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.