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 Avoid PPP Loan Forgiveness Fraud 

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Michael Santos

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 HOW TO AVOID PPP LOAN FORGIVENESS FRAUD (5 TIPS)

Government criminal prosecutions of PPP loan fraud will continue with investigations into PPP loan forgiveness applications.

INTRODUCTION

Anyone who received a Paycheck Protection Program (PPP) loan and is a candidate for PPP loan forgiveness will be interested to read on. 

Federal law enforcement continues to flag significant fraudulent and potentially fraudulent activity in original PPP loan applications. 

According to a new study from August 2021, as much as 15% of all PPP loans, about $76 billion in total, contain at least one indication of possible fraud. Now that the process is moving to PPP loan forgiveness, law enforcement’s increased scrutiny of those requests should not surprise anyone. 

Expert observers believe the government will uncover many new cases of PPP fraud during the loan forgiveness review process. Those cases will include previously overlooked instances of fraud (and mistakes) in the original loan application, as well as fraud in the application for forgiveness. The stakes for those involved could not be higher. 

Indeed, people who the government accused and convicted of PPP loan fraud are going to prison as we speak. 

Click here for an article regarding sentencing in PPP loan fraud cases: 

PPP Fraud Sentencing Outcomes.

Below, we share 5 tips to avoid fraud charges when applying for PPP loan forgiveness. Our tips take into account all that we know from the hundreds of PPP loan fraud cases the DOJ has brought to date. Also, we share 3 criminal fraud allegations the Department of Justice (DOJ) will likely make in new PPP loan forgiveness fraud cases.

DISCUSSION

Until now, the focus of PPP loan fraud investigations has been on the initial loan applications. The government has investigated the statements and representations people made to obtain the PPP loans up-front. We now see a shift towards more investigations of loan forgiveness applications, in which PPP loan borrowers must make representations under oath about how they used the PPP loan monies. (Lamborghini, anyone?) 

Of course, it would be pretty brave for someone who used PPP loan money to buy exotic cars to now apply for PPP loan forgiveness. But, stranger things have happened in PPP loan fraud cases already. In one case, a criminal defendant attempted to fake his own death as part of a scheme to get away with millions in PPP loan fraud. 

In any event, anyone seeking PPP loan forgiveness should anticipate a much more careful examination of their loan forgiveness application than was the case for the original loan application. 

Indeed, to handle all of the instances of fraud and potential fraud already flagged for investigation, the DOJ continues to add people to its enforcement team. Since May 2021, the DOJ has had an official COVID-19 Fraud Enforcement Task Force to coordinate efforts. And the Fraud Section of the DOJ has recently posted job listings for at least one additional senior trial attorney to handle PPP loan fraud and other COVID-19 fraud cases.

PPP LOAN FORGIVENESS DATA (as of 9/5/2021)

According to data from the Small Business Administration (SBA), as of 9/5/21, 88% of PPP loans issued in 2020 have submitted forgiveness applications. The SBA has forgiven $456 billion of loans from the 2020 program.  

However, only 31% of loans from the 2021 PPP loan program have requested forgiveness as of 9/5/2021. The SBA has forgiven $53.7 billion of the approximately $270 billion in loans issued in 2021. Assuming most borrowers would like forgiveness, the SBA has a long way to go.

*Pro-Tip: Eligible borrowers can seek loan forgiveness directly from the SBA through a streamlined online portal; this process includes borrowers that received PPP loans of $150,000 or less. 

WHAT IS PPP LOAN FORGIVENESS?

The SBA has the task of processing loan forgiveness applications for existing PPP borrowers.  

To qualify for complete loan forgiveness, the borrower has to certify under oath that during the 8- to 24-week period after they received their PPP loan: 

  • the borrower maintained employee and compensation levels; 
  • the borrower spent loan proceeds on payroll costs and other eligible expenses; and 
  • the borrower spent at least 60% of the proceeds on payroll costs. 

At a minimum, a PPP loan forgiveness application will include the following types of records to substantiate the request:

  • verification of employee status for each full-time employee on the payroll;
  • salary or wage rates for each full-time employee;
  • mortgage documents;
  • real-estate lease agreements;
  • evidence of rent paid;
  • applicable utility bills.

All indications are that the government is on the hunt for borrowers submitting falsified documents. That’s because we saw high levels of falsified documentation submitted during the original PPP loan process.

CAN A BORROWER PAY BACK A PPP LOAN?

Sure. PPP loan borrowers are not compelled to apply for loan forgiveness, and some of those who apply may qualify only for partial forgiveness. 

PPP loans that do not qualify for loan forgiveness will have a 1% fixed annual interest rate over a term of 2 or 5 years. Borrowers that choose not to apply for PPP loan forgiveness begin repaying the loan in monthly installments about 16 months after receiving the money. 

5 TIPS TO AVOID PPP LOAN FORGIVENESS FRAUD

The 5 tips discussed below are a reminder that federal government aid is always subject to criminal penalties for perjury, record-keeping requirements, and many federal laws. Participating in government programs under the type of scrutiny as COVID-19 relief programs demands the utmost care and the help of trusted advisors and legal counsel to avoid severe consequences. 

  1. The Request Is Made Under Oath

Asking for PPP loan forgiveness is akin to saying to the federal government under oath that the business met all the required conditions to get loan forgiveness and has solid evidence to back it up. Or, if documentation is missing, the borrower has a truthful explanation that may pass muster.

Everything submitted for the original PPP loan applications was submitted under penalty of perjury. We have seen hundreds of charges lodged against borrowers for fraud, perjury, and making false statements. Borrowers have pleaded guilty and are receiving prison sentences.

Click here for a video for people awaiting a sentencing hearing:
16 Ways To Mitigate Your Prison Sentence.

PPP loan forgiveness is yet another opportunity for borrowers to make additional statements under oath. It is imperative for everyone involved to consider carefully every part of the forgiveness submission. Every statement, every receipt, every piece of information should be accurate. Any evidence that is missing or questionable should prompt the borrower to seek counsel from trusted advisors before supplying it under oath to the federal government.

If not handled carefully, the PPP loan forgiveness process can result in mistakes, omissions, or outright falsehoods, giving prosecutors ammunition to investigate further. Even benign or honest mistakes can be used out of context down the road in a criminal case.

Borrowers would be wise to remember that in the government’s eyes, any mistake or half-truth is something they can frame as a separate crime, or a separate act of fraud, perjury, and false statements.

Click here for a video on dealing with an encounter with law enforcement in a white-collar investigation: Don’t Do This if The FBI Shows Up.

  1. The Request Is Made Under Oath

Asking for PPP loan forgiveness is akin to saying to the federal government under oath that the business met all the required conditions to get loan forgiveness and has solid evidence to back it up. Or, if documentation is missing, the borrower has a truthful explanation that may pass muster.

Everything submitted for the original PPP loan applications was submitted under penalty of perjury. We have seen hundreds of charges lodged against borrowers for fraud, perjury, and making false statements. Borrowers have pleaded guilty and are receiving prison sentences.

Click here for a video for people awaiting a sentencing hearing: 

16 Ways To Mitigate Your  Prison Sentence.

PPP loan forgiveness is yet another opportunity for borrowers to make additional statements under oath. It is imperative for everyone involved to consider carefully every part of the forgiveness submission. Every statement, every receipt, every piece of information should be accurate. Any evidence that is missing or questionable should prompt the borrower to seek counsel from trusted advisors before supplying it under oath to the federal government.

If not handled carefully, the PPP loan forgiveness process can result in mistakes, omissions, or outright falsehoods, giving prosecutors ammunition to investigate further. Even benign or honest mistakes can be used out of context down the road in a criminal case.

Borrowers would be wise to remember that in the government’s eyes, any mistake or half-truth is something they can frame as a separate crime, or a separate act of fraud, perjury, and false statements.

Click here for a video on dealing with an encounter with law enforcement in a white-collar investigation: Don’t Do This if The FBI Shows Up.

  1. There Is No Such Thing As Too Careful

Because the PPP loan forgiveness application is made under intense scrutiny and under oath, borrowers cannot be too careful when gathering data, reading through their certifications, or consulting trusted advisors. It is good practice to have a second set of eyes look over the relevant materials before they go to the government, especially for larger loans. The goal is to make sure everything looks above board, and any discrepancies are explained.

Given the high stakes, including loss of liberty, borrowers should strive for 100% accurate documentation. Are the payroll costs accurate? Are the non-payroll costs accurate? Are all the submitted expenses authorized and clearly explained? 

Borrowers got away with lies and discrepancies during the rollout of the PPP loans. At the time, the government and the lenders felt pressure to get the money out fast to small businesses trying to preserve jobs. This time around will be different and borrowers should not expect to get away with sloppiness, omissions, mistakes or outright fraud this time around. Plus, when the government is looking for criminal (and civil) enforcement opportunities, this is not a time to play fast and loose with the data.

Borrowers need to take the time necessary to review all certification materials carefully. Whether the original PPP loan application was error-free or presents a few issues that now require clarification, borrowers need to spend the time and resources needed to submit the most accurate PPP loan forgiveness application. This is a serious endeavor with significant ramifications for those involved. The business principals should review all the paperwork, together with their team and legal counsel if necessary. Business leaders who will sign the certifications on behalf of the business ought to review everything with a fine-tooth comb, and should not allow anyone on the team to consider taking shortcuts or altering business records for this submission. 

  1. Mistakes or Omissions From Original PPP Loan May Surface

The frenzy surrounding the original PPP loan program rollout was bound to create many opportunities for omissions, mistakes, and outright fraud. The most egregious examples have been in the news media, and investigators look for more. Government investigations and audits are still ongoing. The PPP loan forgiveness process is highly likely to reveal more omissions or mistakes from the original loan process. 

In fact, PPP loan borrowers may themselves uncover problems with their initial loan when putting together the forgiveness materials and certifications. Therefore, borrowers must be cautious. They must review all PPP loan forgiveness documentation to identify potential false or inaccurate information. 

If the borrower realizes the company or lender overlooked significant issues, part of the strategy could be to pay back the PPP loan and forgo forgiveness altogether so as not to draw additional attention. 

If borrowers identify materially false information, they could consider whether the best bet is to report the errors rather than wait for the SBA or DOJ to approach them. In all cases, companies should consider engaging counsel before dealing with the SBA or DOJ, especially on self-reporting matters.

  1. Keep All Records Related To The PPP Loan & Forgiveness Applications

Consult with legal counsel before getting rid of any relevant payroll records or other essential PPP records. This is prudent even after the PPP loan forgiveness paperwork is submitted and approved. For one, there may be record retention obligations to comply with, or the business may receive a subpoena or an inquiry from the government later on. Audits of PPP loans and PPP loan forgiveness will be ongoing for some time.  

  1. Know About The False Claims Act

One statute that we expect the DOJ will make more use of in PPP loan fraud cases is the False Claims Act (FCA). Basically, the FCA can cover anybody who allegedly made a false statement to secure money from the federal government. Many states have their own versions of the FCA.

In 18 US Code § 287, the FCA establishes criminal liability against any person, organization, or contractor when they knowingly submit or cause, a false or fraudulent claim when the intent is to receive payment or approval.

And the DOJ has already shown that it will use the FCA as a tool to protect PPP funds. In August 2021, the owner of an aviation company in South Florida agreed to settle with the federal government for $287,000 to resolve claims that he lied on the company’s loan application and misappropriated PPP loan proceeds.

3 ALLEGATIONS OF PPP LOAN FORGIVENESS FRAUD

It would not be surprising to see the following 3 core allegations in future PPP loan forgiveness fraud cases brought by the DOJ.

First, the government will allege that borrowers lied when they certified compliance with PPP loan forgiveness requirements. Errors about payroll data or headcount should especially be avoided, as they can form the basis for false statement claims. Because borrowers certify their loan forgiveness applications under the penalty of perjury, any false information risks a criminal investigation and prosecution.

Second, the SBA’s review of the loan forgiveness materials may uncover problems with the initial loan. If not then, there is also the risk of other subsequent audits. PPP loan borrowers should ensure they keep meticulous records. While lenders and the government overlooked errors in loan applications during the early days of the PPP, they are bound to catch some of those errors now during the loan forgiveness review. Borrowers need to be ready for this eventuality.

Third, borrowers themselves may uncover problems with their initial loan applications when putting together the loan forgiveness materials. This situation raises important issues for careful consideration, such as: 

  • whether to pay back the PPP loan and forgo a forgiveness application altogether;
  • when and how to pay back the PPP loan; and
  • whether to self-report any errors discovered voluntarily, rather than wait for the government to come knocking. 

These are complex considerations that require proper vetting with trusted advisors and legal counsel. Self-reporting, for example, can work as a mitigation tool, but it is not a guarantee that the government will not bring charges. 

*Pro-Tip: Prison Professors, an Earning Freedom company, regularly helps clients locate and vet experienced criminal counsel to handle criminal investigations and prosecutions. We work alongside legal counsel to craft mitigation strategies that help clients obtain better outcomes.

Click here for an informative video about hiring legal counsel:

Watch This Before Hiring A Lawyer

CONCLUSION

The government’s investigation of PPP loan fraud (and other COVID-19-related fraud) is far from over, and the PPP loan forgiveness process is the latest front. Assuming that most borrowers intend to seek loan forgiveness, the entire process will take years to play out. 

Thus, people who applied and borrowed PPP loan funds need to remain vigilant and be proactive. Consider the 5 tips detailed in this post, as well as the 3 criminal fraud allegations prosecutors would likely pursue. Remember that even after a PPP loan gets approved for forgiveness, a subsequent audit could reveal evidence of fraud that the government can choose to pursue. 

For some perspective, consider that fraud matters related to government aid for businesses affected by 9/11 lasted about 10 years. After “TARP” (Troubled Assets Relief Program) and the financial crisis of 2008, cases related to mishandling of the program also lasted over 10 years. The federal government is investing a lot of resources to root out many forms of pandemic relief fraud, to recover monies, and set an example for the future.

Prison Professors, an Earning Freedom company, works alongside (not in place of) civil and criminal defense counsel to help clients proactively navigate through investigations and prosecutions. Our team also helps clients prepare mitigation and compliance strategies.

If you have any questions or are uncertain about any of the issues discussed in this post, schedule a call with our risk mitigation team to receive additional guidance.

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