Kiefer: Borrowers of PPP loans could face DOJ fraud investigations
By J. Richard Kiefer
When the coronavirus hit the United States in March 2020, businesses across the country were immediately affected, with small businesses being the hardest hit. Many have closed, laid off employees and stressed over unpaid bills. In response, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), creating the Paycheck Protection Program (PPP), for which Congress eventually appropriated $806 billion. To get funds into the hands of small businesses struggling to survive in the early months of the COVID pandemic, Congress suspended routine Small Business Administration loan processing procedures and allowed banks to lean on the declarations made by the candidates regarding the size of their company, their salary costs and the related eligibility criteria. The program has successfully helped thousands of businesses survive by getting quick cash, but it has also created an opportunity for fraud and honest mistakes in the loan application process.
The Congressional Select Subcommittee on the Coronavirus Crisis has estimated that there is “nearly $84 billion in potential fraud.” SBA Inspector General for Pandemic Recovery Brian Miller released a report focusing on a single area of fraud or error: “We determined that the SBA did not always have sufficient controls in place to detect and prevent duplicate PPP loans. As a result, lenders made more than one PPP loan disbursement to 4,260 borrowers with the same tax identification number and borrowers with the same business name and address. These disbursements totaled approximately $692 million for PPP loans approved from April 3 to August 9, 2020.”
Although the full amount of the fraud is yet to be determined, the Justice Department has filed hundreds of federal criminal lawsuits across the United States against individuals suspected of fraudulently obtaining PPP loans. Almost all of these cases involve what might be termed “low hanging fruit”, or defendants who submitted false documents to obtain loans and then spent the proceeds of the PPP loan on luxury vehicles, expensive jewelry, vacations, and other personal expenses, none of which were “approved expenses” under the CARES Act.
As the DOJ expands its investigations into PPP loan fraud, even honest and well-meaning borrowers could come under intense scrutiny from law enforcement. Much has been written about inconsistencies in SBA regulations and advice to banks and borrowers, called Frequently Asked Questions or FAQs. For example, borrowers often struggled to determine if they met the “need for loan” requirement of the CARES Act, which required borrowers to certify “that the uncertainty of current economic conditions makes it necessary to apply for loan to support the eligible recipient’s ongoing operations. In FAQ #31 published on April 23, 2020, the SBA asserted that in order to meet this requirement, borrowers must consider “their ability to access other sources of liquidity.” The SBA suggested that “it is unlikely that a public company with substantial market value and access to capital markets would be able to make the required certification in good faith…”. Shortly after the SBA released its FAQ #31, a number of large corporations repaid their PPP loans after the SBA said that if they did, they would not be sanctioned and the SBA would not make any criminal referral to the DOJ.
The need for a loan is not the only confusing area of eligibility criteria. SBA affiliation rules, alternative size standards, criteria for determining whether to include foreign affiliates, and calculation of employee counts, among others, have also caused confusion and uncertainty even among companies that only wanted to apply for funds to which they were entitled under the law. Now, if the SBA or DOJ determines that borrowers misinterpreted the criteria, will they become the target of a federal investigation? The head of the DOJ’s fraud section told a national conference late last year that the DOJ would focus on filing civil lawsuits under the False Claims Act (FCA) against borrowers. who, according to the Department of Justice, obtained PPP loan funds to which they were not entitled. Under the FCA, the government must prove that a defendant acted “knowingly”, but that term is defined to include “willful ignorance” or “reckless disregard” for the truth or falsity of the information. . Thus, borrowers who have done their best to understand and interpret the CARES Act and SBA regulations could face scrutiny from the DOJ if the government believes the company’s interpretations were incorrect. The fraud chief said the DOJ will continue to file criminal charges against borrowers who falsified documents and used loan proceeds for personal luxuries rather than paying employees. But for others, the FCA’s civil lawsuits will be the DOJ’s weapon of choice.
Many borrowers have asked if they can be sued or prosecuted under the FCA if the SBA has already audited their PPP loans and approved loan forgiveness. The answer, unfortunately, is yes.” SBA loan forgiveness decisions are not binding on the DOJ. SBA audits have not always been thorough, and the DOJ is likely to argue that the SBA is not did not discover all the relevant facts.
If a borrower receives notice of an investigation from the DOJ, whether civil or criminal, they should immediately retain the services of an attorney experienced in defending such cases. Even though the investigation begins as a civilian FCA investigation, it could lead to criminal prosecution if the government uncovers evidence that demonstrates an intentional or deliberate scheme to defraud the SBA. Borrowers who have been convicted so far of PPP loan fraud have, almost without exception, ended up in jail. The DOJ is committed to vigorously pursuing PPP loan fraud cases and is expected to file many new cases this year.•
• J. Richard Kiefer chairs Dentons Bingham Greenebaum’s CARES Act SBA Audit Defense Team and also co-chairs the National White Collar and Government Investigations Practice Group for Dentons. The opinions expressed are those of the author.