PPP Fraud: Q1 Update on DOJ Activity

Kelley Drye Client Advisory

Our previous alerts on CARES Act enforcement anticipated a wave of cases by the Department of Justice (“DOJ”) charging COVID-related fraud for loans obtained through the Paycheck Protection Program (“PPP”). As expected, enforcement has been swift and steady. DOJ announced at the end of February 2021 that it has prosecuted more than 100 defendants in 70 criminal cases, and seized more than $60 million in cash proceeds derived from fraudulently obtained PPP funds, as well as numerous real estate properties and luxury items purchased with PPP funds.

The PPP provides forgivable loans to assist small businesses with expenses during the COVID-19 shutdown. Like many other federal programs, the PPP requires a series of certifications to receive federal funding. False certifications can expose small businesses to civil liability under the False Claims Act (“FCA”) and the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), as well as criminal liability under (among others) the federal mail and wire fraud statutes.

This alert highlights the most recent DOJ actions concerning PPP loans and what businesses need to know to avoid civil and criminal liability. For additional tips on implementing a corporate compliance program in line with DOJ expectations to prevent and address potential fraudulent conduct, see our prior alert here.

Civil and Criminal PPP Loan Fraud Cases in 2021

Although nearly all of the PPP fraud cases brought to date have been criminal cases, DOJ also intends to use civil enforcement tools such as the FCA and FIRREA. In a recent public statement, Brian Boynton, the acting Assistant Attorney General, emphasized the DOJ’s intention to use the FCA to combat any alleged false representations regarding eligibility, misuse of program funds, and false certifications pertaining to loan forgiveness.” He also noted that the Civil Division is working closely with agencies to investigate potential violations and these collaborative efforts” are expect[ed] to translate into significant cases and recoveries.”

In January, DOJ announced its first FCA and FIRREA settlement based on PPP fraud, which involved SlideBelts, Inc., a California-based internet retailer and debtor in bankruptcy. As part of the settlement, both the company and its president and CEO admitted to making false statements that the company was not in bankruptcy in order to obtain a PPP loan. The DOJ alleged damages and penalties totaling $4.1 million. SlideBelts ultimately agreed to pay $100,000 to resolve the FCA and FIRREA allegations and was forced to return the $350,000 loan it obtained.

SlideBelts also highlights that a PPP loan of any amount can become the subject of an FCA action, thereby limiting the safe harbor” for loans of less than $2 million. Although the Treasury Department had previously announced – in connection with an interim rule published by the Small Business Administration’s Fourth Interim Rule – that only PPP loans of more than $2 million will be given a full review” to ensure legitimate economic need before they will be forgiven, the certifications for any loan amount may be audited and may give rise to FCA liability.

As for FIRREA liability, SlideBelts also demonstrates that nearly any misstatement to a financial institution can expose a company to liability under the statute, which then entitles DOJ to civil penalties for mail or wire fraud that affects a federally-insured financial institution. To prove FIRREA’s requirement that the perpetrated fraud or misstatement affect” a financial institution, as a practical matter, has never been a high hurdle for DOJ; if the misstatement is in connection with a loan application, the requirement is typically found to be satisfied. The Government also need prove a FIRREA claim only by a preponderance of the evidence, so any FCA case based on PPP fraud will likely involve FIRREA penalty claims as well, as was the case with SlideBelts. Moreover, like the FCA, FIRREA provides a financial incentive to whistleblowers to report violations to the Government.

Finally, of the eight federal criminal cases related to COVID-relief fraud charged in February 2021, six proceedings centered on alleged fraudulent statements in loan applications about payroll expenses for employees. Specifically, the indictments allege that the applications contained false and misleading statements about the number of employees or average monthly payroll expenses for the business’s operations. Certain defendants allegedly also submitted false documentation in support of their false statements, like falsified federal tax filings, or false W-2s for purported employees who were not in fact employed by the company

Protecting Your Company

Given the substantial resources devoted to investigating and prosecuting COVID relief fraud, and the establishment of the Special Inspector General for Pandemic Recovery (“SIGPR”), we will likely see PPP fraud cases for years to come. Companies should therefore remember to substantiate their eligibility requirements and representations made in PPP loan applications, and carefully review all communications with lenders in particular, as those communications can serve as important and easy-to-gather evidence that a borrower knowingly submitted a false claim. Once PPP loans are obtained, companies should carefully document their use in accordance with the terms of the loan. The company’s recordkeeping should therefore include documented support for eligibility, for representations made in connection with the application, for any decision the company made in a regulatory gray area in connection with obtaining the loan, and for the appropriate use of any funds obtained.

To the extent that a misstatement is discovered after submission of an application, or after obtaining the loan, consult with counsel on how best to navigate any necessary correction.

Attorneys in Kelley Drye’s White Collar, Investigations and Compliance and Government Contracts practice groups are currently advising clients with respect to PPP fraud and monitoring developments related to the COVID-19 pandemic and the obligations they create. Clients should feel free to contact the authors or any other Kelley Drye attorney they work with to further discuss the topic.