Almost a year ago, in response to the COVID-19 pandemic and the associated economic downturn, the Small Business Administration-backed Paycheck Protection Program (PPP) provided loans to help businesses keep their workforce employed during the COVID-19 crisis. This article examines how the government enforces program requirements.
CARES law, PPP
Under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and related legislation, more than $ 3 trillion in government grants, loans and grants has been allocated for economic assistance related to the pandemic, including more than $ 525 billion for PPP.
Between March 2020 and the PPP close in August 2020, the SBA, in coordination with the country’s banks, approved more than 5.2 million loans for small and medium-sized businesses with fewer than 500 employees suffering the immediate effects of the foreclosure. pandemic, including being forced to close his business and lay off employees.
PPP loans have been made to companies in a variety of industries, ranging from manufacturing, construction, finance, law, health, education and retail to the arts. They allowed companies to continue paying wages and salaries for eight weeks after receiving funds. The PPP provided critical funding to support businesses and their employees in the early months of the COVID-19 pandemic.
On January 13, 2021, the SBA began accepting applications for Second Draw PPP loans eligible businesses that have already received a PPP loan. A minimum of $ 25 billion will be allocated for such loans to eligible borrowers with up to 10 employees or for loans of up to $ 250,000 to eligible applicants in low to moderate income communities. To be eligible for a second-draw PPP loan, a borrower must: (1) have received a first-draw PPP loan and has (or will use) the full amount for an authorized use; (2) have 300 employees or less; and (3) must demonstrate a reduction of at least 25% in gross revenue between comparable quarters in 2019 and 2020. Loan terms for second-draw loans generally follow those for first-draw loans.
The SBA is accepting second-draw requests until March 31, 2021. However, on February 2, 2021, President Joe Biden signed an executive order intended to help “smaller” businesses by creating a two-week window starting February 24. 2021, while only companies with up to 20 employees can apply PPP loans.
PPP loan remission
Since fall 2020, companies have been working with the SBA and their lenders to meet PPP requirements by submitting the necessary documents and certifications to get PPP loans canceled. Government agencies responsible for PPP oversight have identified waste and abuse by applicants or recipients of PPP funds and held violators legally accountable. They have also opened numerous large-scale investigations into civil and criminal abuses of PPP funds.
Government surveillance, investigations
To date, the FBI, the Office of the SBA Inspector General, the IRS, the United States Postal Inspection Service, the FDIC Office of Inspectors General, and the Federal Finance Agency of the housing, the Fraud Section of the Department of Justice (DOJ) and the United States attorneys’ offices nationwide have charged around 100 people with PPP fraud under the Federal False Claims Act (FCA) and other federal laws.
Collectively, those charged allegedly stole more than $ 175 million from the PPP, while actual losses exceeded $ 70 million. To date, almost half of the thefts have been recovered through confiscations and the liquidation of durable goods (for example, vehicles, houses and jewelry) that government agents have successfully seized or tied to individuals.
Prosecutors identified fraudsters attempting to steal $ 30,000 or more. For example, the DOJ indicted 11 people, including a professional athlete and his business leader, for allegedly conspiring in Miami and Cleveland to defraud the government of $ 24 million using forged records and fraudulent P3 requests.
Identified fraudsters, held accountable
The Miami and Cleveland conspirators are accused of using general strategies emblematic of many fraudsters seeking to illegally “gamble” PPP. For example, fraudsters have submitted requests containing blatantly inaccurate statements about the number of employees “working” for a company and forged certifications regarding average monthly income and payroll figures. Indeed, in some instances, for example, claimants have resorted to submitting bogus tax records, “fake” payroll and business income and stolen personal identifying information to unsuspecting victims.
More troubling still, the fraudsters used illegally obtained funds for illegitimate purposes, such as purchasing luxury items and to “line the pockets” of PPP thieves, rather than for PPP purposes designated to support national companies. For example, one defendant pleaded guilty to spending $ 320,000 in PPP funds to buy a Lamborghini sports car. Others have been accused of using PPP funds to purchase expensive real estate, jewelry and art.
Unsurprisingly, fraudsters are generally reluctant about their criminal history when submitting P3 requests.
In United States v. Yates, 5: 21-cr-00003-RWS-CMC, a recent indictment against an individual, Samuel Yates was charged with two counts of wire fraud for allegedly seeking millions of dollars in SBA-approved PPP loans on behalf of of two dummy companies. The indictment alleges that in a PPP request, Yates requested $ 5 million in COVID-19 relief funds by falsely claiming the company employed 400 people with a monthly payroll of $ 2 million. In a second request, Yates reportedly requested a PPP loan of $ 500,000 to cover the payroll of 100 employees. According to the indictment, none of the information Yates provided in his petition was true. Indeed, Yates allegedly used a random name generator to list the names of “employees” in his applications and submitted false tax returns attesting to the fiscal health of his “businesses”.
In United States v. Hsu, CR-20-191-JLR, defendant Austin Hsu pleaded guilty to a single wire fraud account. Hsu admitted to submitting nine fraudulent Economic Disaster (EIDL) loans and other PPP requests seeking $ 1.1 million in alleged relief, of which $ 700,000 was disbursed. To obtain fraudulent loans, Hsu claimed to own and operate a healthcare company (Back 2 Health), for which he received EIDL and PPP funds. Hsu admitted to using the names of current (and former) Back 2 Health employees to submit bogus PPP requests for four different companies he also owned. Hsu further admitted to bolstering his demands with fraudulent federal tax returns. Additionally, he admitted to starting a new business in June 2020 and then requesting relief from the EIDL, falsely stating to the SBA that the company had been in business since 2017 and, as of the date of the request, had nine. employees and $ 1.5 million in gross revenue.
Hsu’s sentencing is slated for April 19, 2021, and could face up to five years in federal prison, significant fines, and full restitution to SBA and PPP programs.
Government civil regulations
Recent comments from the DOJ confirm that the criminal enforcement of clear PPP fraud will be a government priority. Legal observers have estimated that the DOJ will face headwinds in building civil fraud cases in light of the complex regulatory guidelines issued under the PPP, EIDL and other grant programs created by the CARES law.
DOJ policy is not to rely on “sub-regulatory guidelines”, such as the SBA’s FAQ guidelines for the PPP program, to support civil action. The 2018 edition of DOJ Manual expressly prohibits the DOJ from using “mere non-compliance with guidance documents issued by federal agencies” to establish a CAF case.
Nonetheless, the DOJ could allege that an applicant’s failure to comply with government-issued regulatory guidelines proves scientist (intentional or conscious conduct), an essential part of an FCA action. Additionally, while the civil division of the DOJ should bring fewer fraud cases against PPP applicants who make false certifications in their loan applications, the government should aggressively pursue civil lawsuits against companies and individuals who make false certifications in their loan forgiveness applications. . Companies wishing to obtain loan forgiveness should therefore carefully document the use of PPP funds and comply with all program requirements.
Yet the government recently completed a civil fraud investigation that resulted in admissions of liability, full return of PPP funds, and significant fines.
In United States v SlideBelts, Inc. and Brigham Taylor, The fraud allegations against internet retail company SlideBelts, Inc. and its President / CEO Brigham Taylor resulted in DOJ’s first civil settlement with a PPP fund beneficiary. SlideBelts and Taylor have agreed to reimburse the SBA for the $ 350,000 they were accused of illegally receiving from the PPP fund and to pay a fine of $ 100,000, of which $ 17,500 will come directly from Taylor.
As part of the settlement agreement, SlideBelts and Taylor also admitted to lying to a federally insured bank in their claim by stating that SlideBelts was do not bankrupt in the hope that the bank would approve (and the SBA would guarantee) the $ 350,000 PPP loan to the company. Indeed, the company had filed a Chapter 11 petition with the bankruptcy court (In re SlideBelts, Inc., 2: 20-bk-24098) initially in August 2019 and, later, in June 2020.
The settlement resolves charges that could have resulted in the payment of more than $ 4 million under the FCA and the Financial Institutions Reform, Collection and Enforcement Act.
Complaints from PPP whistleblowers
Organizations should be prepared for possible Alert launcher complaints alleging that the company abused PPP funds and that these whistleblower complaints caused the employee to suffer unfavorable employment action. Indeed, recent comments from DOJ lawyers confirm that the DOJ continues to take steps to facilitate the investigation and reporting of COVID-19 fraud and abuse to the government.