The Paycheck Protection Program (PPP) was a groundbreaking initiative that was signed into law on March 27, 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was created to offer small businesses, as well as individuals, a much-needed financial lifeline amid the unprecedented economic effects of the COVID-19 pandemic. With almost $350 billion worth of federal funds, the PPP aimed to help small and medium-sized enterprises (SMEs) battle against the financial constraints of the current situation.

Despite the program’s enormous size, the PPP was depleted of funds within minutes. Lenders who participated in the PPP were inundated with requests almost instantaneously, pushing many qualified companies away from what should have been their financial rescue. Fraud allegations are common when it comes to federal programs that provide relief to businesses or individuals. However, with the disorganized state of the PPP release, and the extraordinary speed with which hundreds of billions of dollars were allocated, there is a high likelihood that many companies that availed PPP loans may face intense examination and inquiry by federal authorities.

Fraud Concerns Linked to PPP
Aside from fraud concerns, other severe flaws have emerged regarding the PPP system. Responding to concerns, the US Treasury’s Office of the Comptroller of the Currency (OCC) is actively soliciting feedback from lenders on how they can improve future programs and address issues that have arisen from the PPP. As FastCompany.com suggested, since similar federal relief programs have seen their share of fraud, the issue of fraud identification could be the subject of increased scrutiny.

Other PPP fraud concerns exist, and proactive efforts include identifying unqualified companies that improperly received funds from the PPP. These companies will likely face high levels of prosecution risks related to PPP’s near-immediate exhaustion of funds, which gained widespread negative publicity. Therefore, engaging experienced federal counsel to mitigate prosecution risks can be vital for such companies.

PPP Loan Fraud Constituents
As with all federal programs, misrepresentation or falsification of certain acts and omissions with the possibility of federal fraud allegations exists for PPP. These include not only intentional misrepresentations, leading to criminal fraud allegations but also unintentional mistakes that still result in the improper receipt of PPP funds. Some PPP fraud constituents are:

1. Loan Stacking
The OCC stated that “loan stacking,” which means that an applicant received multiple PPP loans from different lenders, is potential fraud. The US government can track the distribution of all funds granted by PPP, making companies that received funds from more than one lender an early focus of the government’s prosecution of PPP fraud.

2. PPP Loan Application Fraud
PPP had various eligibility criteria, with companies misrepresented information on their loan application in a fraudulent claim for eligibility, leading to prosecution possibilities. This includes misrepresenting facts such as the actual law-required number of employees (which was 500 or fewer employees in most industries to qualify), misclassifying employees as independent contractors to fall below the 500 employee’s threshold, misrepresenting meeting Small Business Administration (SBA) employee-based size requirements for eligibility in their sector, and misrepresenting payroll costs to increase the loan amount. Under PPP, companies were only entitled to receive a loan equal to up to two months of average monthly payroll costs from the prior year plus an additional 25 percent, capped at a maximum loan amount of $10 million.

3. Fraudulent Loan Certification
Applicants for any PPP loan must certify to particular facts in good faith. Any bad-faith certification has the potential for charges of federal fraud. The certifications required includes, among others, “The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments, all information provided in your application, and supporting documents are true and accurate.”

4. Using PPP Funds for Ineligible Business Purposes
Companies that received PPP funds are limited to only four specific purposes: payment of payroll costs, including benefits, payment of mortgage interest, payment of rent, and payment for utilities. PPP funds are eligible only to cover existing expenses for mortgage interest, rent, and utilities incurred on or before February 15, 2020. Any expenses beyond these purposes will be considered as impermissible use of PPP funds and suspected as fraud.

5. Using PPP Funds for Fraudulent Purposes
The U.S. Treasury Department notes that “There is no personal guarantee requirement [under the PPP]. However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against you.” This means that not only companies that fraudulently obtain loans through the PPP can be prosecuted, but the individuals personally involved in fraudulent activities can face prosecution as well. Under the False Claims Act, individuals can receive fines of tens of thousands of dollars and federal imprisonment of up to five years when presumed to have fraudulently obtained PPP funds. In cases of significant fraud, company owners and executives could potentially face hundreds or millions of dollars in criminal fines and decades behind bars.

6. Fraudulent Loan Forgiveness Certification
Although PP’s interest rate is as low as 1%, many companies are qualified for loan forgiveness. To request loan forgiveness, aside from continually meeting eligibility requirements, companies must provide documentation that they have used PPP funds accordingly, with specific certification that the information indicated is true.

7. Misrepresenting or Concealing Information During a PPP Audit or Investigation
Audits and investigations will be conducted on many companies with access to PPP loan funds. This will include audits and investigations conducted by the Federal Bureau of Investigation (FBI), the US Department of Justice (DOJ), and various other federal agencies and task forces formed to fight PPP loan fraud. Companies facing audits or investigations must be careful not to disclose any harmful information to prevent concealing pertinent information from federal authorities. Making false statements or concealing required information is a fraud form, and individuals could potentially face prosecution for making false statements to federal law enforcement agents.

What to Do When Targeted for SBA PPP Loan Fraud?
If your company is targeted in an audit or investigation for PPP loan fraud, your first move must be to engage experienced federal defense counsel. This is a serious concern that requires immediate attention, and you will depend on the counsel of qualified lawyers to help you fend off federal allegations. Oberheiden P.C’s federal defense attorneys can help you with broad-ranging issues relating to the novel COVID-19 outbreak, with active representation of clients. We can help you fight allegations of PPP loan fraud using our defense track record in federal prosecutions.

PPP Loan Fraud Constituents Table

PPP Loan fraud constituents have been identified, with companies and individuals who acquired PPP funds exposed to high prosecution risks. The following table provides information on PPP fraudulent constituents.

|Constituents |Explanation |
|——————————————–|—————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————————|
|Loan Stacking |It’s when an applicant received multiple PPP loans from various lenders. The federal government has the authority to track the distribution of all funds from PPP, leading businesses that received funds from more than one lender to be among the first targets of government’s prosecution intentions on PPP fraud. |
|PPP Loan Application Fraud |PPP has specific eligibility criteria. Companies who misrepresented information on their loan application in a bid to fraudulently claim eligibility also face prosecution. Misrepresentations such as indicating a wrong number of employees, misclassifying employees as third-party contractors, indicating that they meet applicable SBA employee-based size standards, and payroll costs misrepresentation in a bid to increase the loan amount are fraudulent practices. PPP only allowed the loan amount of up to two months of their average monthly payroll costs from the last year plus an additional 25 percent, subject to a maximum loan amount of $10 million. |
|Fraudulent Loan Certification |A good faith certification required made by PPP loan applicants include “current economic uncertainty makes the loan necessary to support ongoing operations,” “the funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments,” “no other loan under [PPP] will be received,” and “all the information you provided in your application and all supporting documents and forms is true and accurate.” Bad-faith certification could lead to allegations of federal fraud. |
|Using PPP Funds for Ineligible Business Purposes|Companies that received funds from PPP are restricted to four primary purposes, including paying payroll costs that include benefits, paying mortgage interest, rent, and utilities. Using of PPP funds for other purposes other than the mentioned may be regarded as Impermissible use and considered potential fraud. |
|Using PPP Funds for Fraudulent Purposes |There is no personal guarantee requirement under PPP, but if PPP funds are used for fraudulent cases, criminal charges may be filed against the stakeholders, regardless of the kind of entity. Under the False Claim Acts, fraudulent individuals may be fined tens of thousands of dollars and jailed for up to five years. Prosecution could be extend up to hundreds of millions of dollars in criminal fines and decades behind bars to executives and company owners in cases of significant fraud. |
|Fraudulent Loan Forgiveness Certification |Loan forgiveness eligibility and documentation requirements are stringent. Companies must provide documentation of their usage of PPP funds accordingly and certification that the information supplied is true. |
|Misrepresenting or Concealing Information During an Audit or Investigation|When the time comes to audit and investigate companies that accessed PPP loan funds, they must avoid disclosing potentially dangerous information or making any misrepresentations or concealing pertinent information, as doing so has the potential to expose individuals or business entities to further legal scrutiny as making false statements or withholding information from federal authorities can be considered a fraud form. It’s important to know that individuals or business entities could face individual prosecution for making false statements to federal law enforcement officers. |