More than 11.4 million forgivable loans worth nearly $800 billion were granted to small businesses impacted by the pandemic through the Paycheck Protection Program (PPP). Unfortunately, the PPP has also been subject to widespread abuse.
As of Dec. 15, 2021, the Department of Justice’s Fraud Section has prosecuted over 150 defendants in more than 95 criminal cases and has seized over $75 million in cash proceeds allegedly derived from fraudulently obtained PPP funds, as well as real estate properties and luxury items purchased with such proceeds.
We expect the government to continue prioritizing PPP fraud and see three key enforcement areas to watch in 2022. Some best practices can help prepare for any possible government audits or investigations into alleged PPP fraud.
DOJ Actions Against Borrowers
In 2021, the DOJ brought numerous criminal PPP fraud actions against borrowers based on alleged egregious conduct, such as falsifying employee and payroll information and using loan proceeds for personal expenses. The DOJ also brought five civil PPP actions under the False Claims Act (FCA), including for alleged false certifications regarding prior receipt of a PPP loan and misrepresentations about the company’s status as a debtor in bankruptcy.
In May 2021, the DOJ established the Covid-19 Fraud Enforcement Task Force to marshal its resources in partnership with agencies across government and enhance enforcement efforts against Covid-19-related fraud, a strong indication that DOJ enforcement is here to stay.
In December 2021, the Secret Service appointed a National Pandemic Fraud Recovery Coordinator to further bolster interagency efforts to uncover and prosecute pandemic-related fraud.
While we will likely see more criminal cases involving alleged egregious conduct, we expect that the DOJ’s increasing use of data analytics and collaboration with other government agencies will lead to more complex criminal actions, including involving multiple companies and applications and where companies provide different information on loan applications than to investors or banks.
Aided by the growing number of qui tam whistleblowers reporting conduct to the DOJ in the hope of receiving bounties under the FCA, we also expect the DOJ to bring more False Claims Act and other civil actions, including for conduct that may fall into grayer and/or technical areas.
Actions Against Lenders
While the PPP rules allowed lenders to rely on borrowers’ good faith certifications regarding PPP eligibility and compliance, recent government probes indicate that lenders may still be on the enforcement radar.
For example, in May 2021, the DOJ’s Civil Division reportedly launched an investigation into possible errors caused by fintech lenders’ use of high-speed software and automated lending platforms with few manual checks.
On May 28, 2021, the House Select Subcommittee on the Coronavirus Crisis sent letters to four fintech companies that had been linked to high numbers of fraudulent loan prosecutions and whose due diligence and fraud detection practices had been publicly called into question. On Nov. 23, 2021, the subcommittee expanded its investigation and announced additional probes into to two fintech start-ups that processed one-third of all PPP loans in 2021, based on potential links to disproportionate numbers of PPP loans to fraudulent or ineligible borrowers.
Authority of the Special IG for Pandemic Recovery
The CARES Act established the Special Inspector General for Pandemic Recovery (SIGPR) to conduct, supervise and oversee audits and investigations of certain pandemic relief funds. In June 2020, Brian D. Miller was confirmed as the SIGPR. In his first quarterly report to Congress, Miller stated that it was unclear whether his jurisdiction extended to the PPP, and he invited Congress to clarify. In July 2021, following the Office of Legal Counsel’s rejection of Miller’s jurisdiction over the PPP, Miller proposed that Congress grant him jurisdiction “to enhance pandemic oversight.”
It should be closely watched whether Congress gives Miller jurisdiction in 2022, as we can expect even more PPP criminal and civil enforcement as a result.
By analogy, according to the Office of Special Inspector General for the Troubled Asset Relief Program’s (SIGTARP) Sept. 30, 2021, Semiannual Report to Congress, the SIGTARP has yielded 463 prosecutions, 313 criminal convictions, and over $11 billion in recoveries of misappropriated stimulus funds. The SIGTARP is still active today, with 17 prosecutions, 16 convictions, and $222.6 million recovered in fiscal year 2021.
Best Practices for Borrowers and Lenders
Given the government’s focus on PPP enforcement, companies should consider taking steps now to best defend themselves against any government audit or investigation.
Borrowers should consider reviewing their loan origination and forgiveness applications to ensure that (i) proper loan amounts were applied for, received and forgiven, (ii) loan proceeds were used in accordance with the PPP rules, and (iii) all supporting documentation, including of how loan proceeds were spent, is in proper order.
Lenders should consider (i) assessing the technical administration of their loans to identify vulnerabilities that may subject them to investigation, (ii) auditing underlying application data, including entity and employee information, to identify any loans to potentially ineligible borrowers, and (iii) assessing their compliance programs and fraud controls to ensure they are sufficiently robust.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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George Stamboulidis is BakerHostetler’s New York office managing partner and co-leads the firm’s White Collar, Investigations and Securities Enforcement and Litigation team. He is a former federal prosecutor for the Eastern District of New York.
Patrick Campbell is a partner in BakerHostetler’s White Collar, Investigations and Securities Enforcement and Litigation team. He represents companies and individuals in complex civil, regulatory, and criminal law enforcement investigations and proceedings, as well as corporate compliance matters.
Christina Gotsis is an associate in BakerHostetler’s New York office and a member of the firm’s White Collar, Investigations and Securities Enforcement and Litigation team.
Lauren Lyster is an associate in BakerHostetler’s New York office and a member of the firm’s White Collar, Investigations and Securities Enforcement and Litigation team.