PPP Loan Fraud Enforcement 2.0: Preparing for the Next Round of Reviews | Fox Rothschild LLP

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While the $ 525 billion Paycheque Protection Program (PPP), enacted under the CARES Act, has undoubtedly helped millions of deserving businesses survive the COVID-19 pandemic, it has also provided a unique opportunity for fraudsters to take advantage of the government’s unprecedented largesse. . The Justice Department has already filed charges against dozens of borrowers alleging P3 loan fraud, but federal officials are preparing to cast a wider net that will dramatically increase the number of loans under review meticulous.

As we wrote earlier, the Department of Justice and other federal law enforcement agencies moved quickly to identify and prosecute PPP loan fraud – in many cases while the loans were still outstanding. granted by the Small Business Administration (SBA). Since the passage of the CARES Act just seven months ago, the Justice Department has filed criminal charges against 65 borrowers who it says collectively attempted to fraudulently obtain $ 227 million in PPP loan financing. , for amounts ranging from $ 30,000 to $ 24 million. These early criminal cases represent the bravest examples of PPP fraud, such as borrowers claiming ghost employees and using PPP funds for personal items. But these early cases are just the start, as government investigators move beyond the most egregious examples of fraud to focus on more nuanced issues of potential fraud, such as eligibility for PPP loans, spending proceeds from PPP loans and loan cancellation. At the same time, the Small Business Administration has pledged to audit all PPP loans over $ 2 million, and Congress has stepped up its oversight (and criticism) of the PPP program. In this busy environment, we can expect to see more scrutiny of borrowers across the entire P3 lending spectrum, and not just the most egregious fraud cases.

Criminal prosecutions continue at a rapid pace

In a speech on October 7, 2020, Deputy Attorney General Jeffrey A. Rosen announced that the Department of Justice has criminally indicted 65 people with PPP loan fraud as part of $ 227 million in relief funds. Eight of these defendants have already pleaded guilty and further convictions are expected.

The PPP loan fraud cases filed by the Department of Justice largely fall into two categories. The first category is made up of individuals or small groups who lied in loan applications about having legitimate businesses, or who claimed to need P3 funding to pay their employees, but instead used money to buy fancy cars and jewelry for themselves, finance home renovations and even gamble in Las Vegas. The second category of cases concerns organized criminal networks. For example, the Department of Justice recently filed charges in Ohio and Florida against 11 people, including a professional athlete and his manager, who requested $ 24 million in PPP funding.

More criminal cases involving PPP fraud are no doubt on the horizon. In a recent speech, Acting Deputy Attorney General Brian Rabbitt stressed that the Justice Department is not slowing down its efforts in this area. To potential fraudsters, he issued a stern warning: “You will be identified. You will be held responsible. You will face the most severe consequences for trying to exploit the suffering of your fellow Americans for your own personal gain.

Intensify congressional surveillance

Over the summer, the Special Senate Subcommittee on the Coronavirus Crisis opened an investigation into the PPP following allegations that it favored large companies over small businesses. The subcommittee reviewed data on all 5.2 million PPP loans approved by the Small Business Administration and released its preliminary analysis on September 1, 2020, concluding that “tens of thousands of loans issued by the administration could be subject to fraud, waste or abuse. . The select subcommittee also concluded that the administration “appears to lack the proper oversight mechanisms to identify and eliminate these issues,” noting that the SBA said it would only audit PPP loans over. $ 2 million, leaving the remaining 99.4% of funds financed PPP loans without any controls.

The select subcommittee identified a series of issues with PPP that suggest a high risk of fraud, waste and abuse, described below:

  • The SBA’s PPP rules stipulated that companies were not allowed to apply for more than one loan. The select subcommittee determined that over $ 1 billion in loan proceeds went to companies that received more than one P3 loan. The select subcommittee identified 10,856 loans in this category and noted that only 65 of these loans exceeded $ 2 million and therefore were subject to an SBA audit.
  • Many PPP loans have been made to companies that have been excluded or suspended from contracting with the federal government. However, in accordance with the SBA’s PPP eligibility criteria, these companies were not eligible for PPP loans. The select subcommittee identified 613 loans totaling $ 96.3 million in this category.
  • Public contractors with known performance and integrity issues received PPP loans. The Federal Recipient’s Performance and Integrity Information System (FAPIIS) database tracks contractor misconduct. The Senate subcommittee found that the SBA had approved 353 loans worth $ 195 million to companies identified in the FAPIIS.
  • By comparing data in the federal government’s Rewards Management System (SAM) with PPP loan applications, the Senate subcommittee identified numerous red flags involving more than 11,000 borrowers and nearly $ 3 billion in PPP financing. Deviations identified by the Senate subcommittee include:
    • Key information in PPP loan applications that do not match SAM data
    • Inconsistent business addresses
    • Companies created after February 15, 2020, and therefore not eligible for PPP loans.
  • Many PPP loan applications omitted key borrower information and were nonetheless approved. For example, hundreds of loan requests did not identify the borrower’s name in the “borrower’s name” field, and several hundred additional requests did not have full business addresses for the borrower. .

The Senate subcommittee report concluded with a series of recommendations to improve the oversight of P3s.

  • First, the subcommittee recommended that the SBA and the Treasury improve internal controls for loan cancellationincluding using existing federal and commercial databases to verify information provided by borrowers.
  • Second, the subcommittee recommended that the administration improve its audit plan for PPP borrowers. As noted, the SBA’s stated plan is to audit only PPP loans greater than $ 2 million and “other PPP loans, as applicable”. Finding that this plan was “clearly insufficient”, the Senate subcommittee recommended that the SBA implement a risk-based audit program and use random sampling techniques. The subcommittee further recommended that SBA audits be accompanied by public education to warn borrowers of criminal penalties and encourage whistleblowers to report to the SBA Inspector General’s Office.
  • Third, the Senate subcommittee stated that the Treasury and the SBA must improve their cooperation with supervisory bodies like Congress and the Pandemic Response Accountability Committee.

Application 2.0: What’s next

The relentless torrent of criminal charges by the Justice Department against PPP borrowers shows no signs of abating, so we expect to see more announcements of new criminal cases and additional guilty pleas in the coming months. But as we noted, identifying and pursuing the bravest examples of P3 loan fraud – the “fruit at your fingertips” – was the easier part.

Now comes the hard part: auditing a reasonable sample of the over 5.2 million PPP loans that have been funded. To this end, we anticipate that various government agencies will engage in a new wave of law enforcement activities. To begin with, we expect the SBA to keep its promise to review larger P3 loans. While the SBA previously announced that it would focus its limited audit resources on loans over $ 2 million – which represents just 0.6% of all PPP borrowers – it was careful to qualify this statement. stating that it would also audit “other PPP loans as appropriate.” This means that borrowers with loans of less than $ 2 million are not immune to scrutiny and should be prepared for inquiries from government investigators.

Congressional oversight of the entire P3 framework can be expected to result in additional regulatory scrutiny of borrowers. The Senate subcommittee report of September 2020 was very critical of the administration’s approach to P3 implementation, and identified five categories of loans in which fraud and abuse were the more likely to be prevalent, and recommended that the SBA take a risk-based approach to audit selection.

Finally, we anticipate that other regulators could assist the SBA in its herculean task of auditing PPP borrowers. The Ministry of Labor has already started auditing beneficiaries of PPP loans under the guise of routine surveys of wages and hours. Other federal agencies could support the SBA in this effort in the coming months.

Any business owner concerned about PPP loan compliance should consult a lawyer immediately and not wait to be contacted by law enforcement. Any business owner who has ever received a subpoena or request from a law enforcement agency regarding a PPP request or loan should immediately consult with an attorney who can assess the full potential of civil and criminal exposure before proceeding. respond to any such subpoena or inquiry.

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