Are Banks Reporting PPP Loan Fraud to the Government?

Dr. Nick Oberheiden is a nationally recognized expert on PPP loan laws
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For companies that received federal loans under the Paycheck Protection Program (PPP), the risks of facing an audit or investigation is significant. The U.S. Small Business Administration (SBA) is auditing all companies that received PPP loans of $2 million or greater, and the SBA’s Investigations Division, the U.S. Department of Justice (DOJ), and various other federal agencies are targeting recipients in PPP loan fraud investigations as well. Audits can lead to loss of forgiveness eligibility and other penalties, and investigations can lead to criminal charges carrying substantial fines and federal imprisonment.

What is the risk of your company being targeted? If your company received $2 million or more from the PPP, the answer is initially fairly straightforward: Under the U.S. Treasury Department’s current policy, your company will be audited. But, this belies another risk that your company is facing as well: In addition to being audited, your company could also be targeted in an investigation, and the impetus for this investigation could potentially come from a number of different sources.

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Dr. Nick Oberheiden

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John W. Sellers

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Aaron L. Wiley

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Gamal Abdel-Hafiz

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Chris Quick

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Kevin M. Sheridan

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Ray Yuen

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Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

Federal Authorities are Targeting Banks that Issued Fraudulent PPP Loans

One of these sources could be the bank that issued your company’s PPP loan. As recently reported by Reuters, the DOJ, “has sent grand jury subpoenas to big banks seeking records as part of a broader investigation into potential abuse of a $660 billion emergency loan program to help small businesses hurt by the novel coronavirus.”

The article continues:

“Policymakers worry that the huge pot of cash has been a magnet for fraudsters, and U.S. Treasury Secretary Steven Mnuchin has warned that companies found to have lied to secure loans could face prosecution. The Justice Department opened a probe into the program last month and has already brought criminal charges against borrowers it alleges lied about the state of their businesses and numbers of employees.”

With regard to the banks themselves, the concern appears to be that some (or many) of financial institutions that lent funds under the PPP did not do enough to prevent federal program fraud by borrowers. While the banks were granted protection as long as they could demonstrate that they relied on borrowers’ documentation and certifications when issuing PPP loans, this protection would not extend to circumstances in which any banks knowingly ignored or facilitated fraudulent loan applications. At this point, no allegations against any banks have been made, and it is not clear when – or whether – they will face scrutiny in relation to their lending practices under the PPP.

However, what is clear is that the DOJ and other agencies are targeting borrowers that have illegally obtained and/or illegally used PPP loan funds. The DOJ has already filed charges against several company owners and executives who are alleged to have committed fraud under the PPP. This includes charges for alleged acts including:

  • Creating shell companies in order to file PPP loan applications
  • Falsifying payroll data in order to obtain PPP loans
  • Submitting fraudulent certifications in support of PPP loan applications
  • Fraudulently filing PPP loan applications on behalf of existing companies and then diverting the funds
  • Using PPP loan funds for personal expenses

Previously, the DOJ, the SBA’s Investigations Division, and other authorities have relied on the information contained in PPP loan applications themselves and additional information obtained from the targets of their investigations. However, with the issuance of subpoenas to PPP lenders, this could open up a new source of evidence that federal prosecutors could use to bring charges. As stated in the Reuters article, “[d]ue to their critical role in processing the loans, banks have reams of information that could point to . . . fraud.”

Will Banks Resist Subpoenas to Provide Information about PPP Borrowers?

For PPP loan recipients, this raises an important question: Will banks that receive subpoenas from the DOJ challenge those subpoenas and seek to protect their borrowers’ information? At this point, the answer is, “Maybe,” although it would not be surprising for the banks’ attorneys to fight disclosing information by all legal means available. Not only could disclosing information to the federal government strain the banks’ relationships with their customers, but it could also potentially increase the banks’ own risk of federal prosecution for PPP loan fraud.

Even so, the grounds for challenging federal subpoenas are limited, and the banks could also have an interest in complying with the government’s investigations if there is something in it for them. The top prosecutors and investigative agents at the DOJ are also very good at what they do, and they almost certainly have a clear strategy in place for securing the evidence they need in order to prosecute PPP loan fraud. If this strategy includes securing information from the banks (as appears to be the case), then the odds are that they will use the DOJ’s subpoena power effectively to further their investigations.

What Do Company Owners Need to Know about Their Banks Sharing PPP Loan Information with the DOJ?

If PPP lenders share loan applicants’ and borrowers’ information with the DOJ, what does this mean with regard to federal investigations targeting these companies? One of the primary consequences would likely be an increase in the speed with which new criminal complaints are filed.

Rather than first seeking information from individual applicants and borrowers directly, the DOJ will be able to analyze the banks’ records and systematically flag any companies that appear to have engaged in PPP loan fraud. Then, when seeking additional information from these companies directly, the DOJ will already have a leg up on proving fraud, and it will be up to the companies that are being targeted to affirmatively demonstrate compliance with the terms and conditions of the PPP.

With regard to the types of information that may be shared, the DOJ will be seeking to obtain any and all evidence of fraud perpetrated under the PPP. This includes violations of the PPP ranging from filing applications with multiple lenders (called loan “stacking”) to falsifying application data and misusing PPP loan funds. For more information on the types of issues that may lead to prosecution, you can read: Could Your Company Be Prosecuted for Paycheck Protection Program (PPP) Loan Fraud?

What are the Risks of Being Investigated for PPP Loan Fraud?

For companies and individuals accused of committing fraud in relation to the Paycheck Protection Program, the risks of prosecution can be substantial. The DOJ is pursuing criminal charges in many cases – including charges such as bank fraud, wire fraud, and making false statements to the government – and these charges carry major fines and long terms of federal imprisonment. As a result, when targeted in PPP loan fraud investigations, companies and individuals must react swiftly in order to protect themselves, and they must be prepared to do everything possible to prevent charges from being filed.

With this in mind, for company owners, executives, and other individuals who are concerned about the potential outcomes of a federal PPP loan fraud investigation, it will be prudent to take a proactive approach to preparing for the possibility of a federal investigation – whether triggered by documents disclosed pursuant to a bank subpoena or some other source of information. In general terms, this approach should include answering questions such as:

  • Did your company’s PPP loan application comply with the terms of the program? There are several terms and conditions for PPP loan eligibility. When submitting their PPP loan applications, companies had an obligation to ensure that they met all of the eligibility criteria.
  • Do you have the documentation to prove that your company’s application was compliant? Even if your company has complied with the terms and conditions of the PPP, if you do not have the documentation to prove it, you could still be at risk in the event of a federal investigation. As a result, it will be important to compile all records that demonstrate compliance.
  • Has your company appropriately segregated its PPP funds so that their use can be tracked in accordance with the program? One key aspect of the PPP is that funds obtained under the program can only be used for certain legitimate business expenses. In order to demonstrate the proper use of PPP funds, companies should segregate them into a separate account and clearly document all expenditures.
  • Have any PPP loan funds been used for impermissible expenditures? Using PPP loan funds to cover personal expenses and other impermissible expenditures are issues that have already come up multiple times in DOJ PPP loan fraud investigations. Again, all expenditures from companies’ PPP loan accounts should be carefully tracked and documented.
  • Has your company otherwise violated the terms of the Paycheck Protection Program? Finally, if your company has committed any other violations of the terms of the PPP, you need to know about it before the issue is discovered by the federal government. This requires conducting an internal compliance assessment, and this is a step that should be undertaken with the advice and oversight of outside legal counsel.

Speak with a PPP Loan Fraud Defense Lawyer at Oberheiden P.C.

Are you concerned that your company (or you personally) could be at risk in the event of a PPP loan fraud investigation? If so, you should engage federal defense counsel immediately. To speak with a PPP loan fraud defense lawyer at Oberheiden P.C. in confidence, call 888-680-1745 or request a free case assessment online now.

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