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Paycheck Program Program (PPP) Civil Audits and Reviews

 

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 civil liability.  Fundamental aspects of the PPP have changed over time as ad hoc guidance has been issued in piecemeal fashion.  This lack of definitive guidance must be considered by borrowers that have applied for or will apply for loan forgiveness.

The SBA will review/audit all PPP loans in excess of $2 million following the lender’s submission of the loan forgiveness application.  PPP loans that are $2 million or less may nevertheless be subject to review/audit, subject to the SBA’s discretion. 

For borrowers seeking loan forgiveness, both the lender and the SBA will likely review/audit the loan forgiveness application and substantiating documentation. The independent reviews/audits will not only cover the loan forgiveness application, but will also examine the PPP loan application to determine initial eligibility for the PPP loan.  Therefore, all statements and certifications made on the PPP loan application and loan forgiveness application may be examined.

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.  For borrowers that fail to satisfy the certification of need, the SBA may not pursue further administrative enforcement or refer the borrower to other governmental agencies if the loan is repaid in full after receiving notice from the SBA.  However, the borrower is still not shielded from all potential liability, and could be subject to enforcement for other violations.

You may have an elevated risk for civil audit and review if you obtained a PPP loan in excess of $2 million and/or are a public company.  You may also have an elevated risk for civil audit and review if you provide false information on the PPP loan application, the loan forgiveness application, or in connection with supporting documentation.

You may have a lower risk for civil audit and review if the PPP loan application or loan forgiveness application was submitted in good faith but nevertheless contained minor errors or omissions, or if you relied on the advice of counsel/advisor.  In general, borrowers may be offered the opportunity to provide additional documentation if a determination is made against granting full loan forgiveness. 

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 throughout the PPP process, including before and after PPP loan funds are received and as the loan forgiveness application and review process proceeds. To the extent the loan forgiveness process does not go as expected or if a bank issues an incorrect Form 1099-C, borrowers may appeal the decision.

If borrowers have any questions about the audit, review, and appeals process or are otherwise under a civil investigation for PPP loan issues, they should contact our experienced audit and appeals lawyers for immediate assistance.

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