Borrowers, Lenders: Expect Stricter Enforcement of PPP Fraud
More than 11.4 million forgivable loans worth nearly $800 billion have been allowed 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 December 15, 2021, the Fraud Section of the Department of Justice has for follow-up over 150 defendants in more than 95 criminal cases and seized over $75 million in cash proceeds allegedly derived from fraudulently obtained PPP funds, as well as real estate and luxury items purchased with those proceeds.
We expect the government to continue to prioritize PPP fraud and see three key enforcement areas to watch in 2022. Some best practices can help prepare for potential government audits or investigations into allegations of fraud. PPP fraud.
GM Actions Against Borrowers
In 2021, the DOJ filed numerous criminal PPP fraud cases against borrowers based on alleged egregious behaviors, such as falsifying employee and payroll information and using loan proceeds for personal expenses. The DOJ also filed five PPP civil suits 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 bankrupt debtor.
In May 2021, the DOJ established the Covid-19 Fraud Task Force to leverage its resources in partnership with agencies across government and bolster 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 Enforcement Coordinator further strengthen interagency efforts to uncover and prosecute pandemic-related fraud.
Although we will likely see more criminal cases involving alleged flagrant conduct, we expect that the DOJ’s increasing use of data analysis and collaboration with other government agencies will lead to criminal actions. more complex, including involving multiple companies and applications and where companies provide different information on loan applications than investors or banks.
Helped by the growing number of qui tam whistleblowers reporting conduct to the DOJ in hopes of receiving bounties under the FCA, we also expect the DOJ to pursue more False Claims Act and other civil actions, including for conduct that may fall under more gray and/or technical areas.
Actions against lenders
While the PPP rules has allowed lenders to rely on borrowers’ good faith certifications of PPP eligibility and compliance, recent government investigations indicate lenders may still be on the enforcement radar.
For example, in May 2021, the Civil Division of the DOJ would have 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 letters sent to four fintech companies that had been linked to a high number of fraudulent loan lawsuits and whose due diligence and fraud detection practices had been publicly questioned. On November 23, 2021, the subcommittee expanded its investigation and announced additional investigations into two fintech startups that processed a third of all PPP loans in 2021, based on potential links to a disproportionate number of PPP loans. to fraudulent or ineligible borrowers. .
Special IG Authority for Pandemic Recovery
The CARES Act created the Special Inspector General for Pandemic Recovery (SIGPR) to conduct, oversee, and oversee audits and investigations of certain pandemic relief funds. In June 2020 Brian D. Miller was confirmed as a SIGPR. In his first quarterly report in Congress, Miller said it was unclear whether his jurisdiction extended to PPP, and he urged Congress to clarify. In July 2021, following the Office of General Counsel’s rejection of Miller’s jurisdiction over the PPP, Miller proposed that Congress grant him jurisdiction “to enhance the pandemic monitoring.”
Whether Congress gives Miller jurisdiction in 2022 should be watched closely, as we can expect even more criminal and civil enforcement of PPPs as a result.
By analogy, according to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) September 30, 2021, Semi-Annual Report to Congress, SIGTARP has resulted in 463 lawsuits, 313 criminal convictions and more than $11 billion in recoveries of misappropriated stimulus funds. 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 emphasis on enforcing PPPs, companies should consider taking steps now to better defend themselves against any government audits or investigations.
Borrowers should consider reviewing their loan disbursement and cancellation requests to ensure that (i) appropriate loan amounts have been requested, received and cancelled, (ii) loan proceeds have been used in accordance PPP rules, and (iii) all supporting documentation, including how loan proceeds were spent, is in order.
Lenders should consider (i) assessing the technical administration of their loans to identify vulnerabilities that may be investigated, (ii) auditing underlying application data, including entity and employee information, to identify any loans made to potentially ineligible borrowers, and (iii) assess their compliance programs and anti-fraud controls to ensure that they are sufficiently robust.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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George Stboulidis is the managing partner of BakerHostetler’s New York office 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, Securities Investigations and Enforcement and Litigation team. He represents companies and individuals in complex civil, regulatory and criminal investigations and proceedings relating to law enforcement, as well as corporate compliance matters.
Christina Gotis is a partner 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 a partner in BakerHostetler’s New York office and a member of the firm’s White Collar, Investigations and Securities Enforcement and Litigation team.