The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, as a measure to provide benefits to individuals and companies which have been adversely affected by the COVID-19 pandemic. The Paycheck Protection Program (PPP) was the central focus of the CARES Act. The PPP was endowed with an allocation of $350 billion in funds from the federal government and was created to provide financial support to small and medium-sized companies, which were facing financial strain due to the COVID-19 crisis.

However, despite the large sum of money, the Paycheck Protection Program ran out of funds in just a few minutes due to an overwhelming demand. Lenders, who were inundated with applications immediately, had to deal with a difficult situation. Many companies that were eligible to obtain loans were left out of the program. This situation has raised questions about fraud which is usually inevitable in federal programs that provide financial relief. Given the nature of the PPP and the rapid rate at which its allocation was depleted, companies that have received PPP loans should expect to be under heavy scrutiny from the federal authorities.

There are many fraud concerns related to the PPP. The U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) is seeking input from lenders on how they can improve the program and address the issues that have arisen from the PPP. One of the most significant concerns is that of fraud identification, given the disorganized nature of the program’s rollout. Similar federal programs have encountered fraudulent activities in the past. Other agencies are also looking back to identify companies that unlawfully received funds from the PPP. The risk of prosecution for such companies is high, and it is essential for these companies to seek the help of experienced federal counsel that can help mitigate the risk of facing substantial penalties.

It is crucial to note that companies that received PPP loans will most likely face heavy scrutiny from the federal authorities. Engaging experienced federal counsel is necessary to mitigate the risk of company owners and executives facing massive fines and decades behind bars.

PPP Loan Fraud: What Constitutes it?

As with other federal programs, various acts and omissions can lead to allegations of federal fraud due to the Paycheck Protection Program. These include not only intentional misrepresentations, which can result in criminal fraud charges, but also inadvertent mistakes that led to the improper receipt of federal funds.

Here are some possible allegations of fraud in relation to the PPP:

1. Loan “Stacking”

The Office of the Comptroller of the Currency (OCC) is focusing specifically on “loan stacking,” which refers to companies that have received PPP loans from multiple lenders. The government can track the distribution of all funds from the program, making companies that received funds from more than one lender early targets in the government’s efforts to prosecute PPP fraud.

2. PPP Loan Application Fraud

The PPP had multiple eligibility criteria, and companies that misrepresented information on their loan applications to fraudulently claim eligibility could face prosecution. Misrepresenting information about the company’s number of employees, classification of employees, meeting SBA size standards, and payroll costs can result in false statements that can lead to charges for federal fraud.

3. Fraudulent Loan Certification

PPP loan applicants were required to certify in good faith on various facts. Any bad-faith certifications have the potential to lead to charges for federal fraud. The certifications for securing PPP loans include the necessity of the loan to support a company’s ongoing operations, use of funds to retain workers and make eligible mortgage, lease, and utility payments, not receiving another PPP loan, and ensuring that all information provided is accurate.

4. Using PPP Funds for Ineligible Business Purposes

Companies that received federal funds through the PPP are restricted to using those funds for four specific purposes only. They are using the funds to cover payroll costs, include benefits, paying interest on mortgage obligations, paying rent, and paying for utilities. Using PPP funds for any other purpose is not allowed and can lead to allegations of fraud.

5. Using PPP Funds for Fraudulent Purposes

Individuals who are personally involved in fraudulent activities will be prosecuted. Under the False Claims Act, individuals can face tens of thousands of dollars in fines and up to five years of federal imprisonment for fraudulently obtaining funds from the PPP.

6. Fraudulent Loan Forgiveness Certification

Companies that have consistently met the eligibility criteria and have used PPP funds for authorized expenses can request loan forgiveness. In requesting loan forgiveness, companies must provide documentation that they have continuously met the eligibility criteria and certify in good faith that the documents are legitimate and were used to keep employees and make eligible payments.

7. Misrepresenting or Concealing Information During a PPP Audit or Investigation

Companies that have received PPP loans will face audits and investigations related to their loan funds. If your company is audited or investigated, it is essential to seek the advice and representation of experienced attorneys who know how to fend off federal charges. Making false statements or withholding information you are required to disclose to federal authorities is itself a form of fraud and can lead to prosecution.

What should you do?

If you or your company has been targeted in a PPP loan fraud audit or investigation, the most important thing to do 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. If you need to fight allegations of PPP loan fraud, we can use our experience to protect you.