Help in PPP Loan Fraud Investigation Due to Affiliation & Jail Time:: Avoid Criminal Liability Under 13 CFR 121.301

Getting Jail Time for PPP Loan Fraud is Alive and Well – Seek Legal Counsel from Our PPP Fraud Attorneys. Although You May Have Made an Honest Mistake, or No Mistake At All, Your are Presumed Innocent.  News of an Investigation or Criminal Charges Certainly Does Not Bring a Confident Feel of a Presumption of Innocence.

We Help Clients That May Have Owned More than One Business, Being Investigated for Loan Fraud. We Offer Nationwide Help With SBA Fraud and PPP Loan Fraud Investigations While Helping to Possibly Minimize or Avoid PPP Jail Time.

In a scheme to mislead the IRS and the Paycheck Protection Program (PPP), a federal loan program created to assist businesses in paying their employees and covering expenses during the COVID-19 outbreak, two California men have been given prison sentences. On February 10, 2023, Thanh Ngoc Rudin of Rosemead, 58, received a sentence of 34 months in jail, and today, Seir Havana of North Hollywood, 46, received a sentence of 42 months. Quin Rudin, Thanh Rudin’s brother, received a 10-year prison term in October 2022 for his participation in the fraud.

What is PPP Loan Fraud Under SBA Affiliation Rules 13 CFR 121.301 ?

The Small Business Administration (SBA) recently issued new guidance on affiliation rules related to the Paycheck Protection Program (PPP). The new regulations are intended to prevent PPP loan frauds and other abuses of the PPP loan system. In addition, the SBA has established “affiliates in interest” guidelines which dictate that businesses with shared directors, officers, employees, or shareholders may also be deemed affiliated. It is important for businesses to be aware of these rules, as they can significantly limit the amount of PPP funding available to a particular controlled group.

The PPP Loan Investigations are intended to provide a comprehensive assessment of the implementation, effectiveness, and impacts of the Paycheck Protection Program (PPP) loans. The SBA, DOJ or other law enforcement agency aggressively investigates small businesses if they suspect PPP loan fraud.  

Under the SBA’s affiliation rules, 13 CFR 121.301, small businesses that are considered part of a larger controlled group may be subject to certain restrictions when applying for and receiving PPP loans. For example, if two or more companies have common owners, they might be considered part of an affiliation group even if they operate as separate entities. If you own two or more businesses, you want to immediately retain a PPP fraud investigation defense attorney.

Businesses should also be aware that the SBA takes fraudulent activities related to PPP loans very seriously. Applicants found to have violated affiliation rules may be subject to criminal penalties and other sanctions. For this reason, it is essential that businesses comply with all SBA regulations and review their affiliations carefully before applying for or accepting PPP funds.

SBA Fraud Investigations – Four tests for affiliation based on control apply to participants in the Paycheck Protection Program.

When it comes to SBA fraud PPP loan investigations for purposes of determining the number of employees of an applicant to the Paycheck Protection Program, the applicant is considered together with its affiliates. Following is a summary of the applicable affiliation tests applied when the SBA and or DOJ investigate small businesses for PPP loan frauds. Are people going to jail for PPP loans and fraud? Yes. See Article about DOJ investigation criminal defendants.

You don’t have to actually control another business: Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether the control is exercised, so long as the power to control exists. Affiliation under any of the circumstances described below is sufficient to establish affiliation for applicants for the Paycheck Protection Program.

(1) Affiliation based on ownership. For determining affiliation based on equity ownership, a concern is an affiliate of an individual, concern, or entity that owns or has the power to control more than 50 percent of the concern’s voting equity. If no individual, concern, or entity is found to control, SBA will deem the Board of Directors or President or Chief Executive Officer (CEO) (or other officers, managing members, or partners who control the management of the concern) to be in control of the concern. SBA will deem a minority shareholder to be in control, if that individual or entity has the ability, under the concern’s charter, by-laws, or shareholder’s agreement, to prevent a quorum or otherwise block action by the board of directors or shareholders.

 (2) Affiliation arising under stock options, convertible securities, and agreements to merge.

(a) In determining size, SBA considers stock options, convertible securities, and agreements to merge (including agreements in principle) to have a present effect on the power to control a concern. SBA treats such options, convertible securities, and agreements as though the rights granted have been exercised.

(b) Agreements to open or continue negotiations towards the possibility of a merger or a sale of stock at some later date are not considered “agreements in principle” and are thus not given present effect.

(c) Options, convertible securities, and agreements that are subject to conditions precedent which is incapable of fulfillment, speculative, conjectural, or unenforceable under state or Federal law, or where the probability of the transaction (or exercise of the rights) occurring is shown to be extremely remote, are not given present effect.

(d) An individual, concern or other entity that controls one or more other concerns cannot use options, convertible securities, or agreements to appear to terminate such control before actually doing so. SBA will not give present effect to individuals’, concerns’, or other entities’ ability to divest all or part of their ownership interest in order to avoid a finding of affiliation.

(3) Affiliation based on management. Affiliation arises when the CEO or President of the applicant concern (or other officers, managing members, or partners who control the management of the concern) also controls the management of one or more other concerns. Affiliation also arises when a single individual, concern, or entity that controls the Board of Directors or management of one concern also controls the Board of Directors or management of one or more other concerns. Affiliation also arises when a single individual, concern or entity controls the management of the applicant’s concern through a management agreement.

(4) Affiliation based on identity of interest. Affiliation arises when there is an identity of interest between close relatives, as defined in 13 CFR 120.10, with identical or substantially, identical business or economic interests (such as where the close relatives operate concerns in the same or similar industry in the same geographic area). Where SBA determines that interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.

Religious Exemption. The relationship of a faith-based organization to another organization is not considered an affiliation with the other organization if the relationship is based on a religious teaching or belief or otherwise constitutes a part of the exercise of religion.

Waiver. The affiliation rules under the SBA Paycheck Protection Program as described above are waived for:

(1) any business concern with not more than 500 employees that, as of the date on which the loan is disbursed, is assigned a North American Industry Classification System code beginning with 72;

(2) any business concern operating as a franchise that is assigned a franchise identifier code by the SBA; and

(3) any business concern that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act of 1958 (15 U.S.C. 681).

What Happens in SBA PPP Fraud Investigations?

SBA PPP (Small Business Administration Paycheck Protection Program) fraud investigations are conducted to address potential fraudulent activities or misuse of funds related to PPP loans. The SBA fraud investigation are typically carried out by various agencies, including the Small Business Administration Office of Inspector General (SBA OIG), the Department of Justice (DOJ), and other law enforcement agencies. Here’s an overview of what happens in SBA PPP fraud investigations:

1. PPP Loan Investigation – Initiation: Investigations can be initiated based on various triggers, including whistleblower complaints, suspicious activity reports, data analytics, or referrals from other agencies. The SBA OIG and other law enforcement agencies review the information to assess its credibility and determine whether further investigation is warranted.

2. Gathering Evidence: PPP Investigators collect and analyze evidence related to potential fraud, such as loan applications, supporting documents, bank records, financial statements, payroll information, and other relevant documents. They may also conduct interviews with individuals involved in the loan application process, including business owners, employees, lenders, and other relevant parties.

3. Identifying Fraudulent Activities: Investigators focus on identifying potential fraudulent activities, which may include submitting false information, inflating payroll costs, misrepresenting the number of employees, using SBA PPP funds for unauthorized purposes, or applying for multiple loans under different identities. They assess whether the loans were obtained fraudulently or if there was intentional misappropriation of funds.

4. PPP Loan Fraud Investigations – Prosecution and Legal Action: If the investigation uncovers evidence of fraud, the case may be referred to the DOJ or other prosecuting authorities for potential criminal charges. The decision to prosecute depends on factors such as the strength of the evidence, the severity of the alleged fraud, and the available resources. In cases where criminal charges are pursued, individuals found guilty of PPP fraud may face criminal penalties, including fines and imprisonment.

5. Civil Remedies and Recovery: In addition to criminal prosecution, the SBA and other agencies may pursue civil remedies to recover improperly obtained funds or seek monetary damages. This can involve filing civil lawsuits, imposing administrative penalties, or negotiating settlements with individuals or businesses involved in PPP fraud.

It’s important to note that PPP loan investigations and their outcomes vary depending on the specific circumstances of each case. The SBA and other agencies involved work diligently to identify and address PPP fraud to protect the integrity of the program and ensure that funds reach eligible small businesses in need. 

Who Brings PPP Loan Criminal Charges for SBA Affiliation Violations?

Getting the Proper Legal Help During a PPP Loan Investigation is Critical to the Outcome of Your Case

We look forward to hearing from you soon and helping you through this difficult time.

If you are a small business that is being investigated or charged for fraud under the SBA Paycheck Protection Program, call our SBA PPP Loan Investigation Fraud Lawyers at 1.866.601.5518.