SBA Says My Business Wasn't Operating: How to Prove Otherwise.

A timeline is the cornerstone of a business’s defense when facing claims of operating ineligibility. Demonstrating eligibility requires producing consistent contemporaneous records, the documents and records created at the time the transactions and operations took place. These records must clearly show the business was legitimately active prior to applying for federal disaster relief.

What Types of Records Can Help Prove Preexisting Operations?

To establish prior operations, various records should be used to build a comprehensive business timeline. Tax, payroll, banking, and customer records can all work together to tell the business’s story.

If a business is accused of claiming to be operational before its actual inception, it needs to show that its operations predated the challenged relief application. This requires evidence such as early contracts, vendor invoices, or employee payroll records.

How Do the Rules for PPP and Other Programs Affect Eligibility?

The SBA’s PPP program established its own operating eligibility rules, which generally required businesses to have been in operation before February 15, 2020. This differed from some SBA loan products, which may have their own operating-history requirements; SBA’s general 7(a) eligibility criteria do not impose a blanket two-year operating-history requirement.

Because the PPP’s operating eligibility requirements were pandemic-specific, the exact date or date range proving eligibility depended on the program application date. This made understanding the specific program’s requirements critical for demonstrating eligibility.

What Do the SBA’s Repayment Demands Mean for the Company’s Operating Eligibility?

The SBA’s repayment demands may relate to operating eligibility, improper use of funds, forgiveness documentation, or other grounds. While a repayment demand indicates the SBA’s belief that the company is ineligible for a discharge of its debt, the company’s operating eligibility is determined by the rules and regulations governing the PPP, and the SBA may not have a clear idea of whether the company is eligible for the discharge.

What Does the SBA Mean by Alleging the Business Lacked Eligibility for Program Relief?

The SBA’s allegation that a business lacked eligibility for program relief can mean several things, and each allegation may require a different type of evidence to disprove. Here are some common types of allegations:

• Fraudulent claims of ownership or employees
• Ineligible business types
• Business not operating before the PPP application
• Double-dipping (applying for multiple relief programs)
• Falsifying financial information

Which Records Can Help Connect Payroll, Banking, Taxes, Customers, and the Business Location?

When federal authorities investigate a business alleged to be inoperative prior to PPP application or other ineligibilities, they seek records from all sources that can prove or disprove the allegations.

Investigators will likely scrutinize all types of records, and they will likely work to find records that either contradict or corroborate the business’s representations.

• Bank records, including all bank statements and records of deposits and withdrawals, wire transfers and deposits, checks, credit applications, and loan applications
• Payroll records, including all records of payment to employees, including payroll summaries, W-2s, 1099s, payroll tax returns, and records showing employees’ W-2 and 1099 income
• Lease records, including all signed rental agreements and evidence of compliance with the lease and payment terms
• Employee records, including payroll data and any others that prove business operations
• Tax records, including all returns filed with the IRS and state and local tax authorities
• Electronic records, including emails, texts, Slack messages, and documents stored electronically, as well as metadata about when these records were created, modified, and accessed

The SBA and federal law enforcement agencies have various ways of obtaining these records. Banks and other payment-processing companies are required to produce these records under federal subpoenas, and the SBA may be required to disclose responsive, nonexempt agency records in response to a properly submitted Freedom of Information Act (FOIA) request.

When federal investigators work with the IRS’s Criminal Investigation unit, they can compare tax returns and other tax records with third-party records they obtain from employers, financial institutions, and others. They may also obtain third-party records directly from the government, including records related to properties and real estate owned by the business, contracts with vendors and clients, and other records.

The FBI and other law enforcement agencies can obtain third-party records from companies that process credit card transactions, sell equipment, or provide any other service or good to businesses. These agencies can also interview current and former employees, business associates, vendors, and others to learn about the company’s operations.

Internet investigators can examine the business’s social media accounts, professional networking profiles, websites, search engine results, and online reviews. They can also search cloud-storage providers and other online platforms for any potentially relevant documentation.

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What Kind of SBA Challenge is Being Made: Eligibility, Forgiveness, Repayment, or Criminal Fraud?

Depending on how it came to have federal oversight and investigation, a challenged business will face one or more of four types of challenges:

• Alleged Improper Use of PPP Funds: To qualify for PPP loan forgiveness, businesses were required to use their PPP funds for permitted purposes. Any use of loan proceeds for non-permitted purposes, including for personal purchases or purchases from businesses that are affiliated with the business owner, could qualify as improper use of funds, which may expose the business to SBA repayment demands and federal criminal prosecution.

What Does It Mean to Face Repayment Demands Without a Criminal Conviction?

Federal authorities can and do seek repayment from businesses accused of improperly using federal PPP funds and other business relief programs without securing a criminal conviction.

This is because the government does not need a criminal conviction to recover federal funds that were improperly used. However, it will still be able to seek criminal penalties if a business owner is found to have knowingly misused federal funds.

What Does it Mean to Challenge a Business’s HUBZone Eligibility?

The HUBZone program is designed to promote job growth, capital investment, and economic development in historically underutilized business zones in urban and rural communities. In order to qualify for HUBZone certification, a business must meet the following (among other) requirements:

• It must have a principal office within a HUBZone.
• At least thirty-five percent of its employees must reside within a HUBZone.
• At least 51% of its ownership must be held and controlled by qualifying owners or entities identified in 13 C.F.R. § 126.200(a).
• It must be a for-profit entity.

Meeting these requirements are among the factors that determine a company’s HUBZone eligibility. However, meeting these requirements alone is not enough to qualify a company for certification, as there are other requirements as well.

How Do PPP Forgiveness Procedures Differ from Program Eligibility Determinations?

PPP loan forgiveness procedures were a critical aspect of the program, and they required businesses to affirmatively seek discharge from their loan obligations. They were different from initial PPP loan-eligibility determinations, and they required separate documentation and evidence.

What Does it Mean to Have Culpable Mental State in Criminal PPP Fraud Cases?

In federal criminal fraud cases, a culpable mental state is required in order for a business owner to be convicted of fraud. A culpable mental state can be either “knowingly” and “willfully” committing fraud or showing “reckless disregard” for the truth.

Essentially, a culpable mental state exists when a business owner is aware of the truth, knows that he or she is making a false statement or misrepresenting material facts, and intends to deceive the SBA (or other agency) into granting it federal relief funds.

When Investigators Arrive, What Can Create Additional Exposure Beyond the Original Allegation?

In federal criminal cases, federal prosecutors can get documents through the grand jury process. They use grand juries to get documents by sending grand jury subpoenas for records, other documents, or both to individuals, companies, and third parties. When federal search warrants are executed, investigators may seize hard drives, cloud computing records, other electronic records, and handwritten notes.

If a business owner or its employees attempt to alter or destroy any documents or records that may be relevant to the federal investigation, he or she may create exposure under 18 U.S.C. § 1512 or 18 U.S.C. § 1519, which carry hefty fines and up to 20 years of imprisonment. The same apply to any false statements made to agents or other federal officials, and false statements made to agents or other federal officials can be charged as federal offenses under 18 U.S.C. § 1001.

How Might a Federal Investigation into a Business Begin?

A federal investigation into a business may begin in any of several ways. Some of the ways that federal investigations begin include:

• Agents visiting the business owner or employees
• Service of a subpoena
• Service of a target letter
• Interrogation

If you are served with a federal subpoena, do not assume you have done something wrong. A recipient of a federal subpoena may be a witness, a subject, or the target of an investigation.

If you are not sure what your role in a federal investigation is, our defense counsel can help determine your role and provide advice and strategic guidance.

How long does the SBA take to process PPP loan applications?

The PPP ended on May 31, 2021, so the SBA is no longer processing new PPP loan applications. Most banks and credit unions process PPP loan applications and the SBA generally makes funding decisions quickly. Applicants can receive emails and other documentation once approved by the SBA through their lenders.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 888 348 8028.