The Paycheck Protection Program has already been defrauded out of millions of dollars.
One of the hottest areas for fraud against the government right now is Paycheck Protection Program (PPP) loan fraud. The federal government has authorized nearly a trillion dollars in funds to be dispensed to individuals and businesses to keep the economy afloat during these difficult times.
Whenever the government is giving away money, there are certain to be fraudsters violating the False Claims Act. Hear how the PPP Loan program works (or, at least, was designed to work) from a government fraud attorney.
The PPP Loan Program
Based on the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, Pub. L. 116–136) the Small Business Administration (SBA) received funding and authority to modify its existing loan programs and establish a new loan program. The goal is to assist small businesses nationwide that had been or were expected to be adversely impacted by the pandemic.
Specifically, Section 1102 of the CARES Act authorized the SBA to guarantee 100 percent of certain loans under a new program titled the “Paycheck Protection Program.”
From a high level, the PPP Loan Program is supposed to work like this: small businesses apply for a loan through an SBA-approved lender, which reviews the application and decides if the loan should be issued. The integrity of the program relies on the integrity of this underwriting process, so lenders are expected to follow well-established guidelines and requirements, most of which have been around for years as part of the SBA’s 7(a) loan program.
This process includes verifying the borrower-provided information, including the identity of the business and, in the case of certain businesses, their ultimate beneficial owners. Another example is that lenders must comply with the Bank Secrecy Act, 31 U.S.C. § 5311 et seq., which requires the lender to take steps to ensure that the would-be borrowers are not sham operations. Lenders also must report potentially fraudulent activity to the Treasury’s Financial Crimes Enforcement Network.
If a loan is approved, it is funded by the lender, not the SBA. In other words, PPP borrowers get lender money, not government money. But at the end of the loan’s term, there are several possibilities:
- The business may apply to have the loan forgiven based on having spent the money in specific, approved ways such as payroll and mortgage or rent payments. If the forgiveness conditions are satisfied, the lender is paid back – but instead of being paid by the borrower, they are paid by the SBA with CARES Act funds. At that point, government money has been issued.
- If the business’s use of the funds does not qualify for forgiveness, the business can pay the loan back to the lender itself, without having incurred any interest.
- If the business fails to make payments and defaults on the loan, the lender can turn to the SBA, which has guaranteed to pay the lender back the full value of the loan. In this way, the lender is completely protected.
The Application Process
As those who applied for a PPP loan know, the application was very simple (for a loan application, anyway).
Basically, would-be borrowers had to certify that the loan was necessary because of “economic uncertainty” caused by the pandemic and had to state certain payroll information in order to determine how much loan money they were eligible to receive. Verifying this information was the job of the lenders.
The amount for which a business was eligible is quite literally based on the payroll of the business – number of employees times two and a half months of wages, or, stated differently, two-and-a-half months of payroll. This is calculated based on annual compensation, with a cap for annualized compensation of $100,000.
In other words, the government was not willing to fund anyone to more than $100,000 per year, even if in a “normal” year they would make $200,000 per year.
Self-employed individuals were eligible for a PPP Loan if:
(1) Their business was in operation as of February 15, 2020
(2) They had self-employment income, such as an independent contractor or a sole proprietorship
(3) Their principal place of residence was in the United States
(4) They filed Form 1040 Schedule C. Interim Final Rule “Additional Paycheck Protection Program Eligibility Criteria and Requirements for Certain Pledges of Loans”
Other allocation and amount rules were designed “to preserve the limited resources available to the PPP program,” as the SBA said in its Interim Final Rule styled “Paycheck Protection Program Requirements for Corporate Groups and Non-Bank and Non-Insured Depository Institution Lenders.”
Accordingly, “businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of PPP loans in the aggregate. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.”
With so much money floating around, and so few requirements for obtaining the loans in the first place, the PPP program was unsurprisingly rife with fraud. The New York Times reported that by December, federal investigators had already uncovered $62 million in fraud, with a second round of funding yet to go out.
But with all of that, how can PPP fraud be a False Claims Act case?
The PPP Loan Program Will Keep False Claims Act Lawyers Busy for Years
We expect to see dozens of False Claims Act cases worth millions, if not billions, of dollars. With so much money being passed around with so little oversight, one can expect fraudsters to take advantage. So what are some instances that a potential whistleblower should look out for?
What if a business lied on their PPP loan application?
As you can imagine, Bracker & Marcus has gotten a lot of calls from would-be whistleblowers who know that a PPP borrower was funded for a loan after it, for example:
- Lied about how many employees it had, to get more money
- Lied about how long they were in business (or even that they were in business)
- Got a PPP loan based on a payroll that didn’t exist.
Unquestionably, these are all fraud, and the government has been actively arresting and charging people who lie to obtain PPP funds, such as this Florida man who fraudulently obtained $3.9 million and bought a Lamborghini. But that doesn’t mean they constitute an actionable False Claims Act violation. In those instances, the lenders, not the government, have been defrauded.
The reason these claims are not yet ripe for a False Claims Act case is because the SBA has not paid out any money yet. Remember, the money came from the lender, not the government. Therefore, the claim won’t be ripe until the business applies for forgiveness and lies on the forgiveness application.
In other words, if a company lied to get the loan but then pays it back, that would be a “no harm, no foul” situation and would not make a good FCA case.
What about a business that takes out a PPP loan and then lays everyone off?
In some cases, this may not be fraud at all. There are good reasons why a small business owner might take out a PPP loan and then lay off workers.
Consider a small manufacturing company that employed ten workers and took out a PPP loan to try and stay in business. The PPP loan amount was based on payroll, but to stay in business, the company had to pay rent, buy raw materials to make its products, and pay workers – but its loan amount was only based on payroll.
The company can choose to lay off or furlough workers and use the money that would have gone to pay them for rent (which is an expense that can be forgiven) and for the raw materials (which, at least as of the time of this writing, would not be eligible for forgiveness, even though it is a valid business expense).
When the time comes, the business can choose to apply for forgiveness for the portion of the loan it used on payroll and rent, and then pay back the portion that it used on raw materials. Because it never lied to get the money (it really did have ten employees when it applied) and it didn’t lie to get the SBA to cover the loan (because it didn’t try to write off salaries for all ten employees when it had fewer), there wouldn’t be a good case here.
Even though it would be difficult to bring a False Claims Act case for fraud in obtaining a loan, we expect that any number of cases will be brought for fraud in the forgiveness process. It is at this stage, where employers lie about how PPP funds were utilized to avoid having to repay the loan. If they submit false certifications so that the loan funds are forgiven, then those constitute false claims because it causes the SBA to repay the lenders.
If you are aware of an employer falsifying information to obtain loan forgiveness, contact us at 770-988-5035 today for a free evaluation.
What about the lenders?
For lenders, it may be a different story. If you know about fraud on the part of a PPP Lender, your claim may be ripe right now. That’s because lenders had a responsibility to manage their application process properly.
Both the 100% guarantee of the PPP loans and the payment of SBA Lender Fees (discussed further below) are conditioned on the lender following eligibility requirements for borrowers, including those discussed above, like making sure the borrower was a legitimate business and not a sham operation.
In other words, lenders are expected to know their customers, ensure that the borrower actually was who they said they were, that the business had been in existence the appropriate amount of time, and report suspicious activity.
SBA Processing Fees
Before the passage of the CARES Act, the SBA did not pay lenders for originating SBA 7(a) loans. Under the PPP loan program, however, lenders are compensated for processing PPP loans based on the amount of the funded PPP loan: five percent for loans of not more than $350,000; three percent for loans between $350,000 and $2,000,000; and one percent for loans of $2,000,000 or greater. (85 FR 20816 (3)(d)).
These SBA Lender Fees, along with the promise of a 100% guarantee by the SBA, created quite an incentive for lenders to participate in the SBA program. However, in Interim Final Rule No. 15, the SBA stated that a lender is not eligible for an SBA Lender Fee if the borrower himself is determined to be ineligible for the loan. “If SBA conducts a loan review and determines that the borrower was ineligible for a PPP loan, the lender is not eligible for a processing fee.”
Moreover, previously paid processing fees are subject to clawback: “[f]or any SBA-reviewed PPP loan, if within one year after the loan was disbursed SBA determines that a borrower was ineligible for a PPP loan based on the provisions of the CARES Act or applicable rules or guidance available at the time of the borrower’s loan application, or the terms of the loan application, SBA will seek repayment of the lender processing fee from the lender.”
Similarly, SBA Lender Fees are subject to clawback if a lender has not fulfilled its obligations under PPP regulations. “If a lender fails to satisfy the requirements applicable to lenders that are set forth in section III.3.b of the First Interim Final Rule or the document collection and retention requirements described in the lender application form (SBA Form 2484), SBA will seek repayment of the lender processing fee from the lender and may determine that the loan is not eligible for a guaranty.”
These processing fees are paid as part of the loan transaction, which means that unlike the loan itself, they are ripe. There is also an argument that the entire amount of the loans could be recovered because the U.S. approved a limited amount of PPP loan funds and they should have gone to qualified applicants, not sham applicants.
Do You Have an FCA Claim? Secure Representation Now
If you know of a lender who approved ineligible loans without due care, or who failed to fulfill its obligations under the program, we urge you to contact the Atlanta whistleblower attorneys at Bracker & Marcus LLC for a free evaluation today.