Risks of PPP Fraud: What You Need to Know

Following the US government’s introduction of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, which was aimed at providing financial aid to businesses facing economic challenges due to the COVID-19 pandemic, the Paycheck Protection Program (PPP) was established; a substantial component of the Act. The PPP was granted close to $350 billion with the primary goal of providing much-needed financial support to smaller and medium-sized firms experiencing financial difficulties due to the consequences of the COVID-19 crisis.

Despite its size, the Paycheck Protection Program saw its funds drained in a matter of minutes. Participating lenders were overwhelmed with application requests, and many eligible firms were unable to acquire loans. Typically, whenever a government-run program is introduced to provide financial relief to businesses or consumers, there are bound to be questions raised about the prevalence of fraud. However, due to the nature of the Paycheck Protection Program and the startling pace at which its vast sum of funds was depleted, many companies that obtained PPP loans may have to prepare for severe investigation from federal authorities.

Significant Concerns on Fraud Associated with the PPP

In response to fraud concerns (and to learn from a process that was viewed by many as critically flawed), the US Department of Treasury’s Office of the Comptroller of the Currency (OCC) is requesting feedback from lenders on how future programs can be improved and problems arising from the PPP can be tackled. According to FastCompany.com, the effort is likely to focus on the issue of fraud detection, given the chaotic introduction of the program and the tendency of previous federal relief programs to encounter fraudulent activities.

There are other fraud concerns related to the PPP that may be of interest. While the US Department of Treasury may be planning ahead, other organizations are looking back to identify firms that may have unlawfully obtained funds from the PPP. These companies are more likely to face prosecution given the significant publicity that followed the PPP’s near-immediate depletion, and the most critical action for such companies is to engage competent federal counsel capable of minimizing the risk of being penalized heavily.

What is PPP Loan Fraud?

Like most federal programs, PPP has several acts and omissions that can lead to allegations of federal fraud. This includes not just intentional misinterpretations, which can trigger criminal fraud allegations, but also unintended mistakes that could still result in the improper receipt of federal funds.

Let us take a look at some possible fraud allegations related to the PPP:

1. Loan “Stacking”

The Office of the Comptroller of the Currency warned of “loan stacking,” or an applicant receiving PPP loans from various lenders. The OCC’s website confirms that the Office will concentrate particularly on this form of fraud. The federal government can track the distribution of all funds from the Paycheck Protection Program, so businesses that received funds from more than one lender may become early targets for the government’s effort to prosecute PPP fraud.

2. PPP Loan Application Fraud

The PPP had multiple prerequisites for eligibility. Firms that misrepresented information on their loan applications to fraudulently claim eligibility could face prosecution too. Misrepresenting information such as:

The number of employees in their company ((For the most part, firms were required to have few than 500 employees to be eligible));
They classified employees as independent contractors in order to fall below the 500-employee limit;
They represented that they met Small Business Administration (SBA) employee-based size standards for eligibility in their particular industries if they had more than 500 workers;
They misrepresented the company’s payroll costs to raise the loan amount (under the PPP, companies are only entitled to receive loans equal to two months of their average monthly payroll expenses from the last year plus another 25 percent, subject to a maximum loan amount of $10 million).

3. Fraudulent Loan Certification

In addition to the conditions stated earlier, PPP loan applicants had to certify to various facts. These certifications were required to be made in good faith, and a false declaration has the potential to lead to federal fraud charges. The required certifications for securing PPP loans include:

“Current economic uncertainty makes the loan necessary to support your ongoing operations.”
“The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments.”
“You have not and will not receive another loan under [the PPP].”
“All the information you provided in your application and all supporting documents and forms are true and accurate.”

4. Using PPP Funds for Ineligible Business Purposes

Companies that obtained federal funds via PPP are limited to using those funds for four specific purposes: (i) to cover payroll expenditures, including benefits; (ii) to pay interest on mortgage obligations; (iii) cover rent and; (iv) payment for utilities. As for mortgage interest, rent, and utilities, PPP funds can only be used to cover expenses under obligations that existed before February 15, 2020. Using PPP funds for any other purpose is illegal and has significant potential to lead to allegations of fraud.

What do firms need to do to demonstrate compliance with this expectation? The solution is not completely clear. However, companies that received PPP funds should thoroughly document the source of payment for all eligible and ineligible expenditures to demonstrate compliance in the event of a federal audit or investigation.

5. Using PPP Funds for Fraudulent Purposes

According to the US Treasury Department’s Paycheck Protection Program (PPP) Information Sheet, “There is no personal guarantee requirement [ under the PPP]. . . . However, if the proceeds are used for fraudulent purposes, the US government will pursue criminal charges against you.”

This is critical because it implies that the government does not only plan to prosecute firms that fraudulently acquire loans through PPP, but also individuals that are involved in fraudulent activities. Under the False Claims Act, individuals may suffer tens of thousands of dollars in fines and up to five years of federal imprisonment for fraudulently acquiring funds from the PPP. Suppose prosecutors pursue charges for multiple statutory offences (which may be the case in significant fraud instances). In that case, corporation owners and executives face hundreds of millions of dollars in criminal fines and decades behind bars.

6. Fraudulent Loan Forgiveness Certification

Although the Paycheck Protection Program provides a low 1.00 percent interest rate, numerous firms will be eligible for loan forgiveness. To request loan forgiveness, firms need to provide documentation that shows they have consistently satisfied the eligibility criteria and that they have utilized their PPP funds for authorized expenses. According to the US Treasury Department, businesses must also “certify that the documents are true and that [they] used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.”

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

Several firms will go through audits and investigations connected to their receipt of PPP loan funds. These include audits and investigations carried out by the Federal Bureau of Investigation (FBI), the US Department of Justice (DOJ), several other federal agencies, and task forces engineered to target PPP loan fraud.

Suppose your company is audited or investigated. In that case, you must avoid disclosing harmful information but also ensure that you do not misrepresent or withhold necessary information. Providing false information or not disclosing required information to federal authorities is a form of fraud that may lead to individual prosecution for providing false statements to federal law enforcement officers.

What Should Firms Do When Targeted for SBA PPP Loan Fraud?

If your firm is specified in a PPP loan fraud audit or investigation, what should you do? Engage experienced federal defense attorneys swiftly. This is a significant problem that necessitates your prompt action, and you must depend upon the counsel and representation of knowledgeable attorneys that are adept at defending federal charges. At Spodek Law Group, our federal defense attorneys active also represents clients in various issues connected to the COVID-19 pandemic, and if you have to fight allegations of PPP loan fraud, we can use our expertise to protect you.

Fraud allegations associated with the PPP can be terrifying to most firms. Therefore, it is crucial to stay cautious and avoid making mistakes that may justify prosecution. It is best to use the services of competent legal counsel when applying for the PPP program or informed of any investigation.