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Are Banks Reporting PPP Loan Fraud to the Government?

April 1, 2022 Federal Criminal Attorneys

Every business owner knows that Paycheck Protection Program funds were distributed haphazardly. Businesses, banks, and even the federal government were in a rush to move PPP funds as quickly as possible after the CARES Act was passed in 2020. Nevertheless, the federal government is beginning a process of retroactively scrutinizing many of the PPP applications that were submitted last year. If your business received PPP funds, you should review the legality of your application and consider how your business could be vulnerable to potential criminal charges.

PPP Loan Applications Are Being Scrutinized

The Small Business Administration has announced that it will begin to systematically scrutinize PPP applications that were submitted in 2020. The SBA will rely on a broad range of data sources to detect potential fraud. Businesses that are flagged for potential fraud will have to undergo a PPP audit and potentially face a criminal investigation.

Not all businesses will be audited. However, the SBA has clarified that every business receiving over $2 million in funds will be audited. Other businesses that took out less money can be audited either randomly or at the request of a federal agency.

Many federal agencies will work together on the PPP auditing process. The Department of Justice will be using grand jury subpoenas to obtain evidence of potential PPP fraud from parties that have access to financial records or business data. The Treasury Department and IRS will also be participating in the audit. By working together, federal agencies hope to catch many of the people who attempted to defraud the government of substantial sums of money by misusing PPP funds.

Are Federal Authorities Targeting Banks?

Banks are arguably the main target of the federal government’s investigation. Ultimately, banks have all the records that can be used to determine whether businesses misused their PPP funds. Additionally, many banks worked closely with business owners when submitting PPP applications, so they can answer questions that financial records cannot show on their own.

Under the CARES Act, banks were granted immunity from criminal or civil liability when helping their clients to submit PPP applications. However, this immunity only applies when banks are able to prove that they relied on a borrower’s claims when they made decisions. Additionally, banks are not protected if they knowingly allowed fraudulent applications to be approved.

So far, there is not any direct evidence that the federal government has subpoenaed large troves of information on PPP recipients from banks. Instead, subpoenas have only be used for individual cases.

Will Banks Surrender PPP Data to Federal Agencies?

Nevertheless, legal experts believe that the government’s investigation will eventually extend to acquiring customer data that banks have in their possession. Generally, banks are required to give up customer information when they get a subpoena as part of an investigation. However, since banks were given significant immunity from liability, they may be able to challenge subpoenas in ways that are not normally possible.

Of course, business owners should expect that banks will follow the law. After all, banks have to work closely with regulators to avoid being scrutinized in other areas.

Historically, banks have almost always proven to be willing to comply with requests for information from the government without challenging these requests. However, banks may be uncomfortable about simply handing over the account information of all PPP recipients. If banks give up such a significant amount of information without first going to court, they could upset most of their small business clients. Additionally, banks that hand over such large amounts of information to the government could eventually face charges or lawsuits from that information.

As a result, most banks can be expected to contest wide-reaching subpoenas for information. However, business owners should understand that efforts to overturn subpoenas are rarely successful.

What Could Happen If Bank Data Is Turned Over?

If federal agencies are able to get access to bank data, they could use software to quickly issue a high volume of criminal complaints. Federal agencies have software that can scan financial data for potential fraud or other illegal activities. In particular, the DOJ is known to have software that can scan bank records for companies that may have engaged in fraud. Investigators can then manually investigate each flagged company to determine if a fraud case can be pursued.

What Can Happen If Your Company Is Investigated for PPP Fraud?

Companies that are scrutinized for PPP fraud have a high chance of eventually facing prosecution. As mentioned earlier, many applications were submitted hastily without carefully reviewing every word. If even a small portion of your PPP application was erroneous or made exaggerated claims, you could face charges.

Of course, the government would have to prove in court that you intended to commit fraud when you submitted your PPP application. However, in practice, the road to being found not guilty of federal fraud charges is arduous, long, uncertain, and expensive. Many businesses are put into bankruptcy when customers, officers, lenders, and investors turn away from them after fraud charges are filed. Consequently, to avoid charges, it is crucial for businesses that could have filed inaccurate PPP applications to work closely with their legal team to cooperate with investigators and correct mistakes that were made.

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