On May 4, 2020, the U.S. Attorney for the District of Rhode Island charged two individuals with fraudulently seeking CARES Act Small Business Association (“SBA”) Paycheck Protection Program (“PPP”) loans. The criminal complaints allege that the two men conspired to apply for the loans, which are guaranteed by the SBA, claiming that they had dozens of employees working for different business entities when there were no individuals actually employed. Both defendants were charged with conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud. One of the defendants also was charged with bank fraud. These are the first such charges in the nation and mark the start of likely long-term government investigation of PPP fraud.
THE CARES ACT AND THE PPP
The CARES Act was signed into law on March 27th, 2020, to supply economic assistance to American businesses impacted by the COVID-19 pandemic. The PPP is a component of the CARES Act and provides small businesses with a loan to cover up to eight weeks of payroll costs, including benefits, interest on mortgages, rent, and utilities. Eligible companies include those with 500 or fewer employees and that fall within the definition of a small business pursuant to the SBA Act. Certain nonprofits, veterans organizations, tribal businesses, and self-employed individuals and independent contractors are also eligible. PPP loans are available up to the lesser of $10 million or 2.5 times the applicant’s average monthly payroll cost.
One of the biggest benefits of the PPP is the program’s generous loan forgiveness provisions. For example, as much as 100% of the loan may be forgiven if certain criteria are met, such as a company maintaining both the number of employees on its payroll and the amount of the employees’ salaries.
The PPP loan application is a fairly simple form that contains a number of required certifications that must be made in “good faith.” Although some of the certifications are straightforward, others are ambiguous. Take, for example, the following certification: “Current economic uncertainty make this loan request necessary to support the ongoing operations of the Applicant.” The application does not define what rises to the level of economic uncertainty, what triggers necessity, or even what qualifies as ongoing business operations. Neither the SBA nor the Treasury Department has provided guidance on these ambiguities, simultaneously creating risk and a defense to criminal charges because of the latent ambiguities in the application.
Recently, the Treasury Department announced that the SBA will audit all loans in excess of $2 million following the submission of a loan forgiveness application.
Initial data from the SBA in mid-April reported in excess of 1.6 million loans issued, totaling more than $342 billion. Of those loans, more than 25,000 are for $2 million or more.
FEDERAL INVESTIGATION AND PROSECUTION OF PPP LOAN FRAUD
Given the simple application, the quick application process, the millions of loans approved, and the hundreds of billions of dollars lent, it is no surprise the government has moved quickly to investigate fraud. Indeed, Attorney General William Barr “has directed all U.S. Attorneys to prioritize the investigation and prosecution of crimes related to coronavirus and COVID-19.” And it has been reported that federal prosecutors have contacted at least fifteen of the largest loan processors and the SBA for assistance.
In addition to DOJ investigations, lenders and borrowers should anticipate inquiries from the SBA Office of Inspector General (“SBA OIG”), which has broad authority under federal law to investigate fraud in federal programs. The SBA OIG has the power to issue subpoenas for documents and records and execute search and arrest warrants, and the law requires the SBA OIG to refer alleged criminal conduct to the DOJ.
In addition to vast resources to investigate fraud, the federal government also has numerous prosecution options. As in Rhode Island, the government may rely on conspiracy and bank fraud statutes. In time, other statutes that may be implicated could include wire fraud, mail fraud, and violations of the False Claims Act (“FCA”) and other whistleblower actions. Indeed, with the ability to receive an award of up to 30% of the government recovery pursuant to the FCA, a spike in FCA claims seems likely.
To be sure, with the amount of funds available and the ease of applying, there is a heightened risk of fraud, use of funds for unintended purposes, and ineligible companies receiving loans. But even honest applicants can expect to be scrutinized in the coming months and years.
Nevertheless, businesses should have confidence that the “good faith” certification requirement signals that inadvertent mistakes should not be punished. Companies, however, should be prepared to respond to inquiries from the SBA, the SBA OIG, or the DOJ and to establish the bona fides of the company, the need for the loan, and how the funds were used.
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