Kostelanetz partners Sharon L. McCarthy and Jay Nanavati, and paralegal Lasya Ravulapati, co-wrote an article for Law360 titled “DOJ’s Tracing Rule for Pandemic Loan Fraud Is Untenable.”
During the COVID-19 pandemic, a plethora of small business assistance programs were introduced under the CARES Act, with the most notable being the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan program (EIDL). Of the $1.2 trillion in PPP and EIDL loans issued by the Small Business Administration, the government estimates that about $200 billion, or 17%, were issued to potentially fraudulent actors. Investigating PPP and EIDL borrowers for fraud is expected to remain a top priority for federal prosecutors well into 2026. In September 2025 alone, the DOJ announced three indictments, four convictions, and six sentencings for PPP or EIDL fraud.
In the article, Sharon, Jay, and Lasya examine the litigation positions taken by the Department of Justice in targeting alleged fraud in pandemic relief programs. The trio analyzes the position taken by DOJ in many recent cases–that a borrower’s inability to trace every dollar of pandemic relief loans to allowable expenses constitutes fraud–and argues that it is flawed. They explain why DOJ’s position presents defense counsel with legal avenues to contest federal charges.
The successful prosecutions to date portray a wide spectrum of conduct ranging from false claims to using borrowed funds for personal expenses. However, other investigations revealed more troubling positions taken by the government: that borrowers’ inability to trace every PPP or EIDL dollar to allowable expenses constitutes evidence of fraud, even if the borrowers were truthful about allowable expenses on their loan applications. The notion that PPP and EIDL proceeds are nonfungible and must be segregated from other funds is simply incorrect, the article argues.
While loan documents indicate that borrowers agree to maintain regular books and records, plus receipts for how they spent the loan proceeds, neither PPP nor EIDL loan documents mention fund tracing or segregation. Even after the SBA issued additional guidance clarifying disallowed uses of loan proceeds, its guidance did not contain language mandating that borrowers segregate loan proceeds from other funds into a separate account.
Sharon, Jay, and Lasya examine past EIDL programs, such as those following Hurricane Betsy in 1965 and the 9/11 attacks in 2001, for which borrowers were not required to segregate EIDL funds in separate accounts. They also note that while some government grant programs contain highly specific language on dollar-for-dollar segregation and fund tracing, the SBA did not do so with COVID-era loan applications. The article concludes that the government’s resources are best spent on cases where the loan proceeds were used for personal gain or employees were fabricated.
You can read the complete article here.
About Sharon
Sharon, a Fellow of the American College of Trial Lawyers and former federal prosecutor, has extensive experience representing individuals and corporations in white-collar criminal matters, civil and criminal tax controversies, and complex commercial litigation. She is an Adjunct Professor at Fordham Law School, where she teaches Trial Advocacy.
About Jay
Jay is a criminal tax defense attorney and a fellow of both the American College of Trial Lawyers and the American College of Tax Counsel. He represents individuals and entities facing investigations and prosecutions by the IRS, the FBI, state investigative agencies, U.S. Attorney’s offices, and the Department of Justice Tax Division.
About Lasya
Lasya Ravulapati is a paralegal at Kostelanetz LLP. She graduated from Cornell University in December of 2023 with a B.S. in Healthcare Policy and minors in English and Law & Society.
