White Collar Corner, September 2022

White Collar Corner: While PPP Loans Have Ended, the Investigations Are Ongoing

On August 5, 2022, the PPP and Bank Fraud Enforcement Harmonization Act of 2022 was enacted and established a 10-year statute of limitations (“SOL”) for the prosecution of fraud by borrowers under the Small Business Administration’s Paycheck Protection Program (PPP). The 10-year SOL applies to Economic Injury Disaster Loan programs as well.

Almost $800 billion in loans was distributed under the PPP before it ended in June 2021. Since then, participating businesses and individuals have been requesting loan forgiveness, while the federal government has begun to prosecute PPP loan fraud both criminally and civilly. Businesses must understand the consequences of the PPP loan in the event they are subject to a federal investigation.

PPP Loans and Loan Forgiveness

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. A critical element of the CARES Act was allocating money to businesses affected by the COVID-19 pandemic through the PPP. The U.S. Small Business Administration (SBA) backed loans to qualifying businesses and nonprofit organizations specifically to cover the borrower’s employment costs. But the loan funds could also be used for mortgage interest, utilities and other necessary expenses as long as 60% of the loan was spent on payroll expenses. Borrowers were required to certify that the funds would be spent on specified costs and that the loan was necessary to support ongoing operations. The SBA would forgive the loan as long as those conditions were met. Throughout the PPP, over 5.2 million loans were granted.

PPP loans are subject to scrutiny from several administrative entities. Borrowers should be aware of three types of governmental actions: (1) SBA audits to confirm PPP funds have been spent appropriately; (2) criminal investigations; and (3) civil investigations. We have already seen examples of how the government is proceeding with PPP oversight.

SBA Audits and PPP Loan Forgiveness

Under the PPP, borrowers were allowed to apply for loan forgiveness after all loan proceeds were spent. Presently, nearly one million PPP loan borrowers have not applied for forgiveness.

Federal rules provide that proportional loan forgiveness is available to borrowers. If less than 60% was used on payroll expenses, only the payroll expenses will be forgiven, and the borrower must repay the balance. For example, if a company received a $100,000 loan and spent $54,000 on employee pay and payroll expenses, only the $54,000 would be eligible for forgiveness, and the company must repay $46,000 to the lender.

A borrower applies to its lender for loan forgiveness in the first instance. The lender has 60 days to issue a decision to the SBA. After that, the SBA reviews all loan and loan forgiveness applications, including borrower eligibility, use of the loan proceeds and loan forgiveness amounts. The SBA makes separate determinations from the lender and can deny part or all of the requested loan forgiveness.

The SBA may request documents or further information from the borrower. In addition to individual lender and statutory requirements for document retention, the SBA requires borrowers to retain loan and loan forgiveness records ― six years for loans of $150,000 or more and four years for loans less than $150,000. The SBA has already denied approximately $1.5 billion in PPP loan forgiveness and is currently reviewing over 50,000 applications.

If the SBA denies borrower eligibility for full loan forgiveness, the lender must give written notice to the borrower. The borrower may appeal by filing a notice of appeal with the SBA’s Office of Hearings and Appeals (OHA) within 30 days of denial. In-person appeal is available only upon order by the Administrative Law Judge (ALJ). The ALJ’s decision is due within 45 calendar days and can be reviewed by a federal court.

Criminal Charges for Fraud

Early in 2022, United States Attorney General Merrick Garland appointed a Director for COVID-19 Fraud Enforcement (“Director”) whose sole job is to prosecute individuals and companies committing CARES Act-related crimes, including PPP fraud. One of the Director’s first acts was to establish Strike Teams with analysts and data scientists to facilitate fraud investigations. As of spring 2022, over 500 individuals have been charged with federal crimes as a result of COVID-19 relief funds. Most criminal cases have been for blatant deceptive acts on loan applications and typically result in charges of bank fraud, wire fraud or engaging in a monetary transaction with criminally derived proceeds. The charges often involve falsified tax documents, fabricated employee information or extravagant purchases with loan proceeds.

In a Western District of New York (WDNY) case, a defendant allegedly applied for eight separate PPP loans for a company that had no discernable business operations. According to the United States Department of Justice (DOJ), the defendant listed different numbers of employees with varying average monthly payroll expenses on his separate applications. He was charged with bank fraud, wire fraud and making false statements to a financial institution. As of this writing, his case is still pending.

In another WDNY case, the two defendants allegedly received a $900,000 loan for a company that had been defunct for over a year. On the loan application, the defendants declared the nonoperational company employed 50 people. According to the DOJ’s complaint charging fraud, the defendants spent the PPP loan proceeds on personal vehicles, clothing, meals and gym memberships. Both defendants pled guilty to conspiracy to commit bank fraud and engaging in a monetary transaction with criminally derived proceeds. They face a maximum of 30 years in prison at sentencing.
For a federal criminal conviction for bank fraud or wire fraud, penalties include significant prison time and fines, although sentences vary widely based on the criminal activity and a defendant’s circumstances.

Federal Civil Actions

The DOJ has also civilly settled PPP cases through the False Claims Act (FCA) and Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). In those cases, a borrower may be liable for “treble” damages, plus penalties and attorneys’ fees. While both the criminal and civil cases have involved misrepresentations, the facts in civil cases have not been as extreme as the criminally charged cases.

In one case, a company obtained a PPP loan while being in bankruptcy despite claiming otherwise on the loan application. Shortly after the funds were disbursed, the company president contacted the lender to admit the misrepresentation. Rather than charge the company and individual criminally, the DOJ agreed to a civil settlement. The company returned the loan proceeds to the lender and agreed to pay a $100,000 fine.

In another matter, a California physician obtained two loans for his practice despite affirming he had not already received a PPP loan. He agreed to return the funds on the second loan and paid $70,000 in fines. Similarly, a Virginia company falsely certified it had only received one loan. The company agreed to return the second loan and was fined over $200,000. As these examples make clear, self-reporting may reduce the punishment.

Conclusion

Given the DOJ’s focus on these cases, audits and investigations of PPP irregularities will continue for the foreseeable future. Although the most egregious activities have resulted in criminal charges, fraudulent acts have also triggered steep civil penalties for borrowers. If you or your company has received a PPP loan, you must retain all loan records. Given the quick deadlines for administrative appeals, contact counsel immediately for legal guidance if your loan forgiveness application is denied. Further, if there has been any misrepresentation on the PPP application, immediately seek advice from counsel.

Alan J. Bozer is a partner at Phillips Lytle LLP and leader of the firm’s White Collar Criminal Defense & Government Investigations Practice. He can be reached at (716) 504-5700 or abozer@phillipslytle.com.

Sean B. Bunny is a senior associate at Phillips Lytle LLP and member of the firm’s White Collar Criminal Defense & Government Investigations Practice. He can be reached at (716) 504-5796 or sbunny@phillipslytle.com.