SBA Says I'm Ineligible for Forgiveness: What Now??

The short answer to this question is no. A PPP forgiveness denial, in and of itself, does not establish intentional criminal fraud; 18 U.S.C. §§ 1341 and 1343 address mail- and wire-fraud schemes, while § 1349 addresses attempts and conspiracies to commit offenses under that chapter. While, in some cases, the SBA may deny forgiveness based upon an allegation of fraud, this is by no means always true. A forgiveness dispute that does not involve allegations of fraud cannot, by itself, establish the potential for criminal exposure. With a PPP forgiveness denial, a lender decides that the loan cannot be forgiven based upon its review of the documentation provided by the borrower. The SBA may then review that decision.

What Happens After a Loan Forgiveness Request is Denied?

When a request for forgiveness is denied, the PPP borrower remains responsible for the outstanding principal amount of the loan that was not forgiven, as well as any accrued interest. However, borrowers are generally permitted to apply for forgiveness before their PPP loan matures.

What are some Examples of PPP Forgiveness Issues That do not Establish Criminal Liability?

There are several examples of PPP forgiveness-related issues that do not establish criminal liability. For example:

• If a lender’s review of the PPP borrower’s application for forgiveness establishes that the loan was not fully forgiven because the borrower had ineligible expenses;
• If the lender’s review of the PPP borrower’s application for forgiveness establishes that the loan was not fully forgiven because the borrower did not operate as a “covered business” at the time the PPP loan was issued;
• If the PPP borrower’s application for forgiveness has not been accepted by the lender due to the borrower’s failure to prove that they incurred payroll and other expenses in the amount requested to be forgiven; and,
• The PPP borrower’s loan has been sold to another lender.

How can I challenge a PPP forgiveness denial before the loan matures?

A borrower cannot directly appeal a lender’s forgiveness determination to the SBA’s Office of Hearings and Appeals; the 30-day deadline applies to an appeal of a final SBA loan review decision, while requests for review of certain lender partial-approval decisions follow separate SBA procedures.

Due to the size of the loan, the borrower’s specific circumstances, and the period covered, there are several different PPP loan forgiveness application forms. Generally, for PPP loans of $150,000 or less, the relevant form is Form 3508S. Borrowers who use this form are only able to do so if they meet certain criteria: (i) they are not repaying the PPP loan from the proceeds of another government-backed loan; (ii) they are in compliance with the SBA’s rules and regulations with respect to the PPP loan; (iii) they have not applied for forgiveness more than once during the period covered by the application; and, (iv) they must make the certifications required by Form 3508S; Form 3508S does not impose a 10-percent comparison of payroll expenses with the prior calendar year.

When applying for PPP loan forgiveness, eligible borrowers are able to select a covered period of eight to 24 weeks. For PPP loan forgiveness, it must be established that a borrower incurred eligible payroll and other expenses that meet or exceed the original loan amount during the covered period. If you are the recipient of a PPP loan and intend to apply for forgiveness, you must choose a covered period from a selection of the available options. The covered period cannot be more than 24 weeks long, and cannot be less than eight weeks.

Is there a universal rule that requires PPP lenders to refer borrowers to the SBA Office of Inspector General within 60 days after a forgiveness application is denied? No, there is no such universal rule. While there is the possibility of referral in some circumstances, this is by no means an absolute rule.

When does a PPP forgiveness dispute become a civil or criminal investigation?

Does PPP loan forgiveness preclude subsequent investigation of the borrower’s PPP loan application? No. Even if a borrower’s PPP loan was forgiven in its entirety, the SBA continues to have the authority to reopen its review of the loan and/or investigate a borrower’s PPP loan application if, as a result of new or newly discovered information, the SBA has reason to believe the loan was obtained through fraudulent means. In turn, for PPP borrowers whose loan forgiveness application was denied based on fraud allegations, an investigation into the borrower’s original PPP loan application is a high probability.

If the SBA’s PPP-related investigation is an investigation into the borrower’s initial loan application as well as (or instead of) the borrower’s application for loan forgiveness, then the investigation may encompass both issues. It will be crucial for the borrower to understand both the scope and the nature of the investigation, especially if it is not immediately clear.

Can an investigation based upon PPP-related allegations proceed civilly, criminally, or on both tracks? Yes. Depending on the circumstances, the government may choose to pursue either or both avenues of enforcement.

How can a borrower tell the difference between a civil or criminal investigation? While there is no single rule that definitively distinguishes between the two types of investigations, the following indicators generally point to a criminal investigation:

• Grand jury subpoenas (i.e., subpoenas issued from a grand jury seeking records or testimony);
• Search warrants;
• Target letters;
• Interviews with federal agents (specifically FBI agents, SBA OIG agent or investigators, OPR agents, and DOJ prosecutors);
• Lack of a “Civil Investigative Demand”; and,
• A criminal case number (e.g. FBI or SBA case number).

On the other hand, the presence of the following indicators typically point to a civil investigation:

• Civil Investigative Demands;
• Investigation under the False Claims Act (FCA) or other relevant statutes, and,
• A civil case number.

Which PPP Records are Used to Establish Eligibility, Payroll, and Use of Loan Proceeds?

Which PPP-related allegations are most commonly examined in PPP-related investigations? The most common PPP-related allegations involve:

• Overstating payroll;
• Overstating employee counts; and,
• Misuse of loan proceeds.

What PPP records are used to test eligibility? In order to qualify for a PPP loan, the applicant business had to be operating on February 15, 2020. The government’s evidence in these cases typically include loan applications, bank records, payroll records, tax records, and other related business records.

What is the definition of eligible payroll expenses for PPP loan purposes? Eligible payroll expenses include, but are not limited to:

• Wages and other compensation paid to employees;
• Mortgage interest, rent, and utilities paid during the loan’s covered period; and,

Interest payments on qualifying business mortgages on real or personal property incurred before February 15, 2020, but not interest on other debt obligations.

The government’s evidence in these cases will depend on the allegations involved, but generally, this includes payroll records, bank statements, tax records, rent and mortgage statements, and other business records.

Do PPP loan proceeds used by the borrower personally (instead of in the borrower’s business) become a problem? Absolutely. If a borrower used PPP loan proceeds for any non-business related expenses, this could potentially be used by the government to prove intentional misuse of the PPP loan proceeds in a civil or criminal enforcement action. The government’s evidence in these cases will typically include bank records, loan applications, tax records, and the borrower’s individual account statements, among others.

What evidence does the government have if it has a PPP-related investigation on its hands? Generally, the government’s evidence in PPP-related investigations will include loan applications, bank records, payroll records, tax returns, and other relevant business records. The types of evidence will depend on the allegations involved, and will also be limited by the scope and the nature of the investigation. This information will be gathered via subpoena, search warrant, or an informal investigative interview.

Spodek Law Group is transparent about its fees, and says so before a client signs anything.

How Can I Protect Myself While Resolving an Unforgiven PPP Balance?

Can I resolve the possibility of criminal investigation by paying back my PPP loan to the SBA or other lender? No, not necessarily. Repaying an SBA PPP loan that has been forgiven or which remains partially unforgiven may, however, end (or, at least, substantially diminish) the risk of a civil investigation or enforcement proceeding. A criminal investigation may be referred to civil authorities if, through the course of their investigation, the evidence of criminal fraud is unlikely or impossible to be proven to a jury.

Can a PPP Forgiveness Dispute become a Criminal Investigation?

Yes, it certainly can. But this will depend upon the evidence that a particular borrower was responsible for making or attempting to make a fraudulent statement or representation. This can either be a civil or a criminal investigation, and it can be both. If you or your business or PPP loan are under investigation, then you need to work closely with an experienced defense attorney who has experience in both types of investigation and both types of prosecution.

How Do I Fight the Fraud Allegations Against My Business?

If you or your business are facing allegations of fraud, there is no one-size-fits-all approach. Instead, our PPP defense team takes a tailored approach based on each client’s unique circumstances. Some general defenses to fraud allegations are negligence (because negligence does not satisfy the knowledge and/or intent requirements for fraud) and reliance upon accountants or other tax professionals in good faith (which is particularly relevant if such reliance is documented).

What are the Possible Resolutions of an Investigation Related to an Unforgiven PPP Loan?

Several are possible. While many of them are out of your control (i.e., they are completely up to federal prosecutors and agents), they include:

• Declination of criminal charges or referral;
• Civil settlement (if the investigation is civil);
• Deferred prosecution agreement; or,
• Guilty plea.

Should I Preserve My Records or Delete Irrelevant Files?

You should preserve all pertinent records and documents. You should not delete anything. Once a business owner or PPP loan recipient is made aware that the government has begun investigating their business or their PPP loan, they must ensure that all potentially relevant information is preserved and available for the government’s review.

If You Want Someone to Look at Your Case

Reading about a charge is not the same as having someone read your file. Spodek Law Group keeps an attorney on call around the clock, and the first consultation costs nothing and runs as long as your questions do. The number is 888 348 8028.