The Paycheck Protection Program (PPP) has simultaneously drawn both praise and scrutiny. Part of Congress’s $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus package, PPP was touted as a lifeline for small businesses reeling from the economic downturn caused by the coronavirus pandemic.
Through multiple rounds of funding and an extended Aug. 8 application deadline, the PPP appears to be expanding its reach. As the number of PPP loans grows and early borrowers begin to apply for loan forgiveness, the government will continue to focus on program fraud and abuse.
Now is the time for borrowers to determine how they will respond to the inevitable tide of external inquiries and internal investigations arising from PPP loans.
SBA and Bank Audits Coming
According to July 24 data from the Small Business Association, over 5 million PPP loans have been funded and are valued at more than $519 billion. While many businesses received this cash infusion, others reported challenges applying for funds and getting approved by lenders.
In April, Treasury Secretary Steven Mnuchin said the SBA would conduct a full audit of PPP loans over $2 million prior to forgiveness and that borrowers may face criminal liability if they make false loan certifications. But these high-dollar loans account for a relatively small number across all PPP lending—a little under 29,000 loans (0.6%).
This means that participating banks will likely be on the front lines of the fraud review process for loans at or below the $2 million threshold, which translates into millions of loans and more than $413 billion in government funds.
Banks recognize the financial risk and administrative challenges associated with the PPP loan forgiveness process. For example, bank lobbying organizations reportedly asked Congress in June to automatically forgive PPP loans less than $150,000. Secretary Mnuchin recently expressed a degree of support for a similar measure, stating that policymakers should consider forgiveness for smaller businesses that received PPP loans, so long as forgiveness was coupled with fraud protection.
Absent blanket exceptions, businesses applying for PPP loan forgiveness will need to be prepared for the hard questions and document requests that will come from their lenders, the government, or both. A borrower’s misstep when providing verification documents or making a certification to lenders could result in a loan forgiveness application being denied or a more probing (and costly) government inquiry.
Diligent borrowers may take proactive measures to ensure PPP loan compliance but may still find problems that require an internal investigation.
Now is the time for borrowers to determine how they will respond to the inevitable tide of external inquiries and internal investigations arising from PPP loans. Whether gathering documents for a lender or government regulator, these strategies will help minimize operational disruption.
Develop (or refine) a records management system. A company should know in advance where and how its most important PPP-related documents and information are (or will be) managed and stored. For example, are payroll records stored in-house or with an outside vendor?
The company should also closely track and understand the parts of its business that may be subject to scrutiny for purposes of PPP compliance, such as vendor payments and other operational expenses like rent and utilities.
Designate a subject matter expert. The subject matter expert should be knowledgeable about the PPP’s general requirements, lender-specific rules, and how the company’s operations are impacted by these policies and regulations.
The subject matter expert should also be capable of interfacing with bankers, government officials, and internal stakeholders, as needed. This individual may also serve as the records custodian for PPP-related documents, meaning that the individual is knowledgeable about the company’s document retention practices and related information technology systems.
Determine whether outside counsel with experience in internal and/or government investigations is needed. Given that the PPP program has garnered much attention from regulators, companies should consider retaining outside counsel that has deep and specific experience handling government or internal investigations either in the company’s industry (e.g., healthcare, financial services) or involving similar issues.
This is particularly important when the investigation may result in criminal liability or hefty civil fines. Outside counsel can collaborate with the company’s PPP subject matter expert and other key decision makers as they coordinate investigative responses or take remedial measures. Outside counsel can also work with the company to determine whether and how internal reviews can remain confidential.
It is hard to know whether or when a company that received a PPP loan will be investigated. But planning and preparation can be powerful tools. Putting the preventive measures described above in place will help protect a company’s brand, ensure an accurate response to lenders or the government, and save an organization both time and money.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Nekia Hackworth Jones is a partner at Nelson Mullins in Atlanta who counsels and represents companies in connection with government investigations, internal investigations, and business litigation.