Beneficiaries of the Paycheck Protection Program (PPP) are facing intense inspection from federal authorities. Designed to assist businesses survive the turmoil which has resulted from the COVID-19 pandemic, the PPP has been a vital lifeline for many companies who have barely been able to scrape by.
However, the hundreds of billions of dollars which have been offered in relief are considered to be a highly valued resource during this time of crisis and any potential fraud is being dealt with swiftly and harshly.
What Is the Paycheck Protection Program?
The PPP is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provides the equivalent of $659 billion in financial assistance in the form of loans to smaller-sized businesses during a period lasting from March 2020 to August of the same year.
The loans were offered through all U.S. Small Business Administration (SBA) 7(a) lenders and most federally insured money lending organizations (banks and credit unions). Financial relief was targeted toward smaller economic operations, including sole proprietorships, non-profits, independent franchise owners, and tribal businesses.
PPP loans have a maturity date between 2 to 5 years, depending on when they were applied for, and no fees are charged to applicants. Interest rates are locked in at 1% and many businesses have the opportunity to have their loans completely forgiven if they meet certain criteria.
The express purpose of the PPP was to ensure that employees of at-risk businesses were able to continue receiving a steady paycheck throughout the COVID-19 pandemic to prevent further economic hardship. PPP loan applicants who can demonstrate that the funds they received were used exclusively for maintaining vital business functions, such as paying utilities, and keeping their employees on payroll are eligible for loan forgiveness.
Businesses may apply for loan forgiveness before their maturity date is reached, after which they will be required to start making payments within 10 months.
Why Are Authorities Taking Such an Intense Interest?
The amount of money which was disseminated through the PPP was huge and it had to be distributed within a very short window of time. Once applications started coming through, there was only a brief period before the designated funds ran out. Realistically, financial institutions and government agencies couldn’t properly vet all the applications in a timely manner, but that doesn’t mean federal authorities have lost interest.
A multitude of potential fraud cases are already being investigated and the Department of Justice (DOJ) is currently working on prosecuting loan recipients who are accused of defrauding the federal government; some of which have already pleaded guilty. There have been many reports of individuals who applied for PPP loans under dubious circumstances and used the funding to make egregious personal purchases at taxpayer expense.
Beyond the DOJ, Congress has taken a special interest in making sure all the funding they signed off on has been accounted for properly and that similar loans are distributed appropriately in the future, which is likely to be a top priority as an additional stimulus package with business loan provisions is being seriously considered. Additionally, the SBA has decided to audit all PPP loans that were greater than $2 million in value to determine their legitimacy.
What Activities Are Being Considered Fraudulent?
There is a long list of ways in which applicants could have perpetuated PPP fraud as initial oversight wasn’t very comprehensive.
Within PPP loan contracts, there are stipulations that the funds can only be used for certain purposes that are confined to a handful of broad categories. Federal money cannot be used indiscriminately; it has to be used for very specific things. If the funds obtained through the loans are used for non-authorized activities, such as paying for advertising, then that constitutes fraud.
Legal consequences are also not limited to just organizations. Individuals that are proven to have participated in the mismanagement of funds with prior knowledge that it is against the PPP loan agreement will be pursued as criminal actors.
One of the bigger problems that authorities have been attempting to remedy is the abundance of falsified applications. PPP loans are only allocated to companies which meet certain criteria that are designed to encompass all the different forms of a “small business” model. It was not uncommon for fraudsters to misclassify employees or doctor payroll information to either meet the bare-minimum eligibility for a loan or to increase the loan amount.
This falsification of information also extends to duplicate applications. As there were a plethora of institutions and agencies which were providing PPP loans, some business owners decided to put in applications to a lot of different places in order to receive multiple forms of financial assistance. As there was limited coordination between lenders at the time the loans became available, this issue was not caught. However, once everything settled down, this ploy became obvious to investigators. As PPP loans are clearly designated as being single-use only, the deceptive tactic of putting in multiple applications is being considered fraud.
In addition to deception regarding loan applications, authorities are also ready to bear down significant legal consequences for businesses which refuse to cooperate with auditors or deliberately provide them with falsified or misleading information, even if fraud was not necessarily committed.
The coronavirus pandemic hit most businesses, including small and large companies, negatively. With the virus’s arrival, most enterprises couldn’t sustain themselves, making it essential to have the Coronavirus Aid, Relief, and Economic Security – CARES act, signed into law on March 27th, 2020. The essential item on this act was the Paycheck Protection Program (PPP), which provided aid and relief to businesses, both small and medium-sized, which felt the impact of the COVID-19 pandemic.
Unfortunately, the kit didn’t last long as it was overwhelmed by applications, which made it run out of funds without catering to the needs of many. However, not all companies qualified for this PPP loan, which left undeserving companies to enjoy the kit while leaving others out. The PPP Loan program, being termed partly as fraud, will have many companies scrutinized to establish if they genuinely received the PPP kit. With this occurrence, the U.S. Treasury Department’s Office of the Comptroller of the Currency – OCC finds ways to avoid future frauds of such programs. It’s also trying to find ways to look at what conspired during the program rollout. They will try as much to check on how the fraud got in, find culprits, and get better ways to prevent such from happening in the future.
With the U.S. Treasury Department looking for better ways to offer these programs in the future to avoid frauds, other agencies are digging deep to find the companies involved in the PPP fraud. Once found, these companies might go into prosecution as the scam has attracted parties due to its negative publicity. To avoid being prosecuted and avoid penalties that come with these prosecutions, the affected companies should seek federal counsel to mitigate the risks involved.
Factors that compose the PPP Loan Fraud
Most of the factors that compose the PPP loan fraud include misrepresenting information and inadvertent mistakes that led the companies to enjoy the loan program unlawfully, without following the set rules and guidelines. Some of the possible allegations of PPP fraud include the below.
1. Loan Stacking
Loan Stacking refers to the company accessing the PPP loan from multiple lenders. According to the OCC website’s information, the officials will first start targeting companies that received this loan through numerous financial institutions. The companies that received the loan through this system will be the first and an easy target since the agency will use the available information to get these companies. Any company involved through this type of lending will soon face the charges and penalties involved.
2. PPP Loan Application Fraud
To get the PPP loan funds, companies had to meet all the guidelines on the application forms. Unfortunately, some companies did not meet these criteria. This situation led to them misrepresenting the information that led them to get the loan fraudulently. Some of the information which got misrepresented includes:
- Juggling the number of employees: For a company to fit in the program, it should have less than 500 employees.
- Classifying the employees as independent contractors: Most companies put their employees as independent contractors to reduce their companies’ numbers.
- Large companies with over 500 employees at the time of application made applications as small or medium-sized companies with less than 500 employees.
- Providing false information on the company’s payroll cost to enable it to get PPP loan funds: Companies were supposed to get up to two months of the previous year’s average payroll costs with an additional 25% on a maximum loan limit of $10 million.
3. Fraudulent Loan Certification
Other than the eligibility criteria listed above, companies were supposed to certify individual facts before getting the loan. Although most of these facts were in good faith, some companies failed to provide the right information. Some of the mandatory certifications required to get the PPI loan include:
- Proving the company has been affected negatively by the pandemic, which makes the loan necessary.
- Declaring that the PPP loan funds will entirely be used to retain workers, pay their salaries, and pay for the business mortgages, utility bills, and lease.
- Affirm that you haven’t received, and you have no intention of receiving another PPP loan.
- Conforming that all the information provided in the form is true and accurate and represents the company’s actual position.
4. Using PPP Loan Funds for other Ineligible purposes
Companies that used the PPI loan funds for other uses other than those stated. PPI loan funds are supposed to pay for rents, wages, and utilities and cater to the mortgage interests. Any other use will lead to prosecution for fraud. Companies that received the funds will have to prove how they complied with the requirement.
5. Using the Funds for Fraudulent Purposes
Companies that used the loads for fraudulent purposes will also face criminal charges, as stated in the law. The government will charge companies and its owners for fraudulently obtaining the PPP loan and using it the same way. Such can lead to fines or federal imprisonment for unlawful getting and using the funds.
6. Having Fraudulent Loan Forgiveness Certification
Due to some circumstances, the state scraps off the loan to some companies. For the company to qualify for this, it has to prove that it was eligible for the loan and that it used it as required. Providing false information to get forgiveness will lead to a fraud case.
7. Giving false information or holding important information during audit or investigation
Companies suspicious of engaging in the PPP loan Fraud will undergo investigation and audit. Concealing or giving false information to auditors will lead to new charges against the company and its owners.
Steps to take when your company gets targeted in the PPP Loan Fraud?
If you feel that your company never met the PPP loan criteria and got the loan fraudulently or is a fraud target, all you can do is consult the PPP fraud lawyers immediately. They will help you avoid fraud charges and penalties that come with the fraud case.