In a time when more than $650 billion in stimulus funds are being pumped through the Small Business Administration's (SBA) Paycheck Protection Program (PPP), the potential for bad actors to create havoc for business owners reliant upon these mostly forgivable loans is almost guaranteed.
After the SBA ostensibly announced the exhaustion of the initial $349 billion in PPP funds, Congress appropriated another $310 billion to the program. In an effort to assist small businesses, the PPP funds are intended to be forgivable if expended within 8 weeks if certain conditions are met, such as using at least 75% of the funds for payroll expenses.
Businesses scurried to apply for the available funds, and, with very little opportunity to work through any operational issues associated with the PPP, lenders processed those loan applications. With the haste in which the program went live, many borrowers undoubtedly submitted applications without a full understanding of the restrictions and obligations put on them by the program. Regardless, the legal implications are real, and the investigations are beginning.
The Justice Department recently made clear its intent to police the federal aid being pushed out during the pandemic. Such policing inevitably will include investigations scrutinizing businesses' applications for PPP funds as well as their use of disbursed funds. Authorities seem particularly interested in certain information contained in the applications themselves, such as the veracity of a business's number of employees, payroll costs, and the nature of the borrower's business.
In fact, early last week federal authorities in the District of Rhode Island charged two businessmen, David Staveley and David Butziger, with falsifying applications for more than $500,000 in loans for businesses the government contends have no employees. Authorities believe Staveley and Butziger, through email, developed a scheme to submit fraudulent loan applications supplemented with fraudulent supporting documentation. These individuals were charged with conspiracy, bank fraud, and aggravated identity theft, which, statutorily, carries a period of incarceration upon conviction.
Borrowers are understandably confused by the restrictions and obligations contained in the PPP. Many outlets have already criticized the nature in which the program was rolled out. One only needs to the check the FAQs regarding the PPP loans on the Treasury's website to realize the guidance therein evolves regularly. After the program went live, the government created a so-called "safe harbor" under which a borrower may return funds obtained through incorrect certifications; that "safe harbor" period has now been extended to May 14, 2020. However, nothing in that "safe harbor" currently precludes the government from investigating and prosecuting a borrower for financial crimes. Thus, what on its face appears to grant amnesty, may turn out to be a conduit for an admission of guilt to a federal crime.
Now, more than ever, businesses of all sizes must consider what to do in the event of a government investigation. Such investigations can begin with a knock on the door by federal agents in windbreakers or with a simple grand jury subpoena. Companies need to identify that they are under investigation before it is too late. Identifying an internal (and potentially external) point-of-contact to handle the investigation and to ensure the maintaining of scrupulous records becomes of paramount importance. Additionally, having access to attorneys experienced in governmental investigations will ensure the highest level of protection if, and when, a company is forced to defend against such an investigation. By all indications, the Justice Department intends to examine closely applications related to the PPP, as well as other COVID-19 related scams. Businesses should begin preparing internal processes now for how to handle any such investigation as well as identifying outside counsel that can guide the business on best practices in the event of such an investigation.
Originally published May 13, 2020.
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