Companies and people suspected of cheating the Paycheck Protection Program are being pursued by federal authorities (PPP). Do you think you’re in danger? The following are some PPP loan fraud warning signs that may deserve further inquiry.
Heath Hyde is a widely acknowledged expert in the defense of PPP loan fraud. CBS, NBC, Fox, Marketwatch, USA Today, The Washington Post, Digital Journal, and Cumulus Media have all featured him and his PPP loan fraud expertise.
The Federal Paycheck Protection Program (PPP) is governed by a slew of regulations and limitations. The US Small Business Administration (SBA) granted a grace period during which enterprises could return fraudulently obtained PPP loans without penalty, recognizing the compliance hurdles faced by PPP loan applicants (and the little information initially made accessible to applicants). The SBA Office of Inspector General (SBA-OIG), the US Department of Justice (DOJ), and other government agencies are now aggressively targeting corporations accused of engaging in PPP loan fraud after the grace period expired.
Is your company at risk if it obtained a PPP loan? As a business owner, board member, or executive, are you personally at risk? These are important questions, and you should respond to them as soon as possible. When the SBA-OIG or the DOJ initiate an investigation, it’s critical to mount a strong and timely response. To that reason, all companies who obtained PPP loans would be wise to perform an internal PPP compliance inquiry as soon as possible. We at Oberheiden P.C. are actively representing corporations in PPP compliance audits and investigations during the coronavirus epidemic, as well as in PPP loan fraud audits and investigations.
Despite the fact that the Paycheck Protection Program (PPP) was officially inaugurated in March 2020 with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal authorities have already found multiple PPP loan fraud warning signs. As a result, during audits and investigations, they are searching for a variety of specific PPP loan fraud warning signs and corporations must look for the same warning signs while conducting internal PPP compliance investigations.
During your company’s internal PPP compliance investigation, look for these 10 PPP loan fraud warning signs:
10 PPP Loan Fraud Warning Signs
1. There is no documentation to back up the company’s claims in their PPP loan application.
During the PPP loan application procedure, companies must make a number of affirmative claims. Companies must, for example, represent the following under the program’s terms
• They’re requesting a PPP loan because “the current economic uncertainties necessitate the loan request to sustain the qualified recipient’s ongoing activities;” and,
• They employ fewer than 500 people, qualify as a “small business concern” under Section 3 of the Small Business Act, or meet one of the few other PPP eligibility requirements; and
• Their owners may be eligible for SBA initiatives like as the PPP (i.e. no owner of a 20 percent or greater interest has been convicted of or pleaded guilty to a federal felony within the past five years).
During a federal PPP loan fraud audit or inquiry, federal investigators will investigate not just to establish whether loan beneficiaries are eligible, but also to see if companies have paperwork to back up the claims they made in their PPP loan applications.
2. Submitting Multiple PPP Loan Applications to Different Lenders
Companies can only accept one PPP loan from one lender at a time under the CARES Act. Obtaining numerous PPP loans (or “stacking” PPP loans) is illegal, and organizations that applied with many lenders may be accused of attempting to stack PPP loans. Attempting to get more than one PPP loan, even if only one was obtained, might result in criminal prosecution. Individuals and businesses charged with attempt can face the same consequences as those charged with “successfully” completing a criminal conduct under 18 U.S.C. 1349. (i.e. bank fraud, making false statements to an FDIC-insured financial institution, or making false statements to the SBA).
3. No PPP Compliance Policies and Procedures Have Been Adopted
The CARES Act provides criteria for how corporations use and account for PPP loan monies in addition to its application procedures. Following that, enterprises should implement policies and procedures to assure continuous PPP compliance after receiving PPP loans (or, ideally, in anticipation of receiving a PPP loan). If a company does not have established policies and procedures for PPP compliance, it will be seen as a red flag for fraud in the case of an SBA audit, SBA-OIG, or DOJ inquiry.
4. No separate PPP loan account has been established.
Companies are only allowed to utilize the funds they receive for specified authorized objectives, which is an important feature of the PPP. Payment of salaries and related expenses, payment of insurance premiums, payment of rent and mortgage interest under pre-existing commitments, and payment of company utility bills are all examples of these functions. Companies should deposit their PPP loans into separate accounts in order to account for all disbursements, and they should not mix their PPP loan funds with any other company assets.
5. PPP Loan Expenditures with No Documentation (or Inadequate or Incomplete Documentation)
Companies should thoroughly document their expenditures when using PPP loan funds to show that they have only utilized their PPP loans for permitted reasons. In many circumstances, this will necessitate more than simply documenting the transaction. Inadequate documentation of PPP loan expenses, like compliance program documentation, will be considered as a red flag for fraud, putting corporations in a difficult position when defending against federal fraud allegations.
6. Personal Expenses Using PPP Loan Funds
Using loan funds for personal needs is clearly banned under the provisions of the PPP. The Department of Justice has already filed many federal lawsuits against people who are accused of using PPP loan monies for personal gain, and the defendants are facing large fines and years, if not decades, in federal jail. While blatant and obvious misappropriation of PPP loan funds represents a clear danger, expenditures that combine business and personal reasons (such as payments for travel, vehicles, and home office expenses) can also constitute a risk.
7. Documentation submitted in support of loan forgiveness certification that is insufficient or questionable.
Another important feature of the PPP is that loans made under it are forgiven if they are used exclusively for authorized purposes. Companies must produce proof when seeking forgiveness, and they must affirmatively attest the accuracy of this documentation as well as compliance. Another significant red flag for PPP loan fraud warning signs is insufficient or questionable documentation submitted in support of a request for PPP debt forgiveness, and organizations accused of filing fake forgiveness petitions might face a number of federal crimes.’
8. Atypical Business Activities, Newly-Formed Business Entities, and New Debt Obligations
Atypical company activity, such as incorporating new business companies and taking into new debt commitments, are other red indicators for PPP loan fraud warning signs. These types of activity will be viewed with suspicion by federal auditors and investigators as possible proof of an attempt to obtain a PPP loan unlawfully or to use PPP loan funds for unauthorized purposes.
Companies must ensure that all key internal workers are aware of the types of behaviors that can enhance the company’s risk of responsibility in the case of a PPP loan fraud audit or investigation, which is why extensive documentation is so important.
9. Reluctance or inability (or unwillingness) to produce PPP compliance documentation
Evasiveness and the inability (or unwillingness) to present PPP compliance documents is also a key red flag for fraud. This includes dubious behavior from any and all corporate individuals who are involved in responding to the government’s inquiry for federal authorities such as the SBA-OIG and the DOJ, and evasiveness from employees during internal PPP compliance investigations for corporations. This is predicated on the proverb that “where there’s smoke, there’s fire”–- if someone is concerned about what might be discovered, there’s typically a cause for it.
10. Other Substantiation, Documentation, and Compliance-Related Issues
Finally, in addition to the above-mentioned PPP loan fraud warning signs, there are a number of other difficulties that can alert federal authorities during audits and investigations. It is critical to rely on the advice and representation of skilled federal counsel to ensure that no one at your organization raises questions for federal authorities unnecessarily.
Our attorneys and former federal agents at Heath Hyde Law are well-versed in the federal auditing and investigating processes. We can utilize our experience to help you and your company (and you personally) decrease risk to the greatest extent feasible, and we invite you to contact us for a free and confidential evaluation of your legal needs.
Resources for PPPs:
Hire an experienced lawyer to represent you:
Find a lawyer to assist you with obtaining a loan:
On your own, how to apply for a loan:
What to do if the SBA denies your debt forgiveness: