Rolls-Royces, Rolexes and rowhouses: Feds crack down on small business loan fraud

A federal loan program designed to rescue small businesses from collapse was allegedly used by some borrowers to pay for Rolex watches, Vegas gambling trips and nights on the town at strip clubs.

Even though the fraudulent use of funds represents only a small portion of the money available in the Paycheck Protection Program, it shows that the rush of loans during the early pandemic emergency led to what prosecutors, Democratic lawmakers and taxpayer advocates fear could be significant abuse.

Federal prosecutors are ramping up investigations against individuals who they say fraudulently obtained the government-backed small business loans, which were aimed at softening the economic blow of the coronavirus pandemic during the wave of shutdowns.

The Justice Department has brought more than 40 cases involving false applications for more than $170 million from both the Paycheck Protection Program and another federal lending vehicle. And the Small Business Administration's inspector general's office says it has “initiated hundreds of cases involving potential fraud" in the two programs.

Officials are targeting people who submitted false applications with the SBA — mostly through the PPP, which offered loans to employers that can be forgiven if they agreed not to fire workers. Prosecutors are also focusing on the Economic Injury Disaster Loan program, which relies on funds directly from the government, not private banks.

The stepped-up enforcement comes as House Democrats warned in a Sept. 1 report that they've found red flags in nearly $3 billion in Paycheck Protection loans after checking the information that borrowers provided against a federal business registration database.

Republicans dismissed the report, noting that the alleged fraud represents a tiny fraction of the $525 billion in PPP loans that were given out to 5.2 million applicants in a program that President Donald Trump's administration says saved millions of American jobs.

But details on the vast majority of those loans — those under $150,000 — have not been released, and the way the money was initially rushed out the door has led some officials and watchdog groups to speculate that only a tiny fraction of the fraud has been uncovered, too.

"These indictments are only the tip of the iceberg regarding fraud in the PPP program," said Tim Stretton, a policy analyst with the Project on Government Oversight, one of numerous groups pressing the administration to release more data on the loan programs.

Taxpayer advocates said the cases underscore the need for more transparency and that the amount of data released by the government is unacceptable — even as Congress is already considering whether to make it easier for PPP loans of less than $150,000 to be forgiven.

Court records for many of the fraud schemes detail how individuals allegedly used money intended to fund their payrolls in order to bankroll personal purchases. Once their applications were approved, some of them left a money trail showing they wired millions to their personal accounts or those of friends and family, investigators say. Others purchased high-end jewelry, cars and property, while some hoarded bundles of cash. In one case, the DOJ charges thousands in PPP funds were spent at strip clubs.

Federal officials have seized luxury goods such as Rolex watches, including a diamond-encrusted custom model; a luxury car fleet with multiple Lamborghinis, a 2020 Ford F-350 and a Rolls-Royce Wraith; a rowhouse in Washington and a home in the Mojave Desert town of Henderson, Nev.; and a $3,750 diamond pinky ring.

Treasury is overseeing the PPP program with the SBA. When asked to comment on fraud cases, a Treasury Department spokesperson said in a statement: "Any program of this scope and size will encounter issues, and we have moved quickly to respond as they arise. The loan forgiveness process currently under way seeks to address data inaccuracies and other matters."

"In addition, all loans are undergoing an automated review and all loans over $2 million will undergo a manual review," the spokesperson said. "Furthermore, any loan may be selected for a manual eligibility or forgiveness review."

Among the larger cases of alleged fraud: A nine-person scheme, the DOJ alleged in numerous criminal complaints, coordinated applications between Florida and Ohio in an attempt to extract $24 million. But many of the multimillion-dollar frauds charged so far — POLITICO counted 18 above $2 million since May — describe hastily planned spending sprees.

Federal officials charged in a July 15 criminal complaint that 40-year-old Andrew Marnell of Los Angeles fraudulently obtained $8.5 million through numerous PPP loans and then blew hundreds of thousands of it gambling in Las Vegas and taking risky bets on Wall Street.

The DOJ charged Marnell with losing more than $525,000 in May alone in the futures markets, citing records from a brokerage account at Schwab, and wiring some $350,000 in PPP funds to the Bellagio Hotel in Las Vegas from June to early July. A public defender representing Marnell did not respond to a request for comment on the case.

One of the first guilty pleas came from a case involving a Virginia couple who the DOJ said on June 24 was arrested while attempting to flee to Poland after netting more than $1.4 million in stolen loans.

The husband, 42-year-old Tarik Jaafar, awaits sentencing on Nov. 13 after he pleaded guilty on Aug. 25. His wife, Monika Magdalena Jaworska, 43, pleaded guilty on Sept. 3 and awaits sentencing Nov. 20. An attorney for Jaafar declined to comment. Jaworska's attorney did not respond to a request for comment on her case.

Pending cases suggest it wasn't hard for anyone with a business license linked to a bank account to commit fraud. In some cases, just having an account and knowledge of how to falsify the information seemed to be enough.

Banks were responsible for issuing Paycheck Protection Program loans and may find their employees implicated in the fraud investigations. In an internal memo, JPMorgan Chase Bank's leaders said they had found instances of customers misusing PPP loans, unemployment benefits and other government programs and that “some employees have fallen short, too.”

“We are doing all we can to identify those instances, and cooperate with law enforcement where appropriate,” they said.

SBA watchdogs in July also voiced “serious concerns" about potential fraud with the EIDL program, which first began distributing relief loans to businesses in March before the Paycheck Protection Program launched in April. The EIDL program doled out more than $188 billion through 3.5 million loans, plus $20 billion in EIDL grants, according to data from Aug. 23.

Numerous media outlets — including The New York Times, The Washington Post and The Wall Street Journal — are suing the SBA to release more information on the PPP and EIDL loans.

Treasury and the SBA released some data on the loans in July, including a limited breakdown of EIDL loans, and a trove of details on some 650,000 businesses and nonprofits that received PPP loans above $150,000. But media groups want lower-value PPP loan data as well as the names and addresses of independent contractors and sole proprietors who got money through the EIDL program.

According to an August SBA report, nearly 72 percent of the value of the $525 billion in Paycheck Protection Program loans was extended in quantities at or above $150,000. But more than 3.5 million loans made under the PPP were $50,000 or below.

Stretton said that's why POGO is pushing for reviews of random samples of loan data at all funding levels. "That's how you can judge to see how much fraud has actually been committed," he said.

Zachary Warmbrodt contributed to this report.