DOJ Targets PPP Fraud and Abuse
Trends in White Collar Enforcement
Under President Biden and Attorney General Merrick Garland, the U.S. Department of Justice (DOJ) is expected to focus more intently on white collar enforcement than it did under the Trump administration. Fraud and abuse related to the Paycheck Protection Program (PPP) have already received considerable attention from authorities and this is almost certain to continue and accelerate in the months ahead. Both institutions and individuals have already been targeted for enforcement actions and everyone who has been involved in a PPP loan application should be cognizant of emerging enforcement trends.
The Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted on March 29, 2020 in order to provide emergency aid to those injured by the COVID-19 pandemic. A principal component of the CARES Act was the PPP, which authorized hundreds of billions of dollars of potentially forgivable loans to small businesses for paycheck protection and other expenses. Pursuant to the CARES Act, the U.S. Small Business Association (SBA) was charged with administering the PPP in order to quickly provide financial relief to small businesses hit hard by the pandemic. Given the amount of money in play and the urgency with which the PPP was administered, it is unsurprising that mistakes, fraud, and abuse have occurred. Nor is it surprising that the DOJ has gone on the offensive in this arena. A number of lessons and predications can be gleaned from what we have seen thus far.
First, the general categories of PPP-related problems are reasonably clear: disqualified businesses receiving PPP funds; errors in loan calculations that caused borrowers to obtain more money than they were entitled to; borrowers creating phony businesses in order to obtain, or attempt to obtain, loans; and the use PPP funds for unauthorized expenses. Undoubtedly, there will be many variations on these themes as more cases are brought.
Although DOJ has numerous criminal laws at its disposal to prosecute fraudulent activity, in the PPP context DOJ has also demonstrated its willingness to employ civil enforcement mechanisms, including both the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Both of these laws are powerful tools in the government’s arsenal and raise the specter of very significant financial liability. The FCA allows the government to recover up to three times the amount of the false claims as well as a penalty of between $5,500 and $11,000 per false claim. Because the FCA can be enforced by individuals through qui tam lawsuits, the business community can expect a significant uptick in the number of whistleblower lawsuits from employees and former employees who claim to possess evidence of PPP-related misconduct.
Although it receives somewhat less attention than the FCA, the FIRREA is an equally powerful law for PPP enforcement. It allows DOJ to sue for civil monetary penalties against those who violate certain specified criminal offenses that affect financial institutions. Among the criminal laws that are actionable pursuant to the FIRREA in civil court are bank, mail, and wire fraud, as well as false statements within federal jurisdictions. Accordingly, institutions that have made incorrect statements in connection with their PPP loan application could find themselves on the receiving end of an FIRREA investigation. One important advantage to DOJ of pursuing an FIRREA enforcement action, as opposed to a criminal prosecution, is that DOJ needs only prove its case by a preponderance of the evidence, as opposed to a far more stringent beyond-a-reasonable-doubt standard that applies in a criminal case. For any business that harbors worries about any aspect of its PPP application, this should be cause for concern.
In January of 2021, DOJ announced its first civil settlement of FCA and FIRREA violations with a PPP borrower. The borrower in that case, a California retailer, Slidebelts, Inc., and its CEO, agreed to pay $100,000 in damages and penalties to resolve FCA and FIRREA claims with the U.S. Attorney’s Office for the Eastern District of California. According to the settlement, Slidebelts and its CEO admitted that the company made false statements to federally insured banks in order to influence those institutions to approve, and the SBA to guarantee, a PPP loan for $350,000. Specifically, in its loan applications, Slidebelts falsely stated that it was not in Chapter 11 bankruptcy proceedings. Had the lender and the SBA known the truth—that Slidebelts was in bankruptcy—the PPP loan would not have been approved and guaranteed.
The Slidebelts settlement makes clear that DOJ will take vigorous enforcement action even for a relatively modest loan. Notably, Slidebelts disclosed its inaccurate statement to the lender after having received the loan and ultimately returned the funds in response to government demands. This may partially account for why DOJ was willing to settle the case for only $100,000. Yet it also demonstrates that self-disclosure of a false statement is not a guaranteed protection against enforcement and penalty.
Given the potency of DOJ’s civil enforcement statutes, the significant risk of large penalties, and the government’s appetite for pursuing these investigations, any business that has concerns about the propriety of its PPP application, or is worried about a whistleblower complaint, should seek legal counsel. A robust internal investigation and proactive strategic approach could avert a more significant problem down the road.