SBA Audit of My $2 Million+ PPP Loan: What to Expect.

In January 2021, the SBA announced that it was reviewing PPP loans of $2 million or more in support of its partnership with the U.S. Department of Justice (DOJ) to conduct comprehensive fraud enforcement action against borrowers and loan servicers. While the SBA’s review process is specifically targeted at lenders and entities that submitted forgiveness applications, SBA officials have stated that their review will look at PPP loan applications as well as loan forgiveness requests and all supporting documentation.

If the SBA identifies evidence of misconduct in the federal government’s loan program (i.e., the CARES Act PPP program), it will refer the matter to the DOJ for appropriate civil and criminal enforcement action. SBA officials have clarified that an audit or review is not, by itself, evidence of fraud or criminal liability, nor does it prove that a borrower intentionally misrepresented its eligibility or submitted false documentation to the SBA.

While borrowers should not consider PPP loan forgiveness to be an affirmative defense against federal charges of fraud under the CARES Act, loan forgiveness does not, by itself, eliminate federal criminal liability. If the SBA or DOJ determines that a loan recipient fraudulently obtained PPP funds, it can pursue civil and criminal charges regardless of whether the recipient’s PPP loan has been forgiven by the SBA.

With this in mind, if you are a PPP loan recipient concerned about the implications of the SBA’s audit or review, we strongly advise you to consult with an experienced federal defense lawyer immediately. A federal criminal defense attorney can get in touch with the SBA or DOJ on your behalf to help protect your (and your business’s) rights and interests.

How should I respond when an SBA or federal investigator requests PPP records?

If the SBA Requests Documentation for an Audit or Review

If your business is the subject of an SBA audit or review and the SBA requests documentation, you will be required to provide all records that support your original PPP application and your loan forgiveness request. According to the SBA’s provided materials, all PPP loan records should be retained for at least six years. These records include documentation of expenditures, including:

• 2020 Q1 / Q2 941 Forms
• 2020 Q1 / Q2 payroll records
• W-2s and 1099s
• Documentation of any business-related expenditures, including, but not limited to:
• Mortgages / rent payments
• Utilities
• Payroll costs
• Interest payments on, or payments for, preexisting business debts
• Equipment and materials purchases
• Home office expenditures (if applicable)
• Online payment processing fees
• Supplier contracts

If an SBA or Federal Investigator Inquiries About a PPP Loan or Forgiveness Request

If an SBA, Department of Justice (DOJ), or federal investigator contacts you or your business regarding an SBA audit or review, remember that the investigation could already be in its later stages (i.e., charges could have already been filed without notifying the company). A federal investigator may also attempt to obtain your bank records, federal tax filings, payroll records, loan application, and other relevant records from third-party sources.

Investigators may also attempt to obtain information by interviewing your employees, accounting firm, bookkeeper, customer, business associate, and other individuals. With this in mind, if you are contacted by a federal investigator, speak with a federal criminal defense attorney before making comments or attempting to comply with requests for documentation.

How does a PPP forgiveness review move from lender screening to an adverse SBA decision?

Step 1: Lender Screening

When a borrower submits a PPP loan forgiveness application, its SBA-approved lender reviews the application first. Per the SBA’s January 2021 guidance, lenders had up to 60 days to review submitted loan forgiveness requests. While lenders are not auditing their borrowers’ documentation in the traditional sense, they are expected to screen for evidence that a borrower has fully complied with the program’s loan forgiveness requirements. Lenders are also required to report suspected PPP fraud to the federal government.

Step 2: Lender Submission to the SBA

If a lender screens in a loan forgiveness request, it forwards the request and all supporting documentation to the SBA for final review.

Step 3: Adverse Eligibility Determination

If the SBA is unable to grant loan forgiveness after reviewing the application and supporting documentation, it will make an adverse eligibility determination. The SBA will then notify the lender of the adverse eligibility determination, and the lender will notify the borrower. An adverse eligibility determination may include a requirement that the PPP loan funds be repaid by a specified deadline.

Step 4: Appeal and/or Reconsideration

If a PPP loan recipient receives a final SBA loan review decision, the borrower generally has 30 calendar days to appeal it; lender decisions must be addressed with the lender. This is a critical juncture, and borrowers should work closely with legal counsel to address the SBA’s concerns promptly and effectively.

Step 5: Criminal Investigation

In some cases, an adverse eligibility determination may lead to a criminal investigation. If the SBA determines that a borrower fraudulently obtained PPP funds, it may refer the matter to the DOJ. As noted, even if a loan was initially forgiven, the SBA and DOJ can still pursue charges based on evidence discovered during the loan’s entire lifecycle.

If any of this describes your situation, it is worth talking through with counsel. Spodek Law Group can be reached at 888 348 8028.

Who can escalate a PPP matter beyond SBA review, and is there a standard end date?

The U.S. Department of the Treasury’s Office of Special Inspector General

The Department of the Treasury’s Office of the Special Inspector General for Pandemic Recovery (SIGPR), which sunset on March 27, 2025, had a mandate to oversee certain CARES Act programs. When the SIGPR uncovers evidence of fraudulent activity, it can refer the matter to the DOJ for civil or criminal enforcement.

The Department of Justice, Federal Bureau of Investigation, SBA Office of Inspector General, and IRS Criminal Investigation Division

Along with the SBA’s internal audit team, the DOJ, FBI, SBA Office of Inspector General (OIG), and IRS Criminal Investigation Division (IRS-CI) have all announced an ongoing effort to recover fraudulently obtained PPP funds. These agencies can uncover alleged fraud through data analysis, whistleblowers, or cooperation with the SBA.

Commercial Banks and Other Financial Institutions

Commercial banks, other financial institutions, and even government agencies have statutory and contractual obligations to monitor accounts for suspected fraud or other illegal activity. If a bank or financial institution detects any “suspicious activity” in connection with a PPP-related transaction, it may file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN). While most SARs do not lead to law enforcement action, they can lead to additional scrutiny if FinCEN or other federal agencies uncover evidence of criminal activity. Once a SAR is filed, the financial institution is generally prohibited from disclosing the existence of the SAR to the target of the investigation.

What federal charges can follow a PPP review even after forgiveness?

If the SBA or DOJ believes that a business or individual fraudulently obtained a PPP loan, it may investigate whether the borrower made material false statements on the loan application or loan forgiveness request, among other possible conduct. With this in mind, if you or your company is the subject of an SBA audit, review, or federal criminal investigation, you should not worry about whether the authorities have evidence of any specific charge. Instead, you should focus on building a strong defense and protecting your rights.

Here are some of the federal charges that could be involved in an investigation concerning alleged fraud related to the Paycheck Protection Program:

• 18 U.S.C. § 1341 Mail Fraud - 20 years maximum imprisonment per count
• 18 U.S.C. § 1343 Wire Fraud - 20 years maximum imprisonment per count
• 18 U.S.C. § 1344 Bank Fraud - 30 years maximum imprisonment per count
• 18 U.S.C. § 1001 False Statements to the Federal Government - 5 years maximum imprisonment per count
• 18 U.S.C. § 1349 Conspiracy to Commit Fraud - penalties generally match those for the underlying offense
• 18 U.S.C. § 287 False Claims to the Federal Government - 5 years maximum imprisonment per count
• 18 U.S.C. § 1956 Money Laundering - 20 years maximum imprisonment per count
• 18 U.S.C. § 1957 Engaging in Monetary Transactions in Property Derived from Specified Unlawful Activity - 10 years maximum imprisonment per count

Many of the above charges may be investigated and prosecuted by the Justice Department’s COVID-19 Fraud Enforcement Task Force and its participating agencies.

How long can I expect to spend in federal prison if convicted of bank fraud under 18 U.S.C. § 1344?

Under 18 U.S.C. § 1344, an individual convicted of bank fraud can face up to thirty years in federal prison per count; a corporation can face fines and other sanctions, but not imprisonment. These are substantial penalties, and a federal criminal defense attorney who can proactively manage your case is essential.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 888 348 8028 to speak with our team.