How to Avoid Allegations of Federal Fraud in Relation to Paycheck Protection Program (PPP) Loans

In the midst of the COVID-19 pandemic, the United States Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes the $350 billion Paycheck Protection Program (PPP). The PPP was created to provide urgent financial relief to businesses during this crisis; however, due to its disorganized application rollout, the PPP has attracted various concerns about fraud.

It is not surprising that anytime there is a federal relief program, there will always be questions raised regarding fraud. It is for this reason that the Office of the Comptroller of the Currency (OCC) is seeking feedback from lenders on how to improve the program and eliminate the flaws that have emerged during its implementation. Fraud identification, in particular, is likely to become an area of increased focus for the OCC, given the nature of the PPP and the rate at which its funds were quickly depleted.

There are various other fraud concerns related to PPP loans as well. As a result, companies that received PPP loans should expect to face heavy scrutiny from federal authorities, and the risk of prosecution is likely to be high. Therefore, it is important that these companies engage experienced federal counsel who can help mitigate the risk of facing substantial penalties.

This article examines the various acts and omissions that have the potential to trigger allegations of federal fraud under the PPP. It also highlights steps companies can take to avoid allegations of fraudulent activity under the program.

Fraudulent Acts under PPP

1. PPP Loan “Stacking”

Applicants for PPP loans may only receive funding from a single participating lender, but reports indicate some applicants have received loans from multiple lenders, which is known as stacking. In light of this, the OCC will focus on loan stacking as one of the primary types of fraud related to PPP loans. With the federal government tracking PPP funds’ distribution, the potential for the government to identify and prosecute companies that received PPP loans from more than one lender is high.

2. PPP Loan Application Fraud

PPP loans were made available to companies that met certain criteria, including having 500 or fewer employees. Fraudulent acts under PPP can include misrepresenting the number of employees or misclassifying employees as independent contractors to meet the employee threshold. Illegal misrepresentation of eligibility or falsification of payroll costs to increase loan amounts may also lead to allegations of federal fraud.

3. Fraudulent Loan Certification

Federal law mandates that loan applicants make certain certifications under PPP, including the good faith certification that the funds will be used to cover employees’ payroll and prevent layoffs. If an applicant makes a certification in bad faith or fails to satisfy the certification criteria, they may face charges for federal fraud.

4. Using PPP Funds for Ineligible Business Purposes

Under PPP, companies that receive federal funds must use them for specific purposes, such as payroll costs, rent, mortgage payments or utilities. As a result, using PPP funds for anything else could lead to allegations of fraud.

5. Using PPP Funds for Fraudulent Purposes

Under the False Claims Act, individuals can face criminal fines and up to five years of federal imprisonment if they fraudulently obtain funds from the PPP. Company owners and executives could face millions of dollars in criminal fines and decades behind bars if they are charged with multiple statutory offenses.

6. Fraudulent Loan Forgiveness Certification

To request loan forgiveness, companies under PPP must certify that the documents provided are accurate and that the forgiveness amount was used according to the program’s rules. The companies must also have continually met the eligibility requirements. Failure to adhere to these requirements could lead to allegations of PPP fraud.

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

In the event of a PPP loan fraud audit or investigation, companies must be careful not to make any misrepresentations or conceal information. Making false statements or withholding information from federal authorities is a form of fraud and could lead to individual prosecution for making false statements to federal law enforcement agents.

What Companies Need To Do

In order to avoid allegations of federal fraud under PPP, companies must engage in compliance efforts. These include:

1. Avoid Wrongful Acts

Companies must avoid any act that could constitute PPP fraud, including fraudulent loan certifications, misrepresentation of eligibility or the amount of payroll costs, and the use of funds for ineligible business purposes.

2. Document Everything

Documenting merely the source of payment for each expense is inadequate to prove compliance with PPP. Companies must maintain a detailed record of expenses covered under PPP, including payroll expenses with detail and backup documents that could help them demonstrate their eligibility and proper use of PPP funding.

3. Devise a PPP-Specific Compliance Program

PPP compliance programs should be developed based on the specific requirements under the program. Companies must also conduct regular reviews to ensure the continued efficacy of the program.

4. Develop a Response Plan

It is advisable to develop a response plan for responding to fraud allegations arising from PPP. This should incorporate the company’s incident response plan and compliance program.

Conclusion

Ultimately, companies that receive PPP loans must make a commitment to comply with the program’s rules and requirements. Failure to comply with the conditions of the PPP or any fraudulent activity will put a company at risk for federal fraud charges. It is essential to engage experienced federal defense counsel immediately if your company is targeted in a PPP loan fraud audit or investigation. An experienced federal attorney can provide guidance to protect your interests, and work with you to resolve any allegations of fraud.