United States:
PPP Scam: Q1 Update on DOJ Activity
March 29, 2021
Kelley Drye & Warren LLP
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Our previous CARES enforcement alerts saw a wave of cases by the Department of Justice (“DOJ”) alleging COVID fraud on loans obtained through the Paycheck Protection Program (“PPP”). As expected, enforcement was swift and steady. The DOJ announced in late February 2021 that it had prosecuted more than 100 defendants in 70 criminal cases and seized more than $ 60 million in cash receipts from fraudulently obtained PPP funds, as well as numerous real estate and luxury goods purchased with PPP funds.
The PPP is providing loans to help small businesses shut down COVID-19 with spending. Like many other federal programs, the PPP requires a number of certifications in order to receive federal funding. False certifications can expose small businesses to civil liability under the False Claims Act (“FCA”) and the Financial Institution Reform, Forfeiture and Enforcement Act (“FIRREA”), as well as criminal liability under the Federal Post Office and Federal Wire (among others) Fraud statutes.
This warning highlights recent action by the DOJ regarding PPP lending and what businesses need to know to avoid civil and criminal liability. For more tips on implementing a corporate compliance program in line with the DOJ’s expectations to prevent and combat potential fraudulent behavior, see our previous warning here.
Civil and Criminal PPP Loan Fraud Cases in 2021
Although almost all of the PPP fraud cases submitted to date have been criminal, the DOJ also intends to use civil enforcement tools such as the FCA and FIRREA. In a recent public statement, Brian Boynton, Acting Assistant Attorney General, emphasized the DOJ’s intention to use the FCA to combat alleged “eligibility misrepresentations, program funds misuse and lending certification.” . He also noted that the Civil Department is working closely with the authorities to investigate possible violations and that these “joint efforts” are “expected”[ed] translate into major cases and recoveries. “
In January, the DOJ announced its first FCA and FIRREA settlement over PPP fraud involving SlideBelts, Inc., a California-based internet retailer and debtor. As part of the settlement, both the company and its president and CEO admitted making false claims that the company had not gone bankrupt in order to obtain a PPP loan. The DOJ claimed damages and penalties totaling $ 4.1 million. SlideBelts eventually agreed to pay $ 100,000 to resolve the FCA and FIRREA allegations and was forced to repay the $ 350,000 loan it received.
SlideBelts also points out that any amount of a PPP loan can be the subject of FCA action, reducing the “safe haven” for loans of less than $ 2 million. Although Treasury previously announced, in connection with a provisional settlement released by the Small Business Administration’s Fourth Intermediate Rule, that only PPP loans greater than $ 2 million will be “fully scrutinized” to ensure that there is a legitimate economic need before it is awarded, the certifications for each loan amount can be checked and result in FCA liability.
With regard to FIRREA liability, SlideBelts also shows that almost any false information given to a financial institution can expose a company to legal liability, which then entitles the DOJ to civil law sanctions for postal or transfer fraud affecting a federally insured financial institution. FIRREA’s demand to prove that the fraud committed or false information practically “affects” a financial institution was never a major hurdle for the DOJ. If the incorrect information is related to a loan application, the requirement is usually found to be met. The government also needs to prove a FIRREA claim by just a preponderance of evidence, so any FCA case based on PPP fraud is likely to include FIRREA penalties, as was the case with SlideBelts. In addition, like the FCA, FIRREA offers whistleblowers a financial incentive to report violations to the government.
Finally, of the eight federal criminal cases indicted in February 2021 in connection with COVID fraud cases, six focused on alleged fraudulent statements in loan applications regarding wage and salary costs for employees. In particular, the charges allege that the petitions contained false and misleading information about the number of employees or the average monthly wage bill for the company’s operations. Certain defendants have also allegedly submitted false documents to support their false information, such as fake federal tax returns or fake W-2s for alleged employees who were not actually employed by the company
Protect your company
Given the significant resources devoted to investigating and tracking COVID relief fraud and the establishment of the Special Inspector General for Pandemic Recovery (“SIGPR”), we are likely to see cases of PPP fraud in the years to come. Companies should therefore remember to justify their eligibility requirements and details in PPP loan applications and, in particular, carefully review all communications to lenders, as these communications can serve as important and easy-to-understand evidence that a borrower has knowingly submitted a false claim. Once PPP loans have been obtained, companies should carefully document their use according to the terms of the loan. The company’s records should therefore provide documented support for eligibility, for statements made in connection with the application, for any decision the company has made in a regulatory gray area related to the granting of the loan, and for the appropriate use of the received Include funds.
To the extent that a misstatement is found after submitting an application or after receiving the loan, consult an attorney for the best way to control the corrections required.
The content of this article is intended to provide general guidance on the subject. A professional should be obtained about your particular circumstances.
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