Do You Know if Your Company is Complying with the Terms and Conditions of the PPP?

Yes. On April 28, 2020, U.S. Treasury Department Secretary Steven Mnuchin announced that the SBA will be conducting audits intended to uncover PPP loan fraud. According to Mnuchin, the SBA’s auditing efforts will cover all companies that received at least $2 million in funding, and the SBA will conduct “spot checks” for companies that received smaller loans. So, if your company received a PPP loan in excess of $2 million, you can expect to be audited. If your company received less than $2 million in funding, it isn’t off the hook, and you will still need to be prepared to demonstrate compliance if called upon to do so by the SBA.

The risks of facing an SBA audit can be substantial. Most immediately, an audit could result in the loss of eligibility for loan forgiveness under the PPP. However, if the SBA uncovers evidence of fraud, it could refer your company (or you personally) to the U.S. Department of Justice (DOJ) for prosecution. The DOJ has already charged numerous individuals with bank fraud, wire fraud, and other crimes related to fraudulent activity under the PPP, and it has signaled its intention to continue aggressively pursuing leads involving PPP loan fraud.

During PPP audits, the SBA will be examining companies’ practices in relation to the PPP loan application process as well as their use of PPP funds. The SBA will also be expecting companies to provide documentation validating their applications and PPP loan fund expenditures. For example, some issues that have already come up during federal audits and investigations include:

• Loan “stacking,” or obtaining multiple PPP loans from multiple financial institutions.
• Fraudulently certifying that, “[c]urrent economic uncertainty makes the loan necessary to support your [company’s] ongoing operations.”
• Misrepresenting the company’s payroll or number of employees.
• Using PPP funds for expenses other than payroll costs, mortgage interest payments, rent, and utilities.
• Fraudulently certifying that all loan forgiveness eligibility criteria have been satisfied.

This list is by no means exhaustive. Despite the expedience with which the PPP was rolled out, companies receiving funds under the program are subject to numerous compliance obligations. Any compliance deficiencies have the potential to lead to federal action, and this makes it essential for companies to uncover any and all issues before the SBA conducts an audit or the DOJ launches an investigation.

If you have reason to believe that your company’s PPP loan application may have been fraudulent in any respect, you first need to confirm whether your suspicions are correct. Due to the potential ramifications involved, you cannot afford to make decisions based on assumptions or incomplete information. It will be necessary to carefully review your company’s PPP application and all supporting documentation (whether or not this documentation was collected at the time of application), and you will need to work with legal counsel who is familiar with the PPP’s eligibility criteria and application requirements.

If your company received PPP funds when it was not eligible to do so, then you will need to work with your company’s counsel to determine the appropriate next steps. This could mean returning the funds voluntarily; however, the decision to return PPP funds (and potentially disclose fraudulent conduct) is one that needs to be made based on the advice of an experienced federal compliance and defense attorney.

If your company has used PPP loan funds for purposes other than payroll costs, mortgage interest payments, rent, and utilities, this too is a situation that needs to be handled delicately. The SBA’s “safe harbor” date for returning PPP funds has expired, so your company cannot simply return the funds without risk of penalty. If you find yourself in this situation, or if your company did not adequately segregate its PPP loan in order to account for all expenditures, you will want to speak with an attorney promptly.

If your business has been able to reopen and re-stabilize as a result of your state’s stay-at-home order being lifted, you may no longer need the balance of your PPP loan. If this is the case, you will need to determine if you have an obligation to return the remaining funds. Again, before you voluntarily return funds to the federal government, it will be important to conduct an internal audit or investigation to make sure that doing so is not going to create a risk of federal prosecution for PPP loan fraud.

In order to receive loan forgiveness under the PPP, your company must be able to demonstrate that it has fully complied with the terms and conditions established by the CARES Act and promulgated by the SBA. Your company must provide documentation of full compliance, and you must certify that, “the documents are true and that [your company] used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.”

In order to determine whether your company is fully compliant with the requirements for PPP loan forgiveness, it will be necessary to conduct a comprehensive internal PPP compliance audit. The required certification means that companies cannot request forgiveness with anything less than complete certainty that they have satisfied all applicable terms and conditions.

Conducting an internal PPP compliance audit without engaging legal counsel is not recommended. First and foremost, you need to be certain that your company’s certification for PPP loan forgiveness is valid, and this requires an in-depth understanding of the legal and regulatory requirements that apply. As a result, most companies will need to engage an outside law firm that is actively representing companies with regard to federal compliance in relation to the recent pandemic.

Additionally, if your company is not in full compliance, you will need to decide what to do next. You will also need to ensure that company personnel who may have made mistakes do not compromise the integrity of the audit, and it will be in your company’s best interests to have the audit protected by the attorney-client privilege. At Oberheiden P.C., we offer complimentary initial consultations, and one of our attorneys will be happy to answer any additional questions you may have about conducting an internal PPP compliance audit in confidence.