PPP Loan Fraud Investigations—What Do Small Business Owners Need to Know?
Federal Authorities are Targeting Small Business Owners in Paycheck Protection Program (“PPP”) Loan Fraud Investigations
Since the start of the COVID-19 crisis, the federal government has provided more than $2 trillion to individuals, businesses, and state and local government entities to help ease the financial burdens and uncertainty caused by the pandemic. Among all of the various programs established in response to the crisis, the Paycheck Protection Program (“PPP”) established under the Coronavirus Aid, Recovery, and Economic Security Act (“CARES Act”) and administered by the Small Business Administration (“SBA”) has proven to be the most problematic for recipients by far.
The PPP provided financial relief to businesses that had been negatively affected by the COVID-19 crisis. Under the program, businesses could receive federally-backed loans ranging from $10,000 to well over $1 million, and these loans were eligible for complete forgiveness provided that recipients used the proceeds for eligible purposes. However, as time has shown, the PPP loan application and forgiveness certification processes were both highly susceptible to fraud. As a result, the SBA and federal authorities including the FBI, DOJ, IRS, and Secret Service have undertaken extensive and aggressive efforts to identify and prosecute individuals and companies that fraudulently obtained funds under the PPP.
While there were certainly many instances in which individuals fraudulently sought (and received) federal COVID-19 relief funds, many individuals and companies targeted in PPP loan fraud audits and investigations did nothing wrong. In recognition of this fact, federal authorities have indicated that businesses that have had their PPP loan accounts seized, frozen, or locked and then subsequently been cleared of any wrongdoing will have their funds released within days.
In many cases, business owners applied for PPP loans in good faith, but the SBA’s subsequent interpretation of the general requirements set forth in the CARES Act has called the legitimacy of their applications into question. Since the federal interpretation of the PPP application and forgiveness eligibility criteria changed over time, and since compliance ultimately proved to require knowledge of corporate compliance and accounting practices, as seen on Fox Business, many business owners learned too late that it simply was not possible for them to comply.
The federal government’s aggressive enforcement efforts have been particularly concerning for self-employed individuals or small business owners who were already facing more than enough concerns during the COVID-19 crisis. Nevertheless, federal authorities continue to aggressively pursue cases of suspected PPP loan fraud involving businesses of all sizes.
Among other agencies, the Secret Service has been actively involved in federal investigations targeting PPP loan fraud. As The Wall Street Journal reported in August, the Secret Service has already seized about $8.2 million in criminal and civil cases, and banks have returned over $650 million in COVID-19 relief funds that they have self-reported as fraudulently obtained.
Banks that issued federally-backed loans under the PPP have also been extremely vigilant with regard to auditing PPP loans. Of course, this is due in large part to the potential for these banks to face federal consequences themselves based upon allegations of facilitating or failing to prevent federal program fraud. In order to protect themselves, banks have increasingly deemed it necessary to take action in response to concerns of PPP loan fraud. Legitimate borrowers have had their loan accounts frozen, business owners have had their personal bank accounts frozen and flagged for fraud, and banks have responded to subpoenas issued by the federal government seeking information about new and existing customers that filed PPP loan applications.
The federal government’s relentless pursuit, facilitated by cooperation from PPP lenders, has ensnared many business owners that applied for PPP loans and used their loan funds in good faith. Most of these business owners received loans under $100,000, but many have still had their personal bank accounts frozen and faced questioning from the FBI and Secret Service. This is particularly noteworthy because the loans these small businesses received are significantly below the SBA’s threshold of $2 million for auditing loan recipients at the time they submit their forgiveness certifications.
The SBA has warned that depositing federal loan funds into a personal bank account is considered to be a strong indicator for fraud, and it has urged banks to scrutinize PPP loan recipients who deposited their loans into personal accounts. However, many PPP loan recipients are sole proprietors and gig workers who manage their finances through their personal bank accounts. This presents a significant challenge for these entrepreneurs, many of whom legitimately obtained loans under the PPP but are now being forced to affirmatively demonstrate that they have not intentionally defrauded the federal government.
The potential for a loan fraud investigation and a subsequent criminal indictment is a very real concern for many business owners, and it is a concern that requires a cautious, proactive, and strategic approach. If they are not careful, many legitimate business owners could find themselves the targets of federal PPP loan fraud investigations with substantial fines and years or decades of federal imprisonment on the table. Business owners targeted in PPP loan fraud investigations should engage experienced federal defense counsel promptly, and they should be prepared to provide documentation demonstrating that they have fully complied with the requirements for obtaining and using PPP loan funds.