June 2020 |
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Paycheck Protection Program Fraud

The federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020 to address the economic impacts of the COVID-19 pandemic. As part of the CARES Act, Congress authorized up to $349 billion dollars in forgivable loans to small businesses through the Paycheck Protection Program (PPP). Soon after its passage, Congress authorized an additional $300 billion in PPP funding. These PPP loans have been the lifeblood for small businesses suffering from the economic fallout of the pandemic. Notably, these loans are forgivable under certain circumstances as outlined in the CARES Act. This unique feature of PPP loans makes them particularly attractive. To obtain a PPP loan, a borrower is required to make various certifications, some of which have caused significant confusion and others have served as the basis for recent enforcement actions against bad actors who seek to fraudulently obtain PPP funds. All indications suggest that the Department of Justice and SBA OIG are keeping close tabs on suspected PPP fraud:

Those who submit these applications for [PPP] loans or other assistance need to understand that there are people checking on the representations made, and those representations are made under oath and subject to the penalties of perjury. Federal agencies are watching for fraud, and people who lie and try to cheat the system going to be caught and prosecuted.”

                       – U.S. Attorney Joseph D. Brown of the Eastern District of Texas

“SBA OIG and its law enforcement partners will aggressively investigate fraud in the Paycheck Protection Program . . . The nation’s small businesses are counting on this program, and we will safeguard it to maintain the public trust.”

                       – Small Business Administration Inspector General Hannibal “Mike” Ware

“Providing false statements to gain access to SBA’s programs will be aggressively investigated by our office . . . SBA OIG and its law enforcement partners are poised to root out wrongdoers in the Paycheck Protection Program and maintain its integrity.”

                       – Special Agent in Charge Donald Abram of SBA OIG’s Central Region

A. Good-Faith Certification Regarding Necessity of the PPP Loan

Many large and publicly traded companies recently garnered a flurry of negative publicity for receiving substantial PPP loans and they faced demands from the public and regulators to return the funds. Whether these large companies needed the money was front and center of the debate. Among other things, to obtain a PPP loan, all borrowers are required to certify in good faith that “current economic uncertainty makes [the PPP] loan request necessary to support the ongoing operations of the Applicant.[1] Notably, however, the certification does not define “current economic uncertainty” or describe the factors businesses should evaluate when assessing the necessity of the loan. The imprecise language of the necessity certification has understandably caused confusion among borrowers. However, on May 27, 2020, the U.S. Department of the Treasury updated its “Paycheck Protection Program Loans FAQ” to provide guidance to borrowers regarding the required good-faith certification concerning the necessity of the PPP loan.

According to Treasury, “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.[2]” Although the precise scope and substance of the good-faith necessity certification remains somewhat unclear, businesses (together with their affiliates) who obtained PPP loans of less than $2 million will likely fall under this safe harbor and will be deemed to have made the certification in good faith.[3] This is not to say that a PPP loan of less than $2 million will avoid government scrutiny altogether. Instead, the safe harbor merely addresses the confusion surrounding the good-faith necessity certification and automatically blesses the necessity certification for loans less than $2 million.

The guidance also provides that “borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.[4]

The government has been less than clear on how it will interpret borrower certifications and its guidance does not put the confusion to bed. As a result, we anticipate, at the very least, a fair amount of dialogue between borrowers, the SBA, and other government agencies. Whether that dialogue results in demands to repay the outstanding balance of loans, enforcement actions, or SBA’s referral to other government agencies, including the Department of Justice, remains unclear and only time will tell.

B. Low-Hanging Fruit: False Representations and Documentation

Not all certifications in the PPP application are unclear. In addition to certifying necessity, borrowers are also required to certify that: “The information provided in [the] application and the information provided in all supporting documents and forms is true and accurate in all material respects.[5]” To date, the government has brought several enforcement actions against individuals who allegedly falsified information and documents in support of their PPP applications. All the individuals in the cases described below face the same four charges: (1) false statements to a financial institution[6], (2) false statements to the SBA[7], (3) wire fraud[8], and (4) bank fraud[9]. Notably, the government can pursue these charges even if a PPP applicant did not successfully obtain a PPP loan. Making false statements in a PPP application or submitting false documents in support of same may constitute prohibited conduct giving rise to these four charges. In other words, an individual is not immune from government enforcement simply because a PPP loan was not approved or funded.

In the Eastern District of Texas, for example, an engineer was recently charged with fraudulently seeking millions of dollars in PPP loans[10]. According to court documents filed in the case, the engineer allegedly made false statements to two separate lenders in an effort to obtain two PPP loans on behalf of a single corporate entity. The court documents allege that the engineer falsely reported monthly payroll expenses in the applications and falsely claimed to employ 250 employees in the first application and 264 employees in the second. Additionally, according to the affidavit attached to the charging instrument, the engineer’s entity is not registered with the Texas Workforce Commission and has never filed paperwork related to its payroll or employment records. The Texas Comptroller’s Office of Public Accounts also reviewed its database for records pertaining to the engineer’s entity and informed the government that the entity reported no revenue in the fourth quarter of 2019 and the first quarter of 2020. The engineer is charged with making false statements to a financial institution, making false statements to the Small Business Administration, wire fraud, and bank fraud. The engineer was charged even though the loans were not formally approved or funded.

Another individual was recently charged in the Eastern District of Texas for fraudulently seeking more than $5 million in PPP loans[11]. According to court documents filed in that case, the individual filed two applications for PPP loans with two different lenders. In the first application, the Defendant claimed to have more than 400 employees with an average monthly payroll of $2 million dollars. In the second application he claimed to have more than 100 employees. The government alleges the defendant falsified information in support of his applications. Among other things, the government alleges the Defendant submitted a list of employees with names he obtained from a publicly available random name generator online. Ultimately, the Defendant obtained a PPP loan for more than $500,000. The defendant has been charged by way of a federal criminal complaint with wire fraud, bank fraud, making false statements to a financial institution, and with making false statements to the SBA.

PPP borrowers are also required to certify that “[t]he funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments as specified under the Paycheck Protection Program Rule.[12]” Using the proceeds from PPP loans for things not authorized by the CARES Act or the PPP may result in government enforcement actions. In California, for example, a film producer has been charged for fraudulently obtaining funds under the PPP and using the funds to pay for personal credit cards, legal expenses, and a car loan[13]. He has been charged with wire fraud, bank fraud, false statements to a financial institution, and false statements to the small business administration.

C. Takeaway

The PPP is uncharted territory. Ultimately, it is unclear how and to what extent the government will pursue what it perceives to be bad actors under the PPP. What is clear, however, is that the U.S. Department of the Treasury, the Department of Justice, and SBA OIG are keeping close tabs on suspected PPP fraud. Please note that this blog post is not intended to be a comprehensive summary of the CARES Act or the PPP and should not be considered as legal advice. Additionally, all defendants are presumed innocent until proven guilty and being charged with a crime is merely an accusation. If you have questions or concerns regarding issues related to a PPP loan, please contact the attorneys at Elliott Sauter, PLLC at (469) 758 – 4150.

[1] The PPP Form application containing all certifications can be found at the following URL: https://www.sba.gov/sites/default/files/2020-04/PPP-Borrower-Application-Form-Fillable.pdf (last accessed on June 10, 2020).
[2] U.S. Department of the Treasury, Paycheck Protection Program Loans FAQ; Answer to Question 46;
https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf (last accessed on June 10, 2020).

[3] For purposes of the safe harbor, a borrow must include its affiliates to the extent required under the interim final rule on affiliates, 85 FR 20817 (April 15, 2020).
[4] Id.
[5] PPP Form Application.
[6] 18 U.S.C. § 1014.
[7] 15 U.S.C. § 645(a).
[8] 18 U.S.C. § 1343.
[9] 18 U.S.C. § 1344.
[10] https://www.justice.gov/opa/pr/engineer-charged-texas-covid-relief-fraud (last accessed on June 10, 2020).
[11] https://www.justice.gov/opa/pr/texas-man-charged-5-million-covid-relief-fraud (last accessed on June 10, 2020).
[12] PPP Form Application.
[13] https://www.justice.gov/opa/pr/hollywood-film-producer-charged-17-million-covid-relief-fraud (last accessed on June 10, 2020).

Author: Jordan Rose

Jordan Rose is an experienced civil litigator who has represented medical professionals in liability and licensure matters throughout the state of Texas. Jordan focuses his practice on advising physicians, pharmacies, laboratories and ancillary service providers in complex business disputes, government investigations, payor audits and regulatory and transactional matters.


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