Forgiveness Application Rejected Due to Documentation Errors.

No. Unintentional discrepancies on PPP loan applications, forgiveness applications, or other documentation do not automatically establish criminal liability for PPP loan fraud. While documentation errors and inconsistencies can lead to a denial of PPP loan forgiveness, a denial alone does not prove that a borrower committed criminal fraud. Even when the government alleges a borrower committed fraud or that the borrower had to “repay the loan in full,” it does not necessarily mean that the borrower is facing criminal prosecution. Many businesses mistakenly assume that PPP loan eligibility and PPP forgiveness eligibility are the same. They are different determinations. PPP loan eligibility depends upon whether the business met the program’s applicable statutory and regulatory eligibility requirements, including any COVID-19 impact or revenue-reduction requirements. PPP forgiveness eligibility depends upon how well the business complied with the conditions for loan forgiveness, which is distinct from, but not wholly unrelated to, the business’s eligibility to receive the loan. It is also important to understand that PPP repayment, civil liability, and criminal prosecution are all distinct consequences. PPP borrowers who do not qualify for forgiveness must repay their PPP loan balance, plus any applicable interest. This may expose them to civil liability, but it does not necessarily expose them to criminal prosecution. If you are facing a PPP fraud investigation, you must carefully distinguish between these different consequences. Good-faith compliance can be demonstrated in many cases, including cases involving PPP irregularities. When facing allegations of PPP fraud, we are able to help PPP borrowers and their executives defend against both civil and criminal penalties.

What Must PPP Records Prove After a Forgiveness Rejection?

When seeking PPP loan forgiveness, borrowers typically began by calculating their loan eligibility. PPP loans were calculated based on average monthly payroll costs calculated from the last twelve months. Generally, borrowers’ payroll costs for 2019 or the preceding twelve months had to qualify the business for the program. After calculating their eligibility, borrowers obtained PPP loans. In some cases, borrowers then sought to add to their PPP loans through a second-round PPP program. Then, PPP loan borrowers sought to obtain forgiveness for the amount of their PPP loans. PPP forgiveness is generally available for covered payroll expenses, and it is also available for a percentage of covered rent, utilities, and mortgage interest expenses paid. As PPP loan forgiveness also applied to other expenses related to PPP loans, any covered payments made from a PPP loan balance that met the applicable requirements of the program were eligible to be forgiven. After applying for PPP loan forgiveness, borrowers needed records that supported (i) their claimed eligibility, (ii) their eligible loan amounts, and (iii) their qualifying expenditures. These records had to support the amount of forgiveness claimed and the borrower’s compliance with applicable forgiveness requirements. The documentation that borrowers needed to provide as a result of a PPP loan forgiveness application rejection would depend upon the specific reasons given by the SBA. For instance, in many cases, the SBA denied PPP forgiveness applications because a borrower failed to maintain the employment and wage levels that were necessary to obtain PPP forgiveness.

What Remains Owed After a PPP Loan Forgiveness Denial?

The amount owed after PPP loan forgiveness is denied or reduced depends on the specifics of the borrower’s loan, the amount they had received, and the reasons for their denial. In many cases, borrowing businesses can expect to repay the outstanding principal balance of their PPP loans, as well as any applicable interest.

Additionally, any funds that were not used to cover qualifying expenses need to be repaid. With the government now increasing its scrutiny of PPP loan recipients, borrowers must take care to avoid further scrutiny. Some types of non-qualifying expenses can expose borrowers to the risk of enforcement actions in civil or criminal cases. This includes, but is not limited to, spending PPP funds on personal luxury items, making large deposits into personal brokerage or savings accounts, making inappropriate investment or gambling purchases, and making business expenditures that were not related to pandemic-related business operations. The risk of enforcement action can extend to borrowers whose PPP forgiveness applications were denied based on improper or fraudulent claims as well. While an improper claim may warrant a repayment demand by the SBA, any evidence of a fraudulent claim could be sufficient to warrant an investigation by the DOJ. The SBA, DOJ, the U.S. Department of the Treasury Office of Inspector General (OIG), and other federal agencies are all scrutinizing PPP loans, and the federal government has filed criminal and civil enforcement actions against thousands of PPP loan recipients nationwide. The government will often require borrowers to repay the full amount of the loan funds obtained (regardless of whether these funds were used for qualifying expenses or not) if there is evidence of a fraudulent claim. Thus, while facing a PPP loan forgiveness denial, borrowers must work with a lawyer to determine the scope of their potential risk and their next immediate steps.

Which PPP Errors Can Become Evidence of Intentional Fraud?

While many errors and inconsistencies on PPP loan and PPP forgiveness applications may not be evidence of intent to commit fraud, this is not always the case. In fact, some types of errors and inconsistencies on the documentation used to apply for PPP funding are more likely to serve as evidence of criminal liability than others. For example, examples of alleged PPP loan fraud include, but are not limited to:

• Falsification of eligibility information: Lying about having employees, falsifying tax records or other documents in order to qualify for PPP loan funds, or using a corporate identity to apply for PPP funding, all can be interpreted as evidence of intent to commit fraud. These types of fraudulent claims can be made at the loan application stage, as well as at the forgiveness application stage.
• Inflation of payroll costs or employee counts: Inflating payroll costs or employee counts for the purpose of qualifying for larger loan amounts can also serve as evidence of criminal misconduct in PPP loan fraud cases if there are sufficient grounds for asserting intentional misconduct.
• Submission of duplicate PPP claims: Attempting to claim funds from multiple lenders or program rounds (i.e., within the PPP First Draw or Second Draw programs) for the same employees or entity may also be interpreted as evidence of intentional fraud.
• Lack of intentionality due to vague or shifting guidance: Some PPP-related errors, including certification and documentation errors, are more likely to be interpreted as non-intentional as a result of vague or shifting government guidance. As long as this is not a case of a fraudulent claim, this can be a powerful defense against allegations of intent to commit fraud.

What Statutes Govern PPP Fraud Offenses?

The federal government has used a wide variety of statutes to prosecute individuals and companies involved in alleged PPP-related criminal misconduct. Some examples of these statutes include, but are not limited to:

• Wire Fraud (18 U.S.C. 1343)
• Bank Fraud (18 U.S.C. 1344)
• False Statements (18 U.S.C. 1001)
• False claims under the False Claims Act (31 U.S.C. 3729 et seq.)
• Conspiracy to Commit Offenses Involving Fraud (18 U.S.C. 371)
• False, Fictitious, or Fraudulent Claims (18 U.S.C. 287)

The potential punishments for federal PPP-related offenses are severe. In some cases, offenders can face up to thirty years of federal imprisonment in addition to other penalties, civil liability, and the repayment of any funds obtained.

What Should a Borrower Bring to Counsel When PPP Records are Challenged?

The first step to establishing a viable defense for PPP loan borrowers involves looking at the government’s allegations in light of the contemporaneous records the business maintained before it applied for its PPP loan or PPP loan forgiveness. Contemporaneous records, or records produced at the time of an act or series of acts, can show that certain information reported on a business’s loan or forgiveness application was accurate (or at least that the business believed the information was accurate when it reported it to the government). The more a business’s contemporaneous records support its claim of PPP eligibility or its PPP loan forgiveness application, the more that business will be able to argue that it did not make any fraudulent claims. A variety of records that were either already in our clients’ possession or had to be sought by business owners and executives (sometimes months after their firms’ PPP records were first flagged). These records range from employment records, to payroll records, and from lease agreements to commercial loan statements. When facing a PPP fraud investigation, business owners and executives need to have a complete understanding of the extent of their potential risk. As a result, it is imperative that they reach out to a trusted, experienced PPP defense attorney right away to determine how they can best protect themselves against allegations of criminal fraud.

Once you engage counsel, your attorney can determine which records and other materials may be most useful in establishing a defense. This, then, can be used to develop a strategic approach for communicating with federal authorities.

Speak With Counsel Before You Answer Anything

If agents have contacted you, the order matters: counsel first, answers second. Spodek Law Group has been practicing since 1976 and defends federal matters nationwide, coast to coast, from offices in New York, Brooklyn, Queens and Los Angeles. Call 888 348 8028.