Paycheck Protection Program (PPP) Fraud: Risks and Consequences

The novel coronavirus (COVID-19) pandemic has caused damages in businesses and individuals worldwide. People are facing financial uncertainty, and companies have to shut their doors permanently. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, to provide financial relief to affected individuals and businesses, including the PPP program. The PPP was assigned $350 billion from the federal fund to provide financial support to small and medium-sized businesses. However, the program ran out of funds within a few minutes because of the high influx of applications made by the lenders.

The disorganized nature of the PPP application rollout draft various fraud concerns, raising suspicions that many companies received loans fraudulently, resulting in heavy scrutiny by federal authorities. Consequently, the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) sought input from lenders to improve future programs and scrutinize PPP fraud, including fraudulent loan certification, fraudulent loan forgiveness certification, stacking, misrepresenting or concealing information, using the funds for ineligible business purposes, and fraudulent loan application.

PPP Fraudulent Activities

1. Fraudulent Loan Certification

PPP loan applicants had to make various certifications required to secure the loan, including;

a) Current economic uncertainties make the loan necessary to support ongoing operations.

b) They will use the funds to retain workers, maintain payroll, or pay mortgage, lease, and utility payments.

c) They will not receive another loan under (the PPP)

d) All the information provided in the application and supporting documents, including forms, is accurate and genuine.

Some bad faith certifications lead to federal fraud charges, and individuals face thousands of dollars in fines and up to five years behind bars.

2. Fraudulent Loan Forgiveness Certification

Loan forgiveness is the eligibility of many companies despite the 1% low-interest rate. To obtain loan forgiveness, companies must continually meet the eligibility criteria and provide documents with authorized expenses. They must also certify that they have used the forgiveness amount to make authorized payments and keep employees.

3. Loan Stacking

The OCC is focusing specifically on companies that received loans from multiple lenders. The federal government can track the distribution of all funds from the Paycheck Protection Program, making those companies easy targets for the government’s efforts to prosecute PPP fraud.

4. PPP Loan Application Fraud

PPP eligibility criteria included representing information on the loan application to falsely claim eligibility. The possible fraud allegations include;

a) Misrepresenting the company’s number of employees; companies had to have 500 fewer employees to be eligible.

b) Misclassifying employees as independent contractors to fall below the 500-employee threshold.

c) Companies with more than 500 employees misrepresented to meet the applicable Small Business Administration (SBA) employee-based size standards for eligibility in their industry.

d) Misrepresenting the company’s payroll costs to increase the loan amount; companies were only eligible to receive loans of up to two months of their average monthly payroll costs from the prior year, plus an additional 25%, with a maximum loan amount of $10 million.

5. Using PPP Funds for Ineligible Business Purposes

Companies received PPP funds to cater to four specific purposes, such as payroll costs, including benefits, paying interest on mortgage obligations, rent, and utilities, authorized by obligation that existed as of February 15, 2020. Using PPP funds for any other purpose is not authorized and could lead to allegations of fraud, and it’s not entirely clear what companies should do in order to prove they are in compliance with this requirement.

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

Companies that received PPP loans will face audits and investigations to ensure their compliance level in the Paycheck Protection Program. However, it’s critical to ensure that you don’t make any misrepresentations or conceal pertinent information when audited or investigated by withholding information you’re supposed to disclose to federal authorities; you risk prosecution for making false statements.

The consequences of being prosecuted are severe, as company owners and executives could face hundreds or millions of dollars in criminal fines and decades behind bars, especially in cases of significant fraud.

Conclusion

The Paycheck Protection Program (PPP) aimed to provide financial relief to affected individuals and businesses during the COVID-19 pandemic. However, the program ran out of fund within minutes, and many companies that should have been eligible to receive loans missed out. This situation led to various fraud concerns, and federal authorities are scrutinizing companies that received PPP loans. In conclusion, it’s critical to comply with the PPP’s eligibility criteria and requirements to avoid any possible allegations of PPP fraud. If you or your company is targeted in a PPP loan fraud audit or investigation, it’s crucial to engage experienced federal defense counsel right away to mitigate the risk of facing substantial penalties.