SBA Fraud / PPP Loan Fraud Defense

Could Your Company Be Prosecuted for Paycheck Protection Program (PPP) Loan Fraud?

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Signed into law on March 27, 2020 the Coronavirus Aid, Relief, and Economic Security (CARES) Act was intended to provide various benefits to individuals and companies affected by the novel coronavirus (COVID-19) pandemic. A centerpiece of the CARES Act was the Paycheck Protection Program (PPP). Endowed with nearly $350 billion in federal funds, the PPP was created to provide much-needed financial relief to small and medium-sized businesses that are facing financial strain due to the economic impacts of the COVID-19 crisis.

Despite its size, the Paycheck Protection Program effectively ran out of funds in a matter of minutes. Lenders participating in the PPP were flooded with applications immediately, and many companies that should have been eligible to receive loans were left out in the cold. Any time a federal program offers financial relief to businesses or consumers, there are going to be questions raised about fraud. But, with the nature of the PPP and the extraordinary rate at which its multi-hundred-billion-dollar allocation was depleted, many companies that received PPP loans can expect to face heavy scrutiny from federal authorities.

Various Fraud Concerns Have Been Identified in Relation to the PPP

In response to concerns about fraud (and in order to identify various other “lessons learned” from what many have viewed as severe flaws in the PPP system), the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is seeking input from lenders about how they can improve future programs and address issues that have arisen out of PPP. According to FastCompany.com based on this effort, “[t]he issue of fraud identification is likely to be the subject of increased focus given the disorganized nature of the application rollout, and considering that similar federal relief programs . . . have seen their share of fraudsters.”

There are various other fraud concerns related to the PPP as well; and, while the U.S. Treasury Department may be looking ahead, other agencies are looking back to try to identify companies that unlawfully received funds from the PPP. For these companies, the risk of prosecution is likely to be high as the PPP’s near-immediate depletion gained widespread negative publicity, and it will be important for these companies to engage experienced federal counsel who can help mitigate the risk of facing substantial penalties.

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What Constitutes Paycheck Protection Program (PPP) Loan Fraud?

As with all types of federal programs, there are various acts and omissions that have the potential to lead to allegations of federal fraud in relation to the Paycheck Protection Program. This includes not only intentional misrepresentations (which can lead to criminal fraud charges), but also inadvertent mistakes that still resulted in the improper receipt of federal funds.

For example, the following are all possible allegations of fraud in relation to the PPP:

1. Loan “Stacking”

As explained in the FastCompany.com article linked above, “[o]ne specific type of potential fraud mentioned by the OCC is ‘loan stacking,’ or an applicant receiving PPP loans from multiple lenders.” The OCC’s website confirms that the Office will be focusing specifically on this type of fraud. The federal government has the ability to track the distribution of all funds from the Paycheck Protection Program, and companies that received funds from more than one lender may become early targets in the government’s efforts to prosecute PPP fraud.

2. PPP Loan Application Fraud

The PPP contained multiple eligibility criteria. Companies that misrepresented information on their loan applications in order to fraudulently claim eligibility could face prosecution as well. This includes misrepresenting information such as:

• The company’s number of employees (in order to be eligible companies in most industries were required to have 500 fewer employees);
• Misclassifying employees as independent contractors in order to fall below the 500-employee threshold; and,
• For companies with more than 500 employees, misrepresenting that they met the applicable Small Business Administration (SBA) employee-based size standards for eligibility in their particular industries; and,
• Misrepresenting the company’s payroll costs in order to increase the loan amount (under the PPP, companies are only eligible to receive loans in amounts equal to up to two months of their average monthly payroll costs from the last year plus an additional 25 percent, subject to a maximum loan amount of $10 million).

3. Fraudulent Loan Certification

In addition to the above-listed eligibility criteria, PPP loan applicants were also required to certify to various facts. These certifications were required to be made in good faith, and any bad-faith certifications have the potential to lead to charges for federal fraud. The mandatory certifications for securing PPP loans include (but are not limited to):

• “Current economic uncertainty makes the loan necessary to support your ongoing operations.”
• “The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.”
• “You have not and will not receive another loan under [the PPP].”
• “All the information you provided in your application and all supporting documents and forms [are] true and accurate.”

4. Using PPP Funds for Ineligible Business Purposes

Companies that received federal funds through the PPP are restricted to using those funds for four specific purposes: (i) to cover payroll costs, including benefits; (ii) to pay interest on mortgage obligations; (iii) to pay rent; and, (iv) to pay for utilities. With respect to mortgage interest, rent, and utilities, PPP funds can only be used to cover expenses under obligations that were preexisting as of February 15, 2020. Using PPP funds for any other purpose is impermissible and has the potential to lead to allegations of fraud.

What do companies need to do in order to prove that they are in compliance with this requirement? The answer is not entirely clear. Minimally, however, companies that received PPP funds will want to thoroughly document the source of payment for all eligible and non-eligible expenses so that they can demonstrate compliance in the event of a federal audit or investigation.

5. Using PPP Funds for Fraudulent Purposes

The U.S. Treasury Department’s Paycheck Protection Program (PPP) Information Sheet states: “There is no personal guarantee requirement [under the PPP]. . . . However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.”

This is important, because it signifies that the government intends not only to prosecute companies that fraudulently obtain loans through the PPP, but also to prosecute individuals who are personally involved in fraudulent activities. Under the False Claims Act, individuals can face tens of thousands of dollars in fines and up to five years of federal imprisonment for fraudulently obtaining funds from the PPP. If federal prosecutors pursue charges for multiple statutory offenses (which will most likely be the case in instances of significant fraud), company owners and executives could be at risk of hundreds or millions of dollars in criminal fines and decades behind bars.

6. Fraudulent Loan Forgiveness Certification

While the Paycheck Protection Program has a low 1.00 percent interest rate, many companies will be eligible for loan forgiveness. In order to request loan forgiveness, companies must provide documentation that they have continually met the eligibility criteria and that they have used their PPP funds for authorized expenses. According to the U.S. Treasury Department, companies must also “certify that the documents are true and that [they] used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.”

7. Misrepresenting or Concealing Information During a PPP Audit or Investigation

Many companies will face audits and investigations related to their receipt of PPP loan funds. This includes audits and investigations conducted by the Federal Bureau of Investigation (FBI), the U.S. Department of Justice (DOJ), various other federal agencies, and task forces that are formed specifically to target PPP loan fraud.

If your company is audited or investigated, you must be extremely careful to avoid disclosing potentially-harmful information, but it is also imperative that you avoid making any misrepresentations or concealing pertinent information. Making false statements or withholding information you are required to disclose to federal authorities is itself a form of fraud, and you could potentially face individual prosecution for making false statements to federal law enforcement agents.

What Should You Do if You or Your Company is Targeted for SBA PPP Loan Fraud?

If you or your company is targeted in a PPP loan fraud audit or investigation, what should you do? The single most important thing you can do is to engage experienced federal defense counsel right away. This is a serious matter that requires your immediate attention, and you will need to rely on the advice and representation of experienced attorneys who know how to fend off federal charges. At Oberheiden P.C., our federal defense attorneys are actively representing clients in a broad range of issues related to the novel coronavirus (COVID-19) pandemic; and, if you need to fight allegations of PPP loan fraud, we can use our experience to protect you.

Speak with an SBA Fraud Defense Lawyer at Oberheiden P.C.

Do you need to speak with a federal defense attorney about Paycheck Protection Program (PPP) loan fraud defense? For a free and confidential consultation with a senior attorney at Oberheiden P.C., call 888-680-1745 or inquire online now.

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