DOJ Scrutiny Has Shifted to Banks That Rolled Out Pandemic Loans

The Paycheck Protection Program authorized nearly $800 billion in forgivable loans intended to save small businesses and the jobs they provided during the pandemic. The Small Business Administration administered the loans, guiding banks and start-up lenders that processed loan applications and urged quick deployment of the funds.

What followed has since been described as the biggest fraud in a generation, and the Department of Justice quickly brought fraud-based prosecutions against loan recipients that spent loan funds on cars, homes, and other luxury items. Recent reports suggest the DOJ is now turning its attention to lenders that approved the loans.

Banks and fintech companies involved in the approval process should consider how best to prepare for potential DOJ inquiries, evaluate the effectiveness of their compliance programs and financial controls, and consider vulnerabilities and potential defenses.

Still uncertain is whether post-PPP investigations will mimic the 2008 financial crisis, when the DOJ largely failed to pursue fraud cases against banks, investment firms, and executives involved in marketing and sale of mortgage-backed securities.

Likely Targets

Nearly 5,500 lenders participated in the PPP, and most loans were quickly approved and eventually forgiven by those lenders, consistent with SBA guidance and urging.

Any lender could be the target of a DOJ investigation, and the public announcement of the investigation will incentivize potential whistleblowers to report potential misconduct at their employers. But recent trends suggest that larger banks with sophisticated compliance programs and greater resources could be passed over in favor of regional and local banks.

The other looming question is whether the DOJ will pursue just the banks or also bank executives and employees. In speeches and recent guidance, the agency continues to declare its intention to prosecute individuals and incentivize corporations to provide evidence of executive culpability, which continues a trend prompted by criticism of its post-2008 crisis record. Time will tell whether past was prologue.

What Statutes Will the DOJ Use?

As is true with any white-collar investigation, the DOJ will have plenty of options when it comes to potential statutory vehicles. Charges against individuals have employed the False Claims Act and Conspiracy statutes—given that PPP loans involved representations to the SBA, False Statements, Wire Fraud, and the Bank Secrecy Act—all could form the basis for subpoenas, search warrants, and eventual charges.

Regardless of its choices, the DOJ will have to grapple with recent judicial opinions construing critical elements of various statutes. In the last term, the US Supreme Court narrowed the scope of the wire fraud statute and defined “knowledge” in the context of the False Claims Act.

The SBA’s guidance to lenders, which included a “hold harmless” provision in the event of a borrower’s failure, will anchor potential defenses. Lenders must understand the legal theories DOJ may pursue as they evaluate potential exposure and weigh potential courses of action.

What Will the DOJ Scrutinize?

DOJ’s primary focus will be whether non-qualifying loans were approved and/or forgiven for financial gain to the bank. But given the volume of lenders and loans, the DOJ will likely focus, at least initially on simpler cases: lenders that processed a high volume of loans, ignored obvious red flags and approved or forgave loans to particularly egregious loan recipients, ignored or circumvented established fraud-detection measures, or colluded with customers or received some financial benefit separate from the standard loan processing fees.

What Banks Can Do to Prepare

Banks and start-up lenders that are proactive and prepared will fare better in this developing landscape. Here are some places to start:

Get your house in order. Given the incentives for qui tam relators, many DOJ investigations will originate with internal whistleblowers. Companies should proactively review their document retention policies and practices to ensure that relevant information is preserved, particularly as new legislation extends the statute of limitations for PPP-related fraud, but also that irrelevant material is not retained and subject to expensive search and review.

Test your compliance program. Banks should proactively review their compliance program and internal controls, including whether controls were actively avoided or ineffective, and consider how to incorporate data from various functions into its compliance systems—e.g., audit, finance, investigations. Where potential deficiencies are discovered or enhancements are identified, banks should proactively document the remediation and testing.

Prepare for DOJ contact. Prosecutors and investigators may seek search warrants or approach bank employees to discuss PPP lending issues. Banks should have established protocols regarding various contingencies and should train executives and employees on how to react and respond in the event of DOJ contact. They should consider, in advance, whether to secure individual counsel for potential targets, and what information to share with that counsel.

Consider cooperation. If a lender discovers illegal conduct by its employees, it will have to decide whether to self-report to the DOJ and seek cooperation credit, which could result in a declination. The determination will turn on multiple factors, including the nature of the misconduct and the seniority of those involved, the pervasiveness of the misconduct and the effectiveness and or avoidance of controls, and the amount of loss.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andy Wise is a member in Miller & Chevalier’s litigation department and practice lead for white collar defense, representing multinational companies, financial institutions, and their executives and directors.

Rich Gallena is counsel in Miller & Chevalier’s litigation department and a former federal prosecutor who conducts internal investigations on behalf of clients and advises companies on complex regulatory issues.

Jeff Lehtman is a member in Miller & Chevalier’s litigation department with extensive experience representing financial institutions, technology companies, and international development banks and their leaders.