Six Steps That May Help Avoid Fraud Investigations for PPP Loans

In early May, two New England men were arrested for allegedly attempting to defraud the federal government by submitting false applications for financial assistance under the new Paycheck Protection Program (PPP). In their bank loan applications, the men applied for more than a half-million dollars in forgivable loans guaranteed by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

This is unlikely to be the last case of fraud under these new SBA programs.

SBA’s Office of Inspector General has full authority to audit or investigate any wrongdoing. An audit or an investigation may lead to civil penalties and potential criminal prosecution. Attorney General William Barr has stated that the Department of Justice will “prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.” There is likely to be collaboration between federal government agencies to investigate possible fraud and abuse associated with these loans.

Fraud enforcement is likely to focus on providing misleading information about the need for the loan, inflating the amount of the loan request, and use of the loan proceeds.

To date, $659 billion in PPP loan funding has been allocated to businesses with 500 or fewer employees, sole proprietors, independent contractors and self-employed individuals that are facing economic hardship. Treasury Secretary Steven Mnuchin announced on April 28, 2020 that the government will perform a full audit on all companies receiving more than $2 million in PPP loans before forgiving the debt. He warned companies that they could suffer consequences if they could not demonstrate their good faith certification that current economic uncertainty made their loan request necessary to support the applicant’s ongoing operations.

Among other certifications in the loan application, the borrower certifies that “the funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the PPP rule; I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”

The following steps may help those applying for and receiving PPP loans avoid an audit or fraud investigation:

1. Accurately summarize the ways economic uncertainty – both current and foreseeable – make the PPP loan necessary to support ongoing operations. How have the company’s ongoing operations been adversely impacted by the economic uncertainty? Has the company been required to close or limit operations? Does the company expect a significant reduction in its operations resulting from shelter-in-place orders or from the general economic decline? Has the company reduced its workforce or does it anticipate needing to do so without the PPP loan funds?
2. Evaluate the need for a PPP loan in light of access to other sources of liquidity. This could include assessing the net assets of the business and the availability of cash reserves, access to alternative sources of financing such as a line of credit, remaining capital commitments or public markets. If available capital could not be used to keep workers employed, document the basis for competing priorities. For example, surety requirements to maintain minimum working capital reserves for performance and payment bonds.
3. Make accurate estimates of the loan amount. Do not inflate average monthly payroll costs to qualify for a larger loan. Only include eligible payroll costs to calculate your loan amount. For example, amounts paid to employees residing outside the United States or to independent contractors cannot be included. False applications and misstatements or other fraudulent conduct related to PPP loans may be subject to federal criminal liability.
4. Use PPP funds only for the authorized purposes. These expenses include eligible payroll, rent, interest and utilities incurred and paid during the eight-week covered period. For example, accrued but unpaid expenses or amounts owed in arrears and paid during the eight-week covered period cannot be included for forgiveness purposes. Document in detail how payroll calculations were made.
5. Maintain and retain accurate records. The eight-week covered period begins on the day the lender makes the first PPP loan disbursement to the borrower. As a borrower, you need to maintain detailed records to support the calculations of full-time equivalent employees (FTEE) and pay rates during the relevant time periods. These calculations will form the basis for your application for forgiveness, and any reduction in the forgiveness amount. Retain all necessary business information, including employee data, payroll, compensation and health benefits records.
6. Make sure you understand loan forgiveness requirements. In the initial phase of the PPP programs, confusion about guidelines and requirements caused some recipients to hold back on using loan proceeds. If you need assistance with understanding program requirements, our professionals can help.

Weaver’s Forensic and Litigation team is available to assist clients undergoing an audit or facing allegations of fraud. Contact us for more information.

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