Paycheck Protection Program (PPP) Loan Fraud: Understanding What Can Lead to Allegations of Fraud

The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed on March 27, 2020, aimed to provide benefits to businesses and individuals affected by the COVID-19 pandemic. A part of the CARES Act was the Paycheck Protection Program (PPP), which was created to provide financial support to small and medium-sized businesses facing financial burdens due to the pandemic. Although the PPP was allocated with nearly $350 billion in funds, its resources ran out in minutes due to an overwhelming number of applications submitted by businesses. Consequently, many companies expected to receive financial support were left out. Therefore, amid concerns about fraud, the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is seeking input from lenders to identify “lessons learned” and improve PPP’s performance. There are several fraud concerns relating to PPP, and companies should expect heavy scrutiny from federal authorities, especially as the PPP funds depleted at an extraordinary rate.

The Allegations of Fraud Related to PPP

As with all federal programs, there are several acts and omissions that could lead to allegations of federal fraud in relation to the PPP. These acts and omissions include both intentional misrepresentations that could lead to criminal charges and inadvertent mistakes that could lead to receiving federal funds unlawfully.

Loan Stacking

The OCC has identified “loan stacking” as a particular type of potential fraud in which an applicant receives PPP loans from multiple lenders. This type of fraud leads the federal government to track the distribution of all PPP funds, and companies that receive funds from more than one lender could face prosecution.

PPP Loan Application Fraud

PPP had several eligibility criteria, and companies that misrepresented information on loan applications subjected themselves to claims of fraud. Companies could misrepresent information such as the number of employees, misclassifying employees as independent contractors, and misrepresenting payroll costs. These misrepresentations increase the loan amount, and companies could face prosecution for fraudulent PPP loan applications.

Fraudulent Loan Certification

Companies applying for PPP loans were required to make several mandatory certifications. These certifications were required to be made in good faith, and any bad-faith certifications could lead to charges for federal fraud. False certifications such as, “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,” and “You have not and will not receive another loan under [the PPP]” are just a few that could result in allegations of PPP loan fraud.

Using PPP Funds for Ineligible Business Purposes

Companies that received federal funds through PPP are restricted to using those funds for four specific purposes: (i) to cover payroll costs, including benefits; (ii) to pay the interest on mortgage obligations; (iii) to pay rent; and, (iv) to pay for utilities. Any other use of PPP funds is impermissible and has the potential to lead to allegations of fraud. Companies that received PPP funds should thoroughly document the source of the payment for all eligible and non-eligible expenses to demonstrate compliance in case of a federal audit or investigation.

Using PPP Funds for Fraudulent Purposes

Companies that used PPP funds for fraudulent purposes will be pursued criminally. The Federal Claims Act allows for tens of thousands of dollars in fines and up to five years of imprisonment for individuals involved in fraudulent activities. Company owners and executives could face numerous criminal penalties and be at risk of losing millions of dollars in criminal fines.

Fraudulent Loan Forgiveness Certification

Loan forgiveness is granted to companies who have continually met eligibility criteria for PPP funds and have used their funds for authorized expenses. Companies must provide documents that support these certifications and certify that the documents are true.

Misrepresenting or Concealing Information During a PPP Audit or Investigation

Companies will face audits and investigations related to their receipt of PPP funds. Companies must avoid making any declarations and withholding information required to disclose to federal authorities. Misrepresentations, false statements, or withholding information can lead to charges for federal fraud, and individuals could face prosecution for their involvement in such activities.

What should companies do to protect themselves?

If your company faces allegations of PPP loan fraud, you should engage experienced federal defense counsel immediately. Spodek Law Group’s federal defense attorneys can provide excellent legal representation and protect you from federal charges relating to PPP loan fraud.