PPP Fraud: Replace On The DOJ’s Exercise – Authorities, Public Sector

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This article highlights recent Justice Department actions
concerning Paycheck Protection Program loans and what businesses
need to know to avoid civil and criminal liability.

Enforcement of the Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”) has been swift and steady. The
U.S. Department of Justice (“DOJ”) announced1
at the end of February 2021 that it has prosecuted more than 100
defendants in 70 criminal cases for COVID-related loan fraud and
seized more than $60 million in cash proceeds derived from
fraudulently obtained funds through the Paycheck Protection Program
(“PPP”), as well as numerous real estate properties and
luxury items purchased with PPP funds.

The PPP provides forgivable loans to assist small businesses
with expenses during the COVID-19 shutdown. Like many other federal
programs, the PPP requires a series of certifications 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 (among
others) the federal mail and wire fraud statutes.

This article highlights the most recent DOJ actions concerning
PPP loans and what businesses need to know to avoid civil and
criminal liability.

CIVIL AND CRIMINAL PPP LOAN FRAUD CASES IN 2021

Although nearly all of the PPP fraud cases brought to date have
been criminal cases, DOJ also intends to use civil enforcement
tools such as the FCA and FIRREA. In a recent public statement,
Brian Boynton, the acting Assistant Attorney General,
emphasized2 the DOJ’s intention to use the FCA to
combat any alleged “false representations regarding
eligibility, misuse of program funds, and false certifications
pertaining to loan forgiveness.”

He also noted that the Civil Division is working closely with
agencies to investigate potential violations and these
“collaborative efforts” are “expect(ed) to translate
into significant cases and recoveries.”

In January, DOJ announced its first FCA and FIRREA settlement
based on PPP fraud, which involved SlideBelts, Inc., a
California-based internet retailer and debtor in bankruptcy. As
part of the settlement,3 both the company and its
president and chief executive officer admitted to making false
statements that the company was not in bankruptcy in order to
obtain a PPP loan. The DOJ alleged damages and penalties totaling
$4.1 million. SlideBelts ultimately agreed to pay $100,000 to
resolve the FCA and FIRREA allegations and was forced to return the
$350,000 loan it had obtained.

SlideBelts also highlights that a PPP loan of any amount can
become the subject of an FCA action, thereby limiting the
“safe harbor” for loans of less than $2million. Although
theTreasury Department had previously
announced4—in connection with an interim rule
published by the Small Business Administration’s Fourth Interim
Rule—that only PPP loans of more than $2 million will be
given a “full review” to ensure legitimate economic need
before they will be forgiven, the certifications for any loan
amount may be audited and may give rise to FCA liability.

As for FIRREA liability, SlideBelts also demonstrates that
nearly any misstatement to a financial institution can expose a
company to liability under the statute, which then entitles DOJ to
civil penalties for mail or wire fraud that affects a
federally-insured financial institution.

To prove FIRREA’s requirement that the perpetrated fraud or
misstatement “affect” a financial institution, as a
practical matter, has never been a high hurdle for DOJ; if the
misstatement is in connection with a loan application, the
requirement is typically found to be satisfied. The government also
need prove a FIRREA claim only by a preponderance of the evidence,
so any FCA case based on PPP fraud will likely involve FIRREA
penalty claims as well, as was the case with SlideBelts.

Moreover, like the FCA, FIRREA provides a financial incentive to
whistle- blowers to report violations to the government.

Finally, of the eight federal criminal cases related to
COVID-relief fraud charged in February 2021, six proceedings
centered on alleged fraudulent statements in loan applications
about payroll expenses for employees.

Specifically, the indictments allege that the applications
contained false and misleading statements about the number of
employees or average monthly payroll expenses for the
business’s operations. Certain defendants allegedly also
submitted false documentation in support of their false statements,
like falsified federal tax filings5 or false
W-2s6 for purported employees who were not in fact
employed by the company.

PROTECTING YOUR COMPANY

Given the substantial resources devoted to investigating and
prosecuting COVID relief fraud, and the establishment of the
Special Inspector General for Pandemic Recovery
(“SIGPR”), we will likely see PPP fraud cases for years
to come.

Companies should therefore remember to substantiate their
eligibility requirements and representations made in PPP loan
applications, and carefully review all communications with lenders
in particular, as those communications can serve as important and
easy-to-gather evidence that a borrower knowingly submitted a false
claim.

Once PPP loans are obtained, companies should carefully document
their use in accordance with the terms of the loan. The
company’s recordkeeping should therefore include documented
support for eligibility, for representations made in connection
with the application, for any decision the company made in a
regulatory gray area in connection with obtaining the loan, and for
the appropriate use of any funds obtained.

To the extent that a misstatement is discovered after submission
of an application, or after obtaining the loan, consult with
counsel on how best to navigate any necessary correction.

As the Special Inspector General for Pandemic Recovery, Brian
Miller, recently stated, “(c)ompanies should document how the
company tried to stay out of trouble, what it did when trouble was
discovered, and the trouble was dealt with. Inspectors general and
the Justice Department may provide leniency to those that are
transparent and cooperative.”7

Footnotes

1. https://www.justice.gov/opa/pr/man-pleads-guilty-directing-covid-relief-fraud-scheme.

2. https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-m-boynton-delivers-remarks-federal-bar.

3. https://www.justice.gov/usao-edca/press-release/file/1352931/download.

4. See https://www.washingtonpost.com/us-policy/2020/04/28/mnuchin-coronavirus-small-business-ppp/.

5. https://www.justice.gov/usao-wdny/pr/federal-grand-jury-indicts-two-brothers-allegedly-defrauding-payroll-protection-program.

6. https://www.justice.gov/usao-mdfl/pr/seminole-county-man-charged-covid-relief-fraud.

7. 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 .

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