Borrower Beware

With not even two months behind it, the Department of Justice is actively investigating and enforcing criminal activity related to the Payroll Protection Program (PPP) under the CARES Act. On May 5, 2020, two New England businessmen were charged with conspiring to make false statements to influence the Small Business Administration (SBA) and to commit bank fraud. Meanwhile, federal authorities have also launched an investigation into a company that allegedly failed to supply $12.5 million in masks and ventilators pursuant to a contract with the state of Maryland.

Of the various programs providing relief to U.S. businesses and workers under the Coronavirus Aid, Recovery, and Economic Security Act (CARES Act), the most discussed program is the Paycheck Protection Program (PPP). But with the program’s aid come numerous rules and regulations, including complex eligibility provisions, strict requirements limiting use of proceeds for payroll expenses, utilities, rent, and mortgage interest during the eight-week period that begins the day the first loan disbursement is made and minimally explained rules for determining how much of a loan will be forgiven. Compliance failures may subject borrowers under the CARES Act not only to repayment obligations but also to federal investigations, including by the SBA Office of Inspector General (SBA OIG) or the new Special Inspector General for Pandemic Recovery (SIGPR) created under the CARES Act. In addition, the Department of Justice has announced it is prioritizing the investigation and prosecution of coronavirus-related frauds including a directive from the Attorney General that all U.S. Attorneys appoint a Coronavirus Fraud Coordinator in each of their districts. Capping off this initiative is Treasury Secretary Steve Mnuchin’s announcement that any loan for more than $2 million will be audited.

Areas of inquiry and enforcement for the SBA IOG, SIGPR, or DOJ will likely include allegations that a borrower: (1) did not have fewer than 500 employees; (2) falsely claimed the COVID-19 crisis hurts the borrower’s business to the extent it qualifies under terms and conditions of the loan program; (3) falsely inflated average monthly payroll costs to get more loan money; (4) misrepresented all the loan money was used toward qualified expenses in order to get the loan forgiven; and (5) failed to disclose that employees have left in order to get more of the loan forgiven.

The enforcement activity that SIGPR is likely to undertake under the CARES Act will likely be similar to the efforts of the Special Inspector General for the Troubled Relief Asset Relief Program (SIGTARP) created in 2008. Those efforts resulted in 430 criminal prosecutions by the DOJ with 370 convictions for bank fraud, securities fraud, money laundering, and other criminal offenses. Of those defendants, approximately 25 percent were employed by financial institutions and approximately 60 percent were borrowers and/or homeowners.

Bona fide need is a requirement for a PPP loan. A borrower must certify in good faith that the economic uncertainty caused by the pandemic made obtaining the loan necessary to support its operations. On April 23, weeks after the loan application process began, the SBA directed that in measuring need, applicants must assess “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This standard applies both retroactively and going forward. For any business worried it might not meet this standard, there is some good news. A Borrower who received a loan before April 23 and repays it in full by May 14 will be deemed to have made this certification—but only this certification—in good faith.

Borrowers are well advised to make sure the certifications in support of their loan applications are complete and accurate. While there will be some allowances made for changed circumstances that were not known—and could not have been known—at the time the applications were submitted, material misrepresentations will lead to a significant risk of enforcement action. As with other federal relief programs, there will be extensive scrutiny of the use of the distributed funds and the representations made to get them. A principal takeaway? Borrower beware.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. It speaks only to guidance available as of May 2, 2020. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.