chandra bozelko

“The new year promises to be an interesting one in white-collar crime” wrote professor Peter Henning of Wayne State University Law School and author of New York Times DealBook’s “White Collar Watch” back in January. Little did the professor know.

I doubt Henning could have predicted that thousands, maybe millions, of floundering businesses would be leaving as much as $100 billion in forgivable loans on the table as they risked insolvency because they were afraid they’d get arrested for taking it. The reopening of the economy is being slowed not just by the virus but because the public is increasingly aware of the government’s capriciousness in criminally charging people.

On May 5, two men in New England became the first people to face a criminal fraud complaint related to the Paycheck Protection Program, the $660 billion plank of the CARES Act that supplements the income of small businesses whose revenue’s been sliced by social distance and shelter-at-home orders. Prosecutors warned: More cases would be filed.

And they were. A cast member of reality TV show “Love and Hip Hop: Atlanta” was charged with making a fraudulent loan application that netted him $2 million, which he spent, in part, on a Rolex, diamonds and child support arrearage.

FBI agents picked up Maurice “Arkansas Mo” Fayne May 13, the same day the Small Business Administration changed the game and announced – in the form of guidance on Question 46 of its Frequently Asked Questions – that it would allow “safe harbor” for any loans under $2 million by assuming that all certifications made about need, meaning those statements applicants make about how much the business required the stimulus loan to stay afloat, were made in good faith.

That’s code for “no criminal charges.” If those PPP loans aren’t used for payroll and overhead, they’ll have to be paid back, but companies that borrowed less than $2 million shouldn’t expect to look out the window and see windbreakers on the stoop.

That also means that if Arkansas Mo had sought and borrowed $1.9 million and hadn’t been found out before May 13, he could have tooled around in his leased 2019 Rolls-Royce Wraith without worrying about red and blue lights pulling up on him.

The average loan is around $240,000, so it stands to reason that many, maybe even a majority, of PPP borrowers are covered by the guidance in Question 46 and won’t become defendants in criminal cases related to the PPP. Among those who’ve been preemptively absolved, there must be a few who fudged the numbers or doctored a document. At least for now, it looks like they’ll get away with it. While collar crime is interesting, indeed.

Attracting my attention is the likely reason for the SBA rule change. The deadline for the original PPP safe harbor provision – the amnesty period for borrowers who had committed fraud in the PPP application process to return the money in any amount with no questions asked – was May 14, a day after the answer to Question 46 appeared.

Business owners had been described as panicked and anxious prior to the May 14. Confessing to a crime when no penalty awaits is easy; the fact that entrepreneurs were perplexed about whether they should return the money during a time of financial amnesty tells me that they likely hadn’t made phony applications but were more afraid that the government would accuse them of doing so even if they hadn’t.

While the number of returned loans hasn’t been reported as of May 15, I bet it was higher than anticipated – almost like a reverse bank run – because people didn’t want to risk an indictment by an unpredictable prosecutorial regime. The SBA changed the safe harbor rule on May 13 because appropriated funds need to be circulating in the economy, otherwise foil the point of the PPP.

Especially during a crisis, no one should take advantage of stimulus programs or other bailouts. Some will, out of greed or even desperation, as the Rev. Jeff Grant, former inmate and founder of Progressive Prison Ministries, described in a first-person column for Entrepreneur.com. But most won’t, and they should feel confident that their lack of intent to cheat the government would protect them from being criminally accused as they’re trying to save their business against unprecedented odds.

But lack of intent – it’s called mens rea, Latin for “guilty mind” – is rarely a protection against indictment. White-collar crime in the year 2020 is interesting because people are proving that they’re hip to this reality; they wisely gave wide berth to fickle federal prosecutors, proving they’d go under before they’d go up the river over some poorly outlined lending rules.