COVID-19 Response: CARES Act Borrowers Beware - Prosecutions Are Beginning
Washington, D.C. (May 6, 2020) - As expected, investigations into potential fraud and abuse are already underway in the award of massive stimulus funds under the CARES Act Paycheck Protection Program (PPP) (see our previous alert from April 23, 2020, “CARES Act Borrowers Beware: The Past is Prologue”). On May 5, the Justice Department announced its first prosecution, charging two Rhode Island businessmen with fraudulently seeking more than a half million dollars in forgivable PPP loans, based on an application claiming dozens of employees at four business entities, which in fact had no employees.
The Treasury Department has announced it will audit all PPP loans in excess of $2 million, as well as “other loans as appropriate,” if the borrower applies for forgiveness, and recent Small Business Administration (SBA) guidance has put borrowers specifically on notice that their certifications of need and eligibility for PPP loans will be subject to close scrutiny and potential investigation. Borrowers should pay careful attention to evolving government guidance and the reality of investigations, as they consider whether to return PPP funds in advance of the newly extended May 14, 2020 safe harbor for those having second thoughts about potential vulnerability, and in any event seek to mitigate legal risk. The SBA has promised to provide additional guidance on how it will review the certification prior to the May 14 deadline.
Focal Point of Risk: PPP Certifications
The PPP loan application, while short, contains several certification requirements. Most are general, but four stand out as requiring more serious attention than borrowers may have devoted in the rush to apply for loans on the “first come, first served” basis that characterized the PPP funding rollout.
- The first set of certifications, at the top of page two of the application form, requires the borrower to confirm it is eligible to receive a loan, meets the applicable size requirements, and will use the proceeds of the loan for purposes consistent with the PPP program.
- In the second set of certifications, the applicant must certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This confirmation of “economic need” is something less than the normal test under the SBA’s normal “7(a)” small business loan program, but as the evolving SBA Frequently Asked Questions (FAQ) document makes clear (see the latest version), it requires more than a nominal degree of diligence.
- A third certification commits the borrower to use the funds to retain workers and maintain payroll, and make rent/mortgage interest and utility payments. To reinforce the point that misuse of the funds is actionable, the certification specifies “I understand that if the funds are knowingly used for unauthorized purposes, the federal government may hold me legally liable, such as for charges of fraud.”
- The seventh certification affirms that all information in the application is true and accurate and requires acknowledgment that “making a false statement to obtain a guaranteed loan from the SBA is punishable under the law,” reminding applicants that federal criminal laws include imprisonment of up to 30 years and fines of up to $1 million.
Increasing Awareness of Risks
In recent weeks, the SBA’s FAQs have been expanding on a near-daily basis, and several have narrowed the scope of PPP loan eligibility, seemingly in response to news reports that many large companies that do not appear to be in dire economic straits have received sizable PPP loans. The most significant response to this adverse publicity is Question 31, published on April 23, which clarifies the “economic need” certification. In the SBA’s view, this requirement means the following: “Borrowers must make this certification in good faith, taking into account 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.”
Going further, FAQ 31 questions the PPP eligibility of publicly traded companies: “For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” Five days later, in FAQ 37, the SBA expanded this warning to private companies, saying “businesses owned by private companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan” should consider themselves within the scope of the government’s views as expressed in FAQ 31.
Recognizing and Mitigating Risk
The federal government’s tools to prosecute false statements and fraud are formidable, including the False Claims Act and criminal false statement statutes. The CARES Act established a Special Inspector General for Pandemic Recovery (SIGPAN), modeled closely on a previous office that is still prosecuting fraud and abuse claims under the federal stimulus program that addressed the 2008 financial crisis. The Treasury Department’s warning that PPP loans in excess of $2 million and others will be audited puts borrowers on notice that they may need to look carefully at their loan application certifications and consult with counsel as needed, including whether to return problematic loans before the May 14 safe harbor deadline and more generally how to mitigate their risks of investigation and prosecution.
Lewis Brisbois’ COVID-19 Response Team is available to assist with any questions you may have regarding the CARES Act and other coronavirus-related legislation and regulations. Visit our COVID-19 Response Resource Center for more alerts on the many areas of law impacted by the pandemic.
Thomas A. Brooks, Partner
Katherine I. Funk, Partner
Jane C. Luxton, Partner