CARES Act: What You Need to Know About PPP Loan Fraud

Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act aimed to provide much-needed financial relief to individuals and businesses affected by the COVID-19 pandemic. One of the key provisions of the CARES Act was the Paycheck Protection Program (PPP), which had nearly $350 billion in federal funds to provide financial assistance to small and medium-sized businesses that had been severely affected by the pandemic. However, due to the program’s massive size, the PPP’s funds were depleted within a few minutes, leaving many eligible companies without any benefits.

With any government program that offers financial relief, fraud concerns are inevitable. The PPP is no exception, and as funds were quickly depleted, it has led to several fraud-related concerns. The Office of the Comptroller of the Currency (OCC) under the U.S. Treasury Department has sought input from lenders on how to improve future programs and to address issues that have arisen in the PPP system. The OCC’s focus is on preventing fraud, and they are looking into lessons learned from this program’s severe flaws.

The unorganized nature of the program’s initial rollout led to several questions raised about fraud. The PPP’s multi-hundred-billion-dollar allocation was depleted within a few minutes, which caused widespread negative publicity. The federal authorities have been scrutinizing the companies that received PPP loans, increasing the likelihood of severe penalties facing these businesses. There are various fraud concerns related to the PPP, and other federal agencies are conducting investigations to identify companies that have unlawfully received funds from the program.

What Qualifies as PPP Loan Fraud?

There are numerous acts and omissions that can lead to allegations of fraud. Intentional misrepresentations and inadvertent mistakes that resulted in the improper receipt of federal funds can be considered fraud. There are several possible allegations of fraud related to the PPP, as discussed below:

1. Loan “Stacking”
The OCC is focusing on loan “stacking,” which happens when an applicant receives PPP loans from multiple lenders. The federal government can track the distribution of all funds from the PPP, and companies that have received funds from more than one lender may become early targets in the government’s efforts to prosecute PPP fraud.

2. PPP Loan Application Fraud
The PPP had several eligibility criteria, and companies that misrepresented any information on their loan applications to fraudulently claim their eligibility would face prosecution for fraud. Misrepresenting a company’s number of employees, misclassifying employees as independent contractors to fall below the threshold, misrepresenting the company’s payroll costs to increase the loan amount, and misrepresenting meeting the applicable Small Business Administration (SBA) employee-based size standards for eligibility all qualify as fraud.

3. Fraudulent Loan Certification
All PPP loan applicants were required to certify that they were meeting eligibility criteria in good faith, making any bad-faith certifications potentially leading to charges for federal fraud.

4. Using PPP Funds for Ineligible Business Purposes
Companies that received federal funds under the PPP are limited to using those funds for only four specific purposes: to cover payroll costs, including benefits; to pay interest on mortgage obligations; to pay rent; and to pay for utilities. Using PPP funds for any other purpose is impermissible and has the potential to lead to allegations of fraud.

5. Using PPP Funds for Fraudulent Purposes
The government will prosecute individuals who are personally involved in any fraudulent activities involving PPP funds. Under the False Claims Act, individuals who fraudulently obtain PPP funds face tens of thousands of dollars in fines and up to five years of federal imprisonment. Company owners and executives are at risk of facing hundreds of millions of dollars in criminal fines and decades behind bars.

6. Fraudulent Loan Forgiveness Certification
Many companies are eligible for loan forgiveness. However, to request loan forgiveness, companies must provide documentation to demonstrate that they have met the eligibility criteria continually and have used their PPP funds for authorized expenses. Any bad-faith certification could lead to allegations of fraud.

7. Misrepresenting or Concealing Information During a PPP Audit or Investigation
Companies that received PPP loan funds face audits and investigations by federal agencies and task forces formed to identify PPP loan fraud. Making false statements to federal law enforcement agents or withholding information that companies are required to disclose to federal authorities is considered fraud.

What Should Companies Do if They are Targeted for PPP Loan Fraud?

Suppose your company is targeted in a PPP loan fraud audit or investigation. In that case, the most important step is to engage experienced federal defense counsel right away. At Spodek Law Group, our federal defense attorneys are actively representing clients in a broad range of issues related to the COVID-19 pandemic, including PPP loan fraud. We have the experience and knowledge to protect you and your business from allegations of PPP loan fraud.