When Congress enacted the Paycheck Protection Program (“PPP”), it sought to provide a vital lifeline to United States businesses left vulnerable by the Covid-19 pandemic. The key benefits of the PPP included the Small Business Administration’s (“SBA”) guarantee of the loans, which meant that borrowers could easily secure loans without meeting all of the usual, stringent requirements imposed by banks and lenders, and the government could forgive loans in their entirety subject to additional conditions. Since the passage of the PPP program last year, the government has issued more than four million loans totaling $224 billion. As the pandemic enters its second year, however, the need to get money out the door has been replaced with the government’s need to demonstrate accountability. As such, federal agencies are ramping up their enforcement and investigation efforts related to PPP loans in order to, in their own words, “send a clear and unmistakable message to those who would exploit a national emergency to steal taxpayer-funded resources from vulnerable individuals and small businesses.”
Enforcement Efforts Against PPP Fraud
Shortly after Congress passed the PPP, the DOJ and other federal regulators focused their initial enforcement efforts on addressing the most egregious examples of fraud, e.g., applicants using loans to finance luxurious lifestyles, seeking loans for multiple and/or fictitious companies, or claiming a need to pay non-existent employees. That initial phase of investigation, however, has moved to more complex investigations where the government is testing the PPP loan recipients’ need for the loan (or necessity certifications), its payroll calculations (Source: United States v. Kindambu, Case No. 1:20-CR-260-RDA [E.D. Va. Jan. 28, 2021] [Doc. 37]), or those recipients had access to other sources of capital. In fact, as of March 2021, the DOJ (which has handled the bulk of prosecutions to date) had charged nearly 500 people with PPP-related criminal offenses.
Enforcement Agencies And Potential Liability
Under the new administration, the DOJ and other agencies are expanding investigations and prosecutions of PPP fraud under a variety of federal statutes. Already in 2021, other enforcement bodies have also gotten involved. In January, Finra sent letters to an unknown number of individuals seeking information related to their PPP loans (as well as other financial information). Similarly, the SEC has been ramping up its pandemic-related enforcement activities. As of this writing, the SEC has brought at least nine enforcement actions based on pandemic-related disclosures, suspended the trading of more than three-dozen firms, and warned that public companies must disclose PPP loans if the underlying circumstances “constitute material facts relating to your advisory relationship with clients.”
Other agencies continue to extend their involvement in PPP fraud enforcement. The SBA is auditing every loan worth over $2 million and is responsible for processing the millions of forgiveness applications. The government has also created two special entities tasked with addressing pandemic-related fraud issues: the Special Inspector General for Pandemic Recovery and an inter-agency Pandemic Response Accountability Committee.
Should these federal agencies or enforcement bodies successfully pursue and obtain a judgment, they correspondingly have a panoply of remedies that they can seek to impose, all carrying significant penalties. To start, criminal liability can arise for borrowers under several different statutes. For instance, 18 U.S.C. § 1001 makes it a crime to knowingly and willfully make a false statement to the government. Anyone who commits fraud in relation to an SBA loan is additionally subject to liability under 15 U.S.C. § 645, and borrowers may also be liable under 18 U.S.C. § 1014 (loan fraud), § 1344 (bank fraud), § 1341 (mail fraud), or § 1343 (wire fraud).
Liability is not only limited to the criminal context, as the DOJ (and other agencies) have a variety of enforcement tools at their disposal. The False Claims Act (“FCA”) provides for civil liability for any demand for money or property to the federal government, with penalties ranging from $11,463 to $23,331 per claim, plus up to three times actual damages suffered (Source: 31 U.S.C. § 3729(a).). And, in January 2021, the DOJ announced its first civil settlement stemming from PPP loan fraud. SlideBelts, Inc., a California company, agreed to pay $100,000 in damages and penalties for making a misrepresentation in its application about its involvement in a bankruptcy proceeding. The settlement included not only charges under the FCA, but also the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a tool used against large financial institutions after the 2008 financial crisis. FIRREA carries penalties that can exceed $2 million per day, or over $10 million per violation (whichever is less), in addition to penalties up to the amount of pecuniary gain (Source: 28 C.F.R. § 85.3(a)(6) and (a)(7)) (adjusted pursuant to 28 C.F.R. § 85.5 for penalties assessed after June 19, 2020); 12 U.S.C. § 1833a(b)(3)).
Ways To Prepare For Oncoming PPP Enforcement
With borrowers facing the risks of significant liability, it is essential that all PPP borrowers be prepared to handle an audit or investigation.
1. Know Your Exposure
As in many other areas, the best defense to PPP enforcement is a good offense. Borrowers should review their applications, uses of proceeds, and forgiveness applications with an eye towards potential liability. Potential areas of concern include:
• Certification – PPP applications required borrowers to make several key certifications, most notably that “the uncertainty of current economic conditions ma[de] necessary the loan request to support the ongoing operations of the applicant.” Beyond the simple cases, future investigations may need to address issues such as hindsight bias, i.e., for companies who legitimately believed a loan was necessary but fared better than expected, as well as the inherent subjectivity of determining “necessity.”
• Use of Proceeds – Uses for loan proceeds were intended to be limited to payroll, interest and rent payments, insurance, and utilities. Whether intentional or not, borrowers may have used funds for other purposes, or spent excess cash on other projects. Companies should proactively trace all funds to ensure they were properly used.
• Calculation of Forgiveness Amount – Many borrowers have begun taking advantage of the PPP’s loan forgiveness program. To be eligible for loan forgiveness, a borrower must make several certifications in their forgiveness application. These include certifying that the funds were used to pay eligible costs (such as payroll, mortgage interest, rent, and business utilities), that the funds were used in line with the PPP’s governing parameters, and that the funds were used only for authorized purposes. Misstatements in forgiveness applications also lead to potential liability.
2. Document Everything
Companies with strong compliance programs are likely to have properly documented every step of the loan process from application to forgiveness. If a borrower has not done so, they should begin immediately and work to understand exactly what was received, where it went, and whether it meets the standards for proper use.