Understanding Paycheck Protection Program (PPP) Loan Fraud: What Companies Need to Know

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into law on March 27, 2020, to provide relief to individuals and companies affected by the COVID-19 pandemic. Among its benefits, the CARES Act established the $350 billion Paycheck Protection Program (PPP) to offer urgent financial aid to small and medium-sized businesses that have been experiencing financial hardships due to the pandemic’s economic ramifications. Despite the huge sum allocated to the PPP, it was quickly depleted within minutes, and many companies that should have been eligible for loans were left without funds. Anytime a federal program offers financial relief to businesses, questions about fraud will always be raised.

The nature of the PPP and the rapid depletion of its multi-hundred-billion-dollar allocation triggered many companies’ expectations that received PPP loans to encounter significant scrutiny from federal authorities. Additionally, several fraud concerns regarding PPP have been identified, and various federal agencies are looking back to determine which companies unlawfully received PPP funds, hence the risk of prosecution is relatively high.

PPP Loan Fraud Identification and Improvement

To address these concerns of fraud and identify the lessons learned from the flaws of the PPP system, the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) has requested feedback from lenders on how to enhance future programs and counter issues arising from PPP. According to FastCompany.com, the identification of fraud is likely to be the main focus because of the ad-hoc nature of the PPP application rollout, and other federal relief programs have also suffered from fraud.

Companies that received PPP loans and are at risk of prosecution should seek the services of experienced federal counsel capable of mitigating the risk of heavy penalties.

Understanding PPP Loan Fraud

As with all federal programs, various acts and omissions could potentially cause fraud allegations in connection with PPP. These acts include not only intentional misrepresentations – which can lead to criminal fraud charges but also inadvertent mistakes that could result in the wrong receipt of the funds.

1. Loan Stacking

The OCC is concerned about ‘loan stacking,’ which is a particular form of potential fraud where an applicant receives PPP loans from multiple lenders. The federal government can track the distribution of all funds from PPP, which implies that companies that received funds from various lenders 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 their application information to fraudulently claim eligibility could face prosecution as well. Some of the misrepresented information includes the number of employees in the company, classifying employees as independent contractors to fall below the 500 employees’ threshold, misrepresenting the company’s payroll costs to increase the loan amount, and misrepresenting that they meet the SBA employee-based size standards for eligibility.

3. Fraudulent Loan Certification

PPP loan applicants were required to certify to various facts in good faith. Making bad faith certification could lead to charges for federal fraud. Some of the mandatory certifications include the funds’ necessity to support the company’s ongoing operations, the loan’s usage to maintain payroll or to pay mortgage, lease, and utility bills, none of the information provided on the application was false or inaccurate.

4. Using PPP Funds for Ineligible Purposes

Companies that received federal funds from PPP are restricted to using those funds for four specific purposes. The funds can only cover payroll costs, pay interest on mortgage obligations, rent, and pay for utilities. With respect to mortgage interest, rent, and utilities, PPP funds can only cover expenses under obligations that existed before February 15, 2020. Using PPP funds for any other purpose is illegal and has the potential to lead to allegations of fraud.

5. Using PPP Funds for Fraudulent Purposes

It’s important to note that the government intends to prosecute companies that fraudulently obtain loans through PPP and those individuals that are personally involved in fraudulent activities. Under the False Claims Act, individuals involved in fraudulent activities can face tens of thousands of dollars in fines and up to five years of imprisonment for fraudulently obtaining funds from the PPP.

6. Fraudulent Loan Forgiveness Certification

While the PPP has a low 1.00 percent interest rate, many companies will be eligible for loan forgiveness. In order to request loan forgiveness, companies must continually show that they’re eligible for funds and that they have used their PPP funds for authorized expenses.

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

Audits and investigations related to PPP loan funds may be directed at several companies. If audited or investigated, companies should be careful when disclosing information and avoid giving false statements or withholding information required to disclose to the government. Making false statements or withholding required information is itself fraud, and an individual could face individual prosecution for making false statements to federal law enforcement agents.

What to do When Targeted for SBA PPP Loan Fraud

If a company is targeted in a PPP loan fraud audit or investigation, there are essential things that it should do. The company should seek experienced federal defense counsel right away to protect its interests. This is a severe matter that requires immediate attention, and it is crucial to rely on experienced attorneys who know how to fend off federal charges. At Spodek Law Group, our experienced federal defense attorneys can offer invaluable advice and representation to companies facing allegations of PPP loan fraud.

Table One: Understanding PPP Loan Fraud

Title Description

Table One: Understanding PPP Loan Fraud

Title Description

Understanding the CARES Act The CARES Act was passed into law in March 2020 to provide relief to individuals and companies affected by the COVID-19 pandemic.

PPP Overview The $350 billion Paycheck Protection Program (PPP) was established as part of the CARES Act to offer financial aid to small and medium-sized businesses experiencing financial hardships due to the COVID-19 crisis.

PPP and Fraud Concerns Anytime a federal program offers financial relief to businesses or consumers; there are questions raised about fraud. With the nature of the PPP and its massive allocation depleted within a short time, the companies that received PPP loans can expect heavy scrutiny from federal authorities.

PPP Loan Fraud Identification and Improvement In response to concerns about PPP fraud and in order to identify various “lessons learned” from PPP’s flaws, the US Treasury Department’s Office of the Comptroller of the Currency is seeking feedback from lenders on how to improve future programs.

Understanding PPP Loan Fraud Various acts and omissions could possibly cause fraud allegations in connection with the PPP. PPP loan applicants must avoid fraudulently claiming eligibility, fraudulent certifications, using funds for ineligible purposes, or concealing information during PPP audits.

What Should You do if You or Your Company is targeted for SBA PPP Loan Fraud? Companies receiving PPP funds can seek advice from an experienced federal defense attorney to protect their interests.

Table Two: PPP Loan Fraud Types

Title Description

PPP Loan Fraud Types

Loan Stacking A specific type of potential fraud in which an applicant receives PPP loans from multiple lenders.

PPP Loan Application Fraud Misrepresenting company information such as misclassification of employees, misstating payroll costs, or the number of employees in the company to fraudulently claim eligibility.

Fraudulent Loan Certification Making bad faith certification could lead to charges for federal fraud.

Using PPP Funds for Ineligible Purposes It is illegal to use PPP funds for any other purpose other than payroll costs, rent, utilities, and mortgage interest.

Using PPP Funds for Fraudulent Purposes Companies and individuals involved in fraudulent activities can face harsh penalties under the False Claims Act.

Fraudulent Loan Forgiveness Certification Companies must continually show that they’re eligible for funds and that they have used their PPP funds for authorized expenses to receive loan forgiveness.

Misrepresenting or Concealing Information During a PPP Audit or Investigation The concealment of required information during audits or investigations can lead to individual prosecution for making false statements to federal law enforcement agents.