United States:
PPP Fraud: Q1 Update On DOJ Activity
29 March 2021
Kelley Drye & Warren LLP
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Our previous alerts on CARES Act enforcement anticipated a wave
of cases by the Department of Justice (“DOJ”) charging
COVID-related fraud for loans obtained through the Paycheck
Protection Program (“PPP”). As expected, enforcement has
been swift and steady. DOJ announced at the end of February 2021 that it
has prosecuted more than 100 defendants in 70 criminal cases, and
seized more than $60 million in cash proceeds derived from
fraudulently obtained PPP funds, 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 alert highlights the most recent DOJ actions concerning PPP
loans and what businesses need to know to avoid civil and criminal
liability. For additional tips on implementing a corporate
compliance program in line with DOJ expectations to prevent and
address potential fraudulent conduct, see our prior alert here.
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, emphasized 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, both the company and its president and
CEO 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
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 $2
million. Although the Treasury Department had previously announced – 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 whistleblowers 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 filings, or false W-2s 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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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