The U.S. Justice Department has begun to investigate and prosecute cases involving public funds obtained through the CARES Act Paycheck Protection Program (PPP) and other pandemic response funding programs.1 According to Assistant Attorney General Brian Benckowski, who heads the Department's Criminal Division, "Whenever there's a trillion dollars out on the street that quickly, the fraudsters are going to come out of the woodwork in an attempt to get access to that money." With respect to the PPP, the cases that the government has filed to date indicate that its focus has been on garden-variety fraud involving fabrication of payroll or other financial data, or blatant misappropriation of PPP funds for personal use.
For example, the Federal Bureau of Investigations, along with the Small Business Administration's Office of Inspector General, the Gwinnett County Sheriff's Office, and the United States Attorney's Office in the Northern District of Georgia, arrested a reality TV personality, Maurice Fayne, a/k/a Arkansas Mo, who allegedly applied for more than $3 million and received just over $2 million in SBA-guaranteed PPP funds. According to the government, the "reality star" took the funds and, with in a matter of days, bought jewelry, leased a luxury car, made loan payments, and paid some child support—none of which is considered an authorized use of the PPP funds. As stated by Special Agent-in-Charge Kevin Kupperbusch of the Small Business Association Office of Inspector General (SBA OIG) Eastern Region, "The defendant allegedly egregiously sought personal gain from a program intended to assist hardworking Americans in this challenging time."
Other cases include charges filed against two Rhode Island businessmen who claimed to have dozens of employees earning wages across four different businesses, but, the government has alleged, the defendants had no employees working for any of their businesses (Two Charged in Rhode Island with Stimulus Fraud). Similarly, an Arkansas man was charged with wire fraud, bank fraud, making false statements to a financial institution, and making false statements to the SBA for filing applications seeking more than $8 million in PPP loans by claiming fictitious payroll expenses (Arkansas Project Manager Charged in Oklahoma with COVID-Relief Fraud). And an Illinois business owner has been charged with filing a PPP loan application seeking more than $400,000 based on false and fraudulent documentation in order to significantly overstate payroll expenses (Illinois Business Owner Charged with COVID-Relief Fraud). These prosecutions demonstrate that borrowers who egregiously fabricated application information or misused PPP funds run a real risk of criminal prosecution.
Navigating the Gray Areas
Because of the ever-shifting rules interpreting the PPP, borrowers that have acted in good faith in applying for and spending PPP funds nonetheless may be concerned about their potential exposure to government investigations and penalties. Below, we provide an overview of how the government will oversee, and potentially investigate, less obvious violations of the PPP program rules.
The CARES Act establishes a Congressional Oversight Commission,2f which will likely be very active. Further, the CARES Act establishes the Pandemic Response Accountability Committee (PRAC), with a goal to "promote transparency and conduct and support oversight of [CARES Act] funds and the Coronavirus response to (1) prevent and detect fraud, waste, abuse, and mismanagement; (2) mitigate major risks that cut across program agency boundaries."3 This Committee is part of the Committee of the Council of Inspectors General on Integrity and Efficiency, which includes the 75 statutorily created federal Inspectors General. Although the CARES Act specifically identifies nine agencies as members of the PRAC, it provides that other Inspectors General may be designated as part of PRAC, provided their agency receives funds or is otherwise involved in the coronavirus pandemic response. As of now, the PRAC consists of 21 Inspectors General, ranging from the newly created Office of the Special Inspector General for Pandemic Recovery housed within the Treasury Department; to the Inspectors General for the Small Business Administration, the Federal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve System; to the IGs for the Departments of Justice, Treasury, Defense, Education, Health and Human Services, Homeland Security, Labor, and Agriculture—just to name a few.
According to the Acting PRAC Chair, Michael E. Horowitz, Inspector General at the DOJ, "The PRAC, working closely with all Federal Inspectors General, seeks to ensure that funds intended to support individuals, workers, healthcare professionals, businesses, and others affected by the pandemic are used efficiently, effectively, and in accordance with the law."4
While the CARES Act establishes a new Inspector General and a congressional oversight committee, it does not take away any preexisting investigatory jurisdiction. This means that, in addition to the above-named agencies, any alleged fraud or misuse of government funds can also be investigated by the Federal Bureau of Investigations, the U.S. Secret Service, and the Internal Revenue Service's Criminal Investigations Division.
What's the risk?
As part of the CARES Act PPP application, all borrowers must certify several statements related to the application, such as the need, use, and repayment of the funds. For example, here are a few of the key certifications5:
- The applicant is eligible to receive a loan under the rules in effect at the time of its application.
- The proceeds will be used only for business-related purposes as specified in the loan application and PPP rules.
- Current economic uncertainty makes this loan request necessary to support the applicant's ongoing operations.
- The funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments.
- Application forms and supporting information are true and accurate in all material respects.
The PPP loan forgiveness also requires borrower certifications, including that:
- The amount of loan requested was used to pay for costs that are eligible for forgiveness and include payroll costs equal to at least 60% of the forgiveness amount.
- The requested forgiveness amount includes all applicable reductions due to any decrease in the number of FTEs or salary/wage reductions.
- The borrower understands that the government can recover the loan amounts and also pursue civil or criminal fraud charges if the borrower "knowingly used the funds for unauthorized purposes."
- The borrower has verified all payments for the costs for which the borrower is seeking forgiveness.
These certifications require that the borrower know and abide by all of the SBA rules and guidance. The interim final rules that have been issued carry legal force and implement the CARES Act statute. However, it is not likely that the informal guidance issued by the SBA and Treasury in the form of FAQs, press statements by the Treasury Secretary, and other, similar guidance will be considered binding law.6 This distinction is important when evaluating your risk related to both civil and criminal liability. (See Avoiding False Claims Act Liability in Government Contracts Responding to COVID-19 for Venable's analysis on civil liability risk pursuant to the False Claims Act.)
How do you evaluate your risk?
Start by evaluating what you submitted to the government as part of your application. Review everything to determine if your PPP loan application (and loan forgiveness application, if applicable) was complete and accurate, as well as in accordance with the intent of the law. A thorough risk assessment will consider your facts and circumstances related to any possible allegations the government could bring against you and your business.
Higher risk: If you obtained government funds under false pretense or through a misrepresentation—e.g., never had an operating business; inflated costs, payroll, or other items to obtain more funds; or used the funds for non-authorized purposes. Using PPP funds or other business funds after obtaining PPP funds during the pandemic to pay large bonuses or increased compensation, to make significant investments, or to buy luxury items, such as cars, jewelry, or houses.
Lower risk: Good faith applications with submission of documents that contain minor mistakes or demonstrate confusion despite efforts to interpret the rules in good faith and well-documented decisions. The rollout of the PPP has been anything but smooth, and the lack of consistent direction, clarity, and rules is likely to pose significant hurdles in any government prosecution, especially one required to prove knowing violations of clearly articulated law.
Take the following examples:
- Access to capital elsewhere: The CARES Act specifically states that borrowers may obtain PPP funds without showing that they cannot obtain credit elsewhere—a standard requirement of the traditional SBA 7(a) loan program.7 However, FAQ 31 seems to contradict that and states: "Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that '[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.' Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business."8 The expanded borrower certification requirement in FAQ 31 was subsequently formalized in the April 24 interim final rule.9 (For more information regarding the borrower certification, see our alert here.) Proving that any certification based on this conflicting information was indeed a knowingly made false statement may prove challenging.
After providing this retroactive guidance, which created substantial concern among borrowers, the SBA issued FAQ 46, which stated that "[a]ny 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."10 The SBA also clarified that, while borrowers with loans in excess of $2 million will be subject to review:
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.
This additional FAQ, therefore, substantially scales back the SBA's plans for administrative enforcement actions with respect to the subjective need certification. It does not, however, reduce the risk for borrowers that include false information in their initial applications or applications for forgiveness, including regarding payroll figures and how PPP funds were utilized (as discussed below).
- Authorized use of funds: The CARES Act states that the proceeds of the PPP loan are to be used for payroll costs; costs related to the continuation of group healthcare benefits and insurance premiums; and payments of interest on any mortgage obligation, rent, utilities, and interest on other debt obligations incurred before February 15, 2020.11 An Interim Final Rule states that "[i]f you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud."12
If the funds are used as allowed under the statute, it seems unlikely that a prosecution would be successful or even materialize. However, if the funds are used for unauthorized purposes, such as payments for inventory or mortgage principal, that could raise the risk of an investigation to determine whether the funds were knowingly misused. As the cases discussed above demonstrate, the risk is heightened if funds are used for patently unauthorized purposes, such as to purchase luxury items or other goods not related to the borrower's business.
What if I do receive a subpoena or civil investigative demand?
The government has made it clear and known that there will be investigations into PPP funding. The fact that an investigation has been initiated does not necessarily mean that a civil or criminal proceeding will follow. And there are steps a business can take now to mitigate its risk and manage a subpoena or CID:
- Ensure that every document and statement made to a financial institution (issuing loans guaranteed by the government) is complete and accurate.
- Document internally the business basis or economic need for the funds and management and board decisions to obtain the funds.
- Keep copies of everything submitted as part of the application in an easily accessible location – e.g., copies of the applications, all supporting documents, any business resolutions or decisions, and any legal advice.
- Document everything that you do with the funds once you receive them. Consider keeping the PPP funds in a segregated account that will make it easy to show where the funds went or how the funds were spent – e.g., only for authorized purposes.
- Use the funds only as permitted in the statute and guidance. Do not buy luxury items with the PPP funds, and consider putting any such purchases on hold until you have repaid the PPP funds to reduce the appearance of any impropriety.
- Seek legal advice when appropriate and provide your attorneys with all relevant and complete information so that you can be advised appropriately.
In the event that your business receives a subpoena or CID, it should coordinate and work with counsel to design and implement a strategy to provide a response to the government and navigate any follow-up the government may pursue regarding the information provided.
1 The Coronavirus Preparedness and Response Supplemental Appropriations Act, Pub. L. No. 116-123, 134 Stat 146 (2020); the Families First Coronavirus Response Act, Pub. L. No. 116-127, 134 Stat 178 (2020); the CARES Act, Pub. L. No. 116-136, 134 Stat 281 (2020); and the Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No. 116-139, 134 Stat 620 (2020).
2 CARES Act, § 4020.
3 CARES Act, § 15010(b).
4 PANDEMIC RESPONSE ACCOUNTABILITY COMMUNITY, About the PRAC, https://pandemic.oversight.gov/about (last visited June 30, 2020).
5 The application with all of the certifications can be found here: https://www.sba.gov/sites/default/files/2020-06/PPP%20Borrower%20Application%20Form%20%28Revised%20June%2012%202020%29-Fillable-508.pdf
6 The FAQs specifically state: "This document does not carry the force and effect of law independent of the statute and regulations on which it is based."
CARES Act, § 1102(a)(1)(I) ("During the covered period, the requirement that a small business concern is unable to obtain credit elsewhere, as defined in section 3(h), shall not apply to a covered loan.).
7 U.S. DEPARTMENT OF THE TREASURY, PAYCHECK PROTECTION PROGRAM LOANS: FREQUENTLY ASKED QUESTIONS (FAQS) (hereinafter "PPP FAQs"), FAQ No. 31, https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf.
8 Business Loan Program Temporary Changes; Paycheck Protection Program—Requirements—Promissory Notes, Authorizations, Affiliation, and Eligibility, 85 Fed. Reg. 23450, 23451 (proposed Apr. 28, 2020) (to be codified at 13 CFR pts. 120 and 121) (available at https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Requirements-for-Promissory-Notes-Authorizations-Affiliation-and-Eligibility.pdf).
9 PPP FAQ No. 46.
10 CARES Act, § 1102(a)(1)(F)(i).
11 Business Loan Program Temporary Changes; Paycheck Protection Program, 85 Fed. Reg. 20811, 20814 (proposed Apr. 15, 2020) (to be codified at 13 CFR pt. 120) (available at https://home.treasury.gov/system/files/136/PPP--IFRN%20FINAL.pdf)