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This article reviews the recent action by the Department of Justice regarding Paycheck Protection Loans and what businesses need to know to avoid civil and criminal liability.
The implementation of the Coronavirus Relief, Relief and Economic Security Act (“CARES Act”) was rapid and steady. The US Department of Justice (“DOJ”) announced in late February 2021 that it had prosecuted more than 100 defendants in 70 criminal cases for credit fraud related to COVID and seized more than $ 60 million in cash receipts from funds fraudulently obtained from the Paycheck Protection Program (“PPP”) and numerous real estate and luxury goods acquired with PPP funds.
The PPP is providing forgivable loans to help small businesses deal with spending during the COVID-19 shutdown. 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 Institutions Reform, Recovery and Enforcement Act (“FIRREA”), as well as criminal liability under the Federal Post Office and federal management fraud laws (among others).
This article takes a look at the DOJ’s recent action on PPP loans and what businesses need to know to avoid civil and criminal liability.
CIVIL AND CRIME PPP CREDIT FRAUD CASES IN 2021
Although almost all of the PPP fraud cases submitted to date have been criminal cases, the DOJ also intends to use civil law enforcement tools such as the FCA and FIRREA. In a recent public statement, Assistant Attorney General Brian Boynton stressed the DOJ’s intention to use the FCA to investigate alleged “Eligibility Misrepresentations, Program Fund Abuse, and Loan Credentials” to fight.
He also noted that the Civil Department is working closely with the authorities to investigate potential violations and that these “collaborative efforts” are “awaiting”[ed] translate into major cases and recoveries. “
In January, the DOJ announced its first FCA-FIRREA settlement based on PPP fraud involving SlideBelts, Inc., a California-based internet retailer and debtor. As part of the settlement3, both the company and its President and Chief Executive Officer admitted making false claims that the company did not go bankrupt to obtain a PPP loan. The DOJ claimed damages and fines totaling $ 4.1 million. SlideBelts eventually agreed to pay $ 100,000 to resolve the FCA and FIRREA allegations and was forced to return the $ 350,000 loan it received.
SlideBelts also points out that a PPP loan of any size can be the subject of FCA action, limiting the “safe haven” for loans less than $ 2 million. Although the Treasury Department had previously announced4 – in conjunction with a transitional arrangement published by the Small Business Administration’s Fourth Interim Rule – that only PPP loans over $ 2 million would be “fully scrutinized” to ensure legitimate economic need The certificates for each loan amount can be checked before they are awarded and can give rise to FCA liability.
As far as FIRREA liability is concerned, SlideBelts also shows that almost any false information given to a financial institution can expose a company to liability under the law, which then entitles the DOJ to civil penalties for postal or wire transfer fraud affecting a state-insured financial institution .
FIRREA’s demand that the fraud or misrepresentation committed “influence” a financial institution has never been a high hurdle for the DOJ from a practical point of view; If the wrong information is in connection with a loan application, the requirement is usually found to be fulfilled. The government also needs to prove a FIRREA claim just by the preponderance of evidence, so any FCA case based on PPP fraud will likely also include FIRREA criminal claims, 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 proceedings indicted in February 2021 in connection with COVID auxiliary fraud, six revolved around alleged fraudulent information in loan applications for wage costs for employees.
Specifically, the indictments allege that the motions contained false and misleading information about the number of employees or the average monthly wage costs for running the company. Certain defendants also allegedly submitted false documents to support their false statements, such as fake tax returns5 or false W-2s6 for alleged employees who were not actually employed by the company.
PROTECT YOUR BUSINESS
Given the significant resources devoted to investigating and tracking COVID relief fraud and establishing the Special Pandemic Recovery Inspector (“SIGPR”), we are likely to see cases of PPP fraud in the years to come.
Corporations should therefore remember to justify their eligibility requirements and representations in PPP loan applications, and particularly carefully review all communications with lenders, as these communications can serve as vital and easy-to-understand evidence that a borrower has knowingly made a false claim.
After taking out PPP loans, companies should carefully document their use in accordance with the loan terms. The company’s records should therefore include documented evidence of eligibility, for the representations made in connection with the application, for any decision by the company in a regulatory gray area related to the borrowing and for the appropriate use of the funds received.
If misrepresentation is discovered after submitting an application or after receiving the loan, consult an attorney on how best to handle the required correction.
As Special Inspector for Pandemic Recovery, Brian Miller recently stated: “[c]Organizations should document how the company tried to stay out of trouble, what it did when a problem was discovered, and how the problem was dealt with. Inspectors-General and the Department of Justice can indulge those who are transparent and cooperative. “7
4th See https://www.washingtonpost.com/us-policy/2020/04/28/mnuchin-coronavirus-small-business-ppp/.
7th B. Miller, “What Companies Should Know about SIGPR Oversight,” Law 360 Expert Analysis, March 11, 2021.
Originally published by Pratt’s Government Contracting Law Report.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.