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Can Companies That Have Received Loans Under The Paycheck Protection Program (PPP) Be Prosecuted For Fraud?

Brian Kuester
Attorney Brian Kuester
PPP Loan Fraud & SBA Fraud Defense Team Lead
Former US Attorney
Former District Attorney
Ellen Comley
Attorney Ellen Comley
Defense Team Lead
Senior Counsel
Roger Bach
Roger Bach
Team Consultant
Former Special Agent (OIG)

The Coronavirus Aid, Relief, and Economic Security (CARES) Act came into effect on March 27, 2020. The Act aims to extend benefits to individuals and companies directly hit by the impact associated with the novel COVID-19 pandemic. Endowed with nearly $350 billion in federal funds, the Paycheck Protection Program (PPP) is an integral and important part of the CARES act. The fund was created with the sole purpose of extending financial help to small and medium-sized businesses directly hit by the novel Coronavirus pandemic. Unfortunately, even with $350 billion in funds, PPP ran out of funds in only a short time. PPP leaders were receiving thousands of applications every minute, which made it impossible to grant loans to all applicants.

It is not surprising that every time a federal program aimed at offering financial relief to small and big businesses is launched, people start immediately scrutinizing it for possibilities of fraud. However, in the case of PPP, since funds adding up to billions of dollar disappeared within minutes, it is quite expected that most of the companies that received grants or loans under the program will be inspected by federal authorities for possibilities of fraud.

The Conversation Around PPP Fraud Is Intensifying with Each Passing Day

The U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) has been contacting and seeking lenders’ opinion regarding the possibilities of fraud as well as to identify the various flaws in the PPP system with the aim of fixing these issues for future programs. According to FastCompany.com, given the past history of similar relief programs-linked frauds and the disorderly and random nature of the PPP rollout, it is only expected that in the months to come, the conversation around PPP fraud will intensify further. Though the U.S. Treasury Department is trying to look ahead, many agencies are concerning themselves with identifying companies that received loans by fraud under PPP. Any company that received funds unlawfully will be under high scrutiny and the risk of prosecution will also be high in the case of such companies. These companies must, therefore, focus all their energy on hiring an experienced and skilled federal counsel who can minimize any risk of the company facing significant penalties.

What Falls Under the Paycheck Protection Program (PPP) Loan Fraud?

Every federal program contains within itself various acts and omissions that can set the base for the identification of potential federal fraud situations. The Paycheck Protection Program is no different in this regard. In the case of PPP, two major ommissions can lead to criminal fraud charges: deliberate misinterpretations and unintentional mistakes that led to the wrong receipt of federal funds.

The following cases or errors can be construed as a fraud with regards to PPP.

Loan Stacking

One specific type of potential fraud that caught the eye of OCC and on which the bureau plans to focus its attention in the coming months is Loan Stacking. In the case of Loan Stacking, an applicant receives loans from multiple lenders. Since the federal government can easily track the distribution of funds among recipient companies, it will be quite easy for OCC to track any company that has committed Loan Stacking fraud and prosecute it.

PPP Loan Application Fraud

The PPP clearly stated several eligibility criteria for companies applying for loans under the program. Thus, companies that presented false information on their loan applications to make themselves fraudulently eligible for a loan are likely to face prosecution as well. Detailed below are some examples of information misrepresentations that can land companies in trouble.

  • To be eligible for loans under PPP, most companies were required to have less than 500 employees. Any misinformation regarding the total number of employees would be counted as a base for prosecution.
  • Companies that misclassified employees as independent contractors to classify themselves under the 500-employee threshold will face action too.
  • Any company with more than 500 employees wrongfully claiming the Small Business Administration (SBA) status would fall under this category of loan default.
  • Under PPP, companies are allowed to claim up to two months of their average monthly payroll amount along with an additional 25% of this amount. Thus, companies that misrepresented information regarding their payroll costs to enhance the value of the loan amount will face strict action from the government.

Fraudulent Loan Certification

Over and above the eligibility criteria discussed above, companies applying for financial help under PPP were required to certify to certain facts. Any misrepresentation of information regarding these facts would be considered evidence for prosecution. Some of the mandatory certifications for companies to be eligible for PPP loans are:

  • Companies had to certify that the loans they demanded under PPP were mandatorily required to support ongoing operations.
  • They were also asked to state in writing that the funds allocated under PPP to their company would only be used to retain workers and male lease, mortgage, and utility payments.
  • Companies were required to vouch that they were receiving only one loan under PPP.
  • Lastly, companies were also required to certify that all information provided by them was true and accurate.

Using PPP Funds for Wrong Purposes

The stipulates of the PPP clearly mentioned that the companies receiving loans under the program were allowed to use the allocated funds only for specific purposes, such as covering payroll costs and benefits, paying mortgages and leases, and utilities. As far as utilities, mortgage, and rent are concerned, companies were allowed to use the allocated funds to cover obligation preexisting as of February 15, 2020. Any company that used the allocated funds for any purpose other than those mentioned under the PPP will draw allegations of potential fraud.

Though there is no clear information on what companies can do to prove they complied with these requirements and stipulates, it is a good idea for companies to maintain a record of all eligible as well as non-eligible expenses that they can present to the federal authority for investigation in case of an audit.

Using PPP Funds for Fraudulent Purposes

The PPP information sheet makes it clear that while companies are not required to provide any personal guarantee, criminal charges can be applied to them if it is found that they used the funds allocated to them under PPP for fraudulent purposes. This is an important tenet under the program as it gives the government the authority to prosecute any company that obtained loans fraudulently as well as prosecute people found to be involved in fraudulent activities regarding PPP. More importantly, individuals found guilty under the False Claims Act can face fines extending to tens of thousands of dollars and up to five years in federal prison. In the case, company owners and executives are found to be guilty of multiple statutory offences, prosecutors can seek millions of dollars in fines and decades in prison.

Fraudulent Loan Forgiveness Certification

The PPP program has a very low-interest rate of 1%. However, many companies will be able to apply for loan forgiveness if they can provide proof that they meet all the eligibility criteria and have used the allocated PPP funds for meeting only the expenses stated under PPP. The U.S. Treasury Department also clearly states that to be considered for loan forgiveness, companies will be required to present proper documents and certify that all documents presented by them are genuine and true. Any company or individual found to be faking this certificate will face action from federal authorities.

Misrepresenting or Concealing Information During a PPP Audit or Investigation

It is quite certain that in the days to come, many companies will face investigations related to PPP loan fraud. In most cases, these investigations will be conducted by the Federal Bureau of Investigation (FBI) along with the U.S. Department of Justice (DOJ). The government may also form special task forces to look into cases of PPP loan fraud. In case the government decides to investigate your company, you must make sure not to divulge any information that can cause you and your company harm. However, you must also steer clear of making any misrepresentations or hiding relevant information. Withholding information and making false statements are counted as fraud by the government and can lead to prosecution.

What Should You Do if Federal Authorities Decide to Investigate Your Company for PPP Loan Fraud?

If you or your company are being audited or investigated for potential fraud under PPP, the first thing you must do is hire a knowledgable and accomplished federal defense counsel. Fraud under PPP is a serious matter that can lead to serious trouble, including financial trouble, for companies and individuals. Thus, you will need the help of experienced attorneys who know how to fight federal charges and lawsuits. The Criminal Defense Firm works with experienced federal defense attorneys who specialize in a variety of areas. Many of our attorneys are currently handling and representing CLIENTS caught in novel COVID-19 pandemic related issues. If you are dealing with PPP loan fraud allegations, reach out to us immediately. You will find us using our best attorneys to protect your interests.

Reach Out to the PPP Loan Fraud Defense Attorneys of The Criminal Defense Firm

At The Criminal Defense Firm we offer a free and confidential consultation session with a senior attorney. Thus, whatever your concern is, pick up your phone and reach out to us at 866-603-4540. You can also fill our online enquiry form and we will reach out quickly.

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