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Paycheck Protection Program (PPP) Criminal Investigations and Enforcement

 

Overview

Millions of businesses, sole proprietors, and independent contractors have obtained PPP loans.  While these loans have provided vital funding to recipients impacted by the COVID-19 pandemic, many borrowers lack a clear understanding of their obligations under the law and consequently their susceptibility to criminal investigation and enforcement.  Fundamental aspects of the PPP have changed over time as ad hoc guidance has been issued in piecemeal fashion.  This lack of definitive guidance has not delayed enforcement actions by the SBA, Department of Justice, the Federal Bureau of Investigations, and the Internal Revenue Service.

The government has sought early indictments in more than 30 cases involving alleged fraud in PPP loan applications and the inappropriate use of PPP loan proceeds; some of the charges include conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud. 

In a representative case, business owners allegedly applied for PPP loans to pay employees of businesses that were not operating prior to the start of the COVID-19 pandemic and to pay employees of a business one applicant did not own.  They discussed via email the creation of fraudulent loan applications and supporting documentation in order to receive more than a half-million dollars in PPP loans. 

The Department of Justice also charged a reality TV personality with federal bank fraud after he diverted PPP loan proceeds for his own personal gain.  Within days of receiving the proceeds, the individual allegedly used more than $1.5 million in PPP funds on unauthorized purchases including a 2019 Rolls-Royce Wraith, jewelry, and child support. 

Borrowers of PPP loans made multiple certifications as part of their initial application.  Each certification provides potential justification for the denial of eligibility or loan forgiveness or could lead to a criminal investigation and enforcement action if not made in good faith.  The most important certification is likely the certification of need, which states:

That the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient. 

The SBA has provided limited guidance on the meaning of this certification, but in general, applicants must take into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

In addition, applicants must attest to the following:

  • Acknowledge that funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments.
  • Certify that the information provided in the application and the information provided in all supporting documents and forms is true and accurate in all material respects. The certification includes recognition that the signer understands that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
  • The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.
  • The Applicant (1) is an independent contractor, eligible self-employed individual, or sole proprietor or (2) employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.
  • All SBA loan proceeds will be used only for business-related purposes as specified in the loan application and consistent with the Paycheck Protection Program rules.
  • To the extent feasible, the Applicant will purchase only American-made equipment and products.
  • The Applicant is not engaged in any activity that is illegal under federal, state, or local law.
  • Any loan received by the Applicant under Section 7(b)(2) of the Small Business Act between January 31, 2020 and April 3, 2020 was for a purpose other than paying payroll costs and other allowable uses loans under the Paycheck Protection Program rules.

In light of the constantly evolving PPP requirements, the numerous certifications made on the loan application and to be made if loan forgiveness is applied for, borrowers need to be prepared for some form of audit/investigation involving their PPP loan.

Borrowers may have an elevated risk for criminal investigation and enforcement if PPP loan funds were obtained based on false statements and misrepresentations.  This could occur if borrowers provide false information on the PPP loan application or loan forgiveness application directly, such as if there is no business or you were not authorized to submit an application on behalf of the business.  False statements and misrepresentations can also be made on the supporting documentation if it is inaccurate, misleading, and false, such as by inflating payroll costs or documenting expenses that were never made.

Borrowers may also have an elevated risk for criminal investigation and enforcement if PPP loan funds were used for non-authorized purposes, including not just personal expenses such as luxury items (jewelry, cars, and homes) but also business expenses such as large bonuses, compensation exceeding the maximum allowed (potentially up to $46,154 for each employee and up to $20,833 for each owner-employee), and significant investments.

Borrowers may have a lower risk for criminal investigation and enforcement if the PPP loan application or forgiveness application was submitted in good faith but nevertheless contained minor errors or omissions, or if borrowers relied on the advice of counsel/advisor.  Because the PPP has developed and changed over time through legislation and other guidance, mistakes can and will occur.  To demonstrate good faith, borrowers should document their decision-making process throughout the PPP process, including before and after PPP loan funds are received, and as the loan forgiveness application and review process proceeds, and during any applicable appeal process.

If borrowers are aware of a criminal investigation related to PPP loan issues, they should contact our experienced white collar defense lawyers for immediate assistance. 

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