The Paycheck Protection Program (PPP) was a major element of the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was signed into law in March 2020. This program aimed to provide financial relief to small and medium-sized businesses facing financial difficulties as a result of the COVID-19 pandemic. However, the program ran out of funds within minutes, and those companies that received PPP loans could now face significant scrutiny from federal officials due to the program’s multi-hundred-billion-dollar allocation being rapidly depleted. Fraud concerns have also emerged, with the U.S. Treasury Department taking a proactive approach to seek input from lenders in order to improve future initiatives and address issues arising from the PPP. With the U.S. government having the ability to track all grants from the PPP, companies defrauding the system risk being prosecuted.

PPP loan fraud may arise from a range of acts and omissions which may lead to federal fraud allegations. These include not only purposeful misinterpretations or failures to perform certain actions which could result in criminal fraud charges, but also unintentional errors that may have led to an unearned receipt of federal funds. One type of potential fraud that has been brought up by the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is loan “stacking,” where an applicant may receive PPP loans from multiple lenders, which is specifically going to be targeted by the OCC in their fraud investigation. Similarly, actionable PPP loan application fraud for eligibility criteria can be committed by entities seeking to fraudulently claim eligibility, for instance, by falsifying information about the number of employees, misclassifying employees as independent contractors to fall below the stipulated number of 500 employees, misrepresenting payroll costs to inflate the loan amount, or misrepresenting the employee-based SBA size standards.

Another form of PPP loan fraud occurs when obligors use their funds in unlawfully deemed purposes (e.g., payment of loan interest, rent, utilities and payroll costs except for those covered by other eventual payroll-related tax subsidies as mandated under the CARES), even if documentary requirements vary among differing lenders, thereby leading to dismissal requests for loan repayment. PPP loan recipients are required to certify working in good faith to secure loan forgiveness and support continuing operations, retention of workers, payment of payroll, mortgage, lease and utility bills; have not received any other PPP support; and the application contents are accurate and factual. Thus, any fraudulent certification of the foregoing leads not only to the revocation of loan forgiveness but also to individual liability for fines and imprisonment under the False Claims Act.

Moreover, companies who have received PPP funds should keep proper documentation so that they can demonstrate their compliance in the event of a federal audit or investigation. In case of fraud, these entities and individuals could face criminal fines and years of federal imprisonment. Lastly, an audit or investigation concerning a PPP loan fraud requires careful legal attention to avoid making any misrepresentations or concealing pertinent information. Any false statements or withheld information made in this regard may lead to individual prosecution for making false statements to federal law enforcement agents.

If your company is the subject of a PPP loan audit or investigation, engaging experienced federal defense counsel immediately is crucial. This is a serious matter that requires your prompt attention, and you will need the legal advice and representation of experienced attorneys who know how to counteract federal charges. At Spodek Law Group, our federal defense attorneys specialize in representing clients in a broad range of issues related to the COVID-19 pandemic, and if you are faced with allegations of PPP loan fraud, our extensive experience can help protect you.

Table 1
PPP Loan Fraud Summary

Type of PPP Loan Fraud Fraud Description

Loan “Stacking” Fraud where applicants receive PPP loans from multiple lenders
PPP Loan Application Fraud Fraud from falsifying information such as number of employees, payroll costs, and classification of employees
Fraudulent Loan Certification Fraudulently securing PAYCHECK protection program loans by lying at one or more certification criteria
Using PPP Funds for Ineligible Business Purposes Fraud from utilizing the loans in uses beyond necessary payroll, mortgage payments, and utilities
Using PPP Funds for Fraudulent Purposes Fraudulent transaction of PPP funds is being prosecuted
Fraudulent Loan Forgiveness Certification Fraudulent loan forgiveness application leading to the revocation of loan forgiveness and individual liability for fines and imprisonment
Misrepresenting or Concealing Information During a PPP Audit or Investigation Making false statements or withholding information during a PPP audit or investigation

Table 2
PPP Loan Certifications Required for Forgiveness

Certification Description

Documentation Documentation must demonstrate that the proceeds were used for payment of covered payroll, mortgage interest obligations, rent obligations, and utility payments
Certification of Payments A Certificate that authorized the eligible forgiveness amount spent on covered payroll costs, total payments on mortgage obligations, rent payments, and utility payments is accurate and details are true
CARES Act Compliance A certification by the applicant that they are in compliance with the requirements of the CARES Act in terms of using the loan/forgiveness amount
Justification A statement from the borrower on how the borrower has maintained the same number of employees and compensation levels during the covered period
Tax Documents Tax documents confirming payment of payroll and payment of rent or mortgage interest during the covered period, plus utility payments
Ownership Furtively certify that the owner provides documentation verifying the number of full-time employees on payroll and its pay rates for the covered period, as instructed by the Small Business Administration.