How Federal Authorities Are Cracking Down on Paycheck Protection Program (PPP) Loan Fraud

The COVID-19 pandemic has caused a lot of negative economic impact on small and medium-sized businesses, and the United States government is seeking ways to assist them. They introduced the Paycheck Protection Program (PPP) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to these businesses. With nearly $350 billion in funding, the PPP aimed to alleviate the economic strain that these businesses have been facing due to the novel coronavirus outbreak. Nevertheless, the program was not without its flaws, and its allocation was rapidly depleted with some companies that should have been eligible to receive loans were excluded.

Besides the challenges of the COVID-19 pandemic, the PPP brought the problem of fraud, which is always an issue when federal programs offer financial relief to businesses or individuals. The extraordinary rate at which PPP funds were depleted has caused heightened scrutiny from federal authorities towards the companies that received PPP loans. Several fraud concerns surrounding the PPP have been identified and are currently being investigated. With the aim of improving future programs, the U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is requesting feedback from lenders on how to address PPP issues and what they can do to mitigate fraud.

The identification of PPP loan fraud is of particular interest, and the disorganized nature of the application rollout has made it a major area of focus. According to FastCompany.com, the OCC’s scrutiny will focus on “loan stacking,” where companies receive PPP loans from different lenders. PPP funds’ distribution is traceable, and companies that received funds from various lenders are likely to be investigated for suspected fraud. While some agencies are looking forward to making the PPP better, other agencies are reviewing previous PPP cases, investigating companies that unlawfully received PPP funds. These companies may face prosecution and will need experienced federal counsel to mitigate possible substantial penalties and legal consequences.

PPP Loan Fraud and Possible Criminal Charges

Several acts and omissions can lead to federal fraud allegations in relation to federal programs. PPP loan fraud constitutes intentional misrepresentations leading to criminal fraud charges. Nevertheless, these could extend to inadvertent mistakes that led to the improper receipt of federal funds. The following are possible allegations of PPP loan fraud.

Loan “Stacking.”

According to the OCC, loan stacking is where a company gets PPP loans from multiple lenders. PPP funds’ distribution is trackable, and companies that unlawfully received funds may become early prosecution targets. Lenders must ensure that their borrowers did not receive PPP funds from other lenders.

PPP Loan Application Fraud.

The PPP established multiple eligibility criteria, and companies that misrepresented information on their loan applications to fraudulently claim eligibility could face prosecution. Such misrepresentations include the number of employees, which should not exceed 500, and misclassifying employees as independent contractors to bypass the 500-employee threshold. Companies with over 500 employees should have misrepresented that they met the Small Business Administration (SBA) employee-based size standards for eligibility in their industries. Lastly, PPP loan applicants should have misrepresented their payroll costs to secure more loan amounts. Companies must have evidence to prove their eligibility criteria authenticity.

Fraudulent Loan Certification.

PPP loan applicants were required to certify the authenticity of specific facts in their applications genuinely. Bad faith certifications may lead to federal fraud allegations. Required certifications included the following:

• “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.”

Using PPP Funds for Ineligible Business Purposes.

PPP funds can only be used to cover four specific purposes, including payroll costs, interest on mortgage obligations, rent, and utility payments. These funds may only cover the pre-existing obligations by February 15, 2020, and using these funds for any ineligible purpose is impermissible and may lead to federal fraud allegations. Companies must maintain proper documentation on expenses to demonstrate their compliance during a federal audit or investigation.

Using PPP Funds for Fraudulent Purposes.

Individuals involved in fraudulent PPP activities could face criminal charges under the False Claims Act. The US government does not require personal guarantees under the PPP, but if the proceeds are used for fraudulent purposes, the government will enforce criminal charges for fraudulently obtaining PPP funds. Prevalent PPP fraudulent activities include submitting fraudulent payroll documentation or filing multiple applications for the same entity.

Fraudulent Loan Forgiveness Certification.

Companies must provide documentation that they have met eligibility criteria and used PPP funds for authorized expenses to request loan forgiveness. False certifications in loan forgiveness requests could lead to allegations of fraud.

Misrepresenting or Concealing Information During a PPP Audit or Investigation.

Any misrepresentation or concealment of pertinent information or false statement to federal authorities during a PPP audit or investigation is a form of fraud. Companies may face audits and investigations from the FBI, the U.S. Department of Justice (DOJ), other federal agencies, and task forces that are specifically targeting PPP loan fraud.

What to do if targeted for SBA PPP Loan Fraud

If a company faces a PPP loan fraud audit or investigation, the best thing is to engage experienced federal defense counsel immediately. Companies will require advice and representation from experienced attorneys to withstand federal charges. At Spodek Law Group, our federal defense attorneys help clients on a broad range of issues related to the COVID-19 pandemic, including fighting PPP loan fraud allegations to protect them from the consequences of the charges.