Fraud Prosecutions for Paycheck Protection Program

Federal prosecutors have already filed charges against at least 33 small businesses or individual owners for alleged Paycheck Protection Program (PPP) loan fraud, such as fabricating applications, falsifying tax or business records, and misusing loan money. For example, a Los Angeles business owner allegedly fraudulently obtained almost $9 million in PPP loans and gambled away hundreds of thousands at a Las Vegas casino and made risky stock-market bets, rather than spending the money on his employees for which it was earmarked. A reality TV star in Georgia was charged with bank fraud after using his $2 million PPP loan to buy $85,000 worth in diamond jewelry, a Rolex watch, and to pay child support, while another recipient in Texas was charged with wire fraud, bank fraud, and other charges after he used his $1.6 million PPP loan to buy a Tesla, make personal investments, and pay off his mortgage. While the investigations for large loans grab headlines, federal prosecutors have also charged businesses who received small loans with fraud. For instance, an Illinois business owner was charged with bank fraud and making false statements to a bank after he submitted an application for over $400,000 in PPP loans utilizing false IRS forms and other fraudulent documents. Federal authorities have seized cash hoards, frozen bank accounts, and recovered other luxury assets that were fraudulently obtained through PPP loans.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act—more commonly known as the CARES Act—was signed into law and authorized the Paycheck Protection Program (PPP), which is designed to help small businesses and self-employed individuals during the pandemic. Due to the urgency of the need of funds, the program was drafted, passed, and implemented in a matter of weeks. The Small Business Administration (SBA), which administers the PPP program, has processed over 4.9 million PPP loans worth $518 billion to small businesses nationwide. Applications for PPP loans were accepted through August 8.

PPP loans, which are designed to cover payroll expenses, business-related utilities, mortgage interest, and rent, are eligible for forgivingness if at least 60% of the proceeds are used to keep employees on payroll or rehire workers who have been laid off. If a borrower received its loan before June 5, the borrower may elect to cover up to either eight or twenty-four weeks of payroll, however, if the loan was received after June 5, then it covers up to twenty-four weeks of payroll. The SBA tasked commercial banks with the responsibility to accept and review the four page applications on which companies self-certified that they needed the loan money in good faith for payroll and other permissible business purposes.

In April, federal officials began to crack down on the abuse of PPP loans after many nationwide companies, including Ruth’s Chris Steak House, Shake Shack, and the Los Angeles Lakers, were criticized for receiving PPP loans that were intended to help small businesses. As of June 30, the U.S. Department of Treasury announced that SBA would begin auditing all recipients of PPP loans of $2 million or greater when and if they seek loan forgiveness. Such loans represented only about 0.6% of the total amount of PPP funds distributed by the end of June, but they accounted for 21% of all the money lent. To review and prosecute the cases, the Department of Justice is working with investigators from the IRS, Federal Housing Finance Authority, and U.S. Postal Service. The False Claims Act, which punishes anyone who defrauds government programs, also applies to PPP loans. As a result, the repercussions for submitting false or inaccurate certifications include not only repayment of the loan and civil or criminal liability, but potentially even treble damages—meaning that the federal government may be able to recover triple the amount of funds fraudulently obtained by the defrauding party.

On June 25, a congressional watchdog released a 400-page report outlining its observations of the CARES Act and found that “because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved.” Furthermore, the watchdog stated that “limited safeguards and lack of timely and complete guidance and oversight planning have increased the likelihood that borrowers may misuse or improperly receive loan proceeds.” The report also included information about a concerning amount of duplicate PPP loans that have been distributed by the SBA to various businesses. For example, one business was allegedly approved four times, thereby receiving four separate loans. The government watchdog urged SBA to improve oversight of the loans and implement safeguards to avoid double dipping.

After U.S. Treasury Secretary Steven Mnuchin warned that companies who receive coronavirus rescue money intended for small businesses could be investigated if it appears they do not really need the money, many companies began to prepare to defend themselves. Some companies have returned the loan money, like Shake Shack and Harvard University. However, other companies denied any foul play. Some insurance companies are offering specific policies, which cost 4%-5% of the value of the loan plus thousands in fees, to protect companies if the government attempts to claw back the loan money, and is offering coverage for legal fees, penalties, and the cost of repaying the loan if the federal government determines the company is not eligible for loan forgiveness. The terms and coverage of these insurance policies vary by policy, but they are designed to mitigate the risk of false or inaccurate certifications.

Business owners should read the SBA’s most recent FAQ page and the revised Loan Forgiveness Application to determine which documents might be required in the loan forgiveness policy, such as tax documentation. In addition, businesses may want to prepare to save other documents; an LA Times article stated that the federal government will most likely seek “payroll and financial records, proof of advice from attorneys or auditors and evidence that businesses weighed other sources of liquidity to stay open.” Moreover, former federal prosecutor Daniel Grooms stated that “the most important thing that businesses can do now and should be doing all along . . . is keeping solid records of their reasoning.” Loan recipients have been told to keep all relevant documentation for up to six years and provide it to SBA when requested. Lastly, Stephen J. Cox, the U.S. Attorney for the Eastern District of Texas, has stated, “We will not punish companies that accessed stimulus funds in good faith compliance with the rules. Nor, will we seek out applicants who made technical mistakes in processing paperwork or honestly misunderstood regulatory or certification requirements. Our focus is on fraud.”

Businesses with PPP loans should consult and work closely with their attorney and accountant to ensure proper compliance with SBA forgiveness requirements and documentation. Businesses should also regularly monitor government announcements on program requirements, as they are being updated and new guidance is being issued almost weekly. PPP loan recipients should be cautious and save all necessary documentation as they navigate through these unprecedented times. In sum, the government is currently investigating potential fraud in the PPP program and, based on the current trends and the immense amount of loans paid out, more investigations and prosecutions relating to PPP loan fraud will emerge moving forward.