PPP Loans and Government Investigation of Fraud

May 13, 2020

PPP Loans and Government Investigation of Fraud: What You Need to Know - and Why May 18 (new date) is Important

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27 – and less than two months later, the federal government is already prosecuting pandemic relief applicants for fraud and abuse.

First up: The May 5 Department of Justice (DOJ) announcement of criminal charges against two New England men for seeking hundreds of thousands of dollars in Payroll Protection Program (PPP) loans under false pretenses. Although the alleged plot was disrupted before any PPP money was disbursed, prosecutors charged the men with conspiring to make false statements and commit bank fraud, among other felonies.

The New England case provides insight into the government’s plans for investigating PPP-related fraud. The F.B.I. and U.S. attorney offices are working with banks, the SBA, Treasury and others to gather and analyze data from the loan applications for red flags. Investigations are likely to be modeled on DOJ’s health care fraud strike force, which identifies targets in part by searching for outliers in Medicare payment data. Like with health care, loan amounts above a certain threshold may subject PPP beneficiaries to heightened scrutiny, as Treasury Secretary Steven Mnuchin recently stated the IRS and SBA will audit all loans in excess of $2 million and prosecute instances of fraud. Something else to note: The New England case was materially lower than the $2 million threshold, which illustrates for those borrowing under that amount that they are not immune to prosecution.

Key takeaways for PPP loan borrowers
While Secretary Mnuchin has indicated further guidance is on its way to clarify, and likely limit, the criteria the government will use to determine who is deserving (and not deserving) of the loans, fraud prosecutions are likely to accelerate after May 18 - most recently the date was May 14. That’s the deadline imposed by Treasury and the SBA for arguably undeserving PPP loan recipients to return the funds - “no questions asked.”

While the New England case looks like a clear case of fraud involving phantom employees for several businesses, at least one of which the defendants did not even own, where things get murky are more common cases of borrowers with questionable economic need for the loan.

Determining “economic necessity” for PPP loans has already engendered a lot of controversy – and it will likely be a major element of fraud prosecutions.

Quick recap: To be eligible for a PPP loan, a borrower must employ no more than 500 employees and must certify in good faith that the loans will be used for payroll and other permissible business purposes. PPP borrowers must also certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” Stories of well-known companies like Shake Shack and AutoNation triggered Treasury’s $2 million loan audit promise – and while further guidance is on the way, borrowers should beware of the government’s determination to root out fraud.

Still, there are several obstacles confronting the government in challenging the accuracy of the defendant’s economic necessity certification – including the vagueness of the certification itself. Neither the CARES Act nor the accompanying guidance issued by the SBA defines what “necessary” means in this circumstance. On April 23, the SBA and Treasury issued an updated “Frequently Asked Questions (FAQs)” document which states that a borrower’s good faith certification as to “economic necessity” must take into account the borrower’s “ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” The updated April 23 FAQs say “[b]borrowers and lenders may rely on the laws, rules and guidance available at the time of the relevant application.” – and that presents another problem for the federal government, which would need to disprove the good faith of a borrower’s certification not only on the law but on world events. With the pandemic adversely impacting the global economy, most borrowers could easily certify that the current “economic uncertainty” requires the loan.

Borrowers beware
So, it’s not necessarily a slam dunk for PPP fraud prosecutions - but know that the federal government has several potential tools in its arsenal for prosecuting PPP fraud, including proving borrowers lied on the SBA loan application under 18 U.S.C. §1001, among other charges. Finally, all SBA loan applications are subject to Freedom of Information Act (FOIA) disclosure, which will likely unveil potential abuse. May 18 looks like a good bet for businesses who don’t want the white-hot media spotlight associated with perceived PPP abuse.

May 18 will come and go. The best advice to PPP borrowers? Be diligent and accurate in your reporting – no matter how the SBA defines forgiveness criteria in the future.

For additional information contact us at info@herbein.com


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