those included nonregistered businesses and multiple businesses listed at residential addresses.
“We found that for certain ZIP codes in certain counties, there were a tremendous amount of loan applications with identical answers,” Griffin says.
The paper, titled “Did Fintech Lenders Facilitate PPP Fraud?” used some examples from Illinois. The data showed 14 PPP loans going to the address of a home with an estimated value of $170,000 in the northern part of the state. Most of the businesses were in the same industry and asked for the same amount. And at a suburban Chicago home, four people living there received PPP loans for $20,833 each, according to the paper.
Overall, Griffin says most of the seemingly fraudulent applications were made in 2021 rather than 2020.
“Fraudsters were probably successful in getting loans during rounds one and two, and then the word spread,” he says.
A bank may have tipped off the federal government about a Utah man charged in August 2020 with PPP loan-related fraud. Michael Douros was approved for a $198,800 loan in May 2020 for a vehicle rental business. Zions Bank canceled the transfer after determining Douros had fewer employees than he indicated on the application and that his monthly payroll was significantly less than the $79,524 he claimed, according to the indictment.
Also, Douros has a 2016 Utah felony conviction, and the program prohibited approving loans for businesses in which more than 20% of the ownership has felony convictions within the past five years. In his sentencing memo, Douros claimed Zions Bank may have stopped his loan because one of its personal bankers, working with Douros’ business partner, knew about Douros’ conviction.
He sought another PPP loan through Cache Valley Bank later that month after transferring his Epic Rentals ownership to a son. Douros again lied about employees and payroll on the application and was approved for a loan of about $239,000. Within a month, Douros’ son transferred him $95,000.
Douros pleaded guilty to money laundering, bank fraud and making a false statement to a bank, according to a January 2022 judgment. He was sentenced to serve 28 months in prison.
Greg Skordas, his lawyer, knows of only a few other PPP loan-related fraud cases brought by the Utah U.S. attorney’s office.
“The government can only audit so many of these PPP loans. I think a huge amount of fraudsters fell through the cracks,” says Skordas, a partner with Salt Lake City’s Skordas & Caston.
The Utah U.S. Attorney’s Office said in late December that it has charged eight PPP loan fraud cases.
Like many criminal defense lawyers interviewed, Skordas says he’s getting calls from people with PPP loans who have not been contacted by federal investigators but fear they might be.
“I tell them anything you say to the government can and will be used against you. On the other hand, the honorable thing to do would be to pay back the money,” Skordas says.
He adds that if a crime was committed, it doesn’t matter if the money is repaid, but the government could see that as a mitigating factor.
Diane Bass, an Irvine, California, criminal defense lawyer, suspects many who received the loans through false information fear getting caught. Her assumption is based on the fact that an April 2021 YouTube video she made about PPP fraud sentencing had more than 239,000 views as of early January.
A common thread she’s seen in the federal charges is the number of employees on the application not matching up with pre-2020 information. More commonly, she sees people who fabricated corporations, tax documents and bank accounts.
One of her clients hired a man to fill out his application and claims the business numbers were inflated without the client’s consent. According to Bass, the man kept 75% of the loans received. “He said, ‘Give me your Social Security number, and I’ll do it all,’” Bass says. “One woman was expecting $20,000, and she got $900,000.”
She adds that the man who filled out the applications is “allegedly deceased.”
Even for legitimate businesses providing PPP loan advice, the work could be confusing, particularly for the April 2020 draws, according to Christopher Kane, an Adams and Reese partner based in New Orleans. His firm helped approximately 300 clients determine if they were eligible for the program.
“The rules changed literally on a daily basis, and we couldn’t make any guarantees,” says Kane, adding that they focused on the regulation in place the day a client’s application was filed. A key instruction throughout the process was making sure payroll data matched what was put in the loan application.
“We would not go back and verify that, but we said to clients, ‘Make sure you can and do,’” Kane says.
For legal advice on applications seeking more than $1 million, he estimates the firm usually charged between $5,000 and $7,000. As of October, some client loans had SBA review after they had been forgiven, but no audits. And some received questions Kane thinks are preaudit-related. He’s hopeful the government will vigorously pursue all fraud in PPP loans, but he acknowledges that may not be realistic.
“Like with any company or agency, at the end of the day, it’s a resource deployment. I think the federal government is going to take a look at what’s the risk and what’s the return,” Kane says.