What Might Trigger an Investigation into my Paycheck Protection Loan?

By Andrea L. Moseley

Small businesses have been struggling for survival throughout the pandemic. As if that was not hard enough, small business executives have had to hang on with both hands to avoid being thrown off the pendulating landscape of pandemic relief loan rules and guidance from the Small Business Association (SBA).

After businesses finally make it through the dizzying application processes, they must face the possibility that the government could investigate the propriety of loan applications or requests for forgiveness based on certain proverbial red flags. Read on for clues about what might trigger the government to take a closer look at you and your business.

In order to advise small businesses and individuals about the risks inherent in their loan applications and possible forgiveness requests, I have been monitoring federal investigation and prosecution trends around the nation. From the vantage point of a white collar defense attorney, I want to understand what is motivating audits and investigations into Paycheck Protection Program (PPP) applications and use that information to anticipate the government’s overarching stratagem for identifying irregularities and/or fraud. We need to know how the government gets the ball rolling in order to understand the playing field.

recent news-THE latest STIMULUS BILL

On Monday, December 21, 2020, the House and Senate passed the second largest stimulus bill in United States history (only second to the CARES Act), which provides $892 billion in pandemic relief, including $284,450,000,000 in funding for additional loans under the Paycheck Protection Program. In short, this 5593 page piece of legislation opens up new loan funding under new qualification rules and modifies some PPP rules for existing loans.

In addition, the new bill provides that borrowers that already have a PPP loan may also be eligible for a second loan, if the first loan has already been used and the borrower meets some additional new requirements. Obviously, the renewed opportunity for businesses to apply for millions of dollars in pandemic relief funds means that government has many more applications to scrutinize and investigate. They will need all hands on deck to keep up with this volume. Here, I discuss three sources of information the government will use to make their search for irregularities and/or fraud much easier.

what do we know for certain at this point about investigations that led to prosecutions?

One of the first and most readily observable patterns is that the Department of Justice (DoJ) has taken a hard swing at PPP fraud involving the overtly fraudulent conduct, the low-hanging fruit. Think, false identities, fake companies with no employees, spending pandemic relief money on personal luxury items, etc. The fact that DoJ is aiming first at this straightforward “classic” fraud comes as no surprise. These cases are live and flourishing.

The million dollar question is when (and I believe it is when, not if) DoJ will turn to the prosecution of more gray areas of alleged fraud and/or false statements made in the application process. In looking for signs of what is to come, remember that the seven PPP certifications are the driving force behind False Claims Act (FCA) allegations. These certifications must be made in good faith and are subject to criminal and civil penalties under the FCA, among other statutes, including false statements to the government and/or false statements to the FCA.

In situations where overt fraud is not the issue, what might trigger an investigation into your business?

First trigger clue: information you provide on the new sba loan necessity forms

Back in October, the SBA sought approval from the Office of Management and Budget (OMB) for the collection of information from the applying public using 11 new forms. Many of these are not new forms but two forms (SBA Form 3509; for-profit business and 3510 for nonprofits) related to approximately 42,000 loans in excess of $2 million, are of particular interest. These controversial forms are referred to as the “loan necessity” questionnaires. The SBA has been clear that loans in excess of $2 million dollars are in the top priority pile for audits. Information provided in a loan necessity questionnaire will enable auditors to evaluate the most ambiguous of the seven certifications for a PPP loan.

spoiler: i will analyze the loan necessity questionnaire in an upcoming post, stay tuned.

Remember from my blog post, that the most ambiguous and confusing certification is what it means for a borrower to certify that “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” This certification is so murky that auditors would need to assimilate a wealth of information to even begin to question the truth of this certification. Likewise, the ambiguous nature of this certification lends itself to mistakes by businesses and an increased chance of unintentional user error.

The consequences of filling out these new forms could be serious in that the SBA could use it to declare a borrower ineligible. Even worse, this information could be used to refer the borrowers to the DoJ for potential criminal liability. In addition, these forms could be used to retroactively scrutinize borrowers’ original certifications resulting in a claw back or in worst cases a referral to DoJ.

second trigger clue: your bank

Banks from which you received your PPP loans have the best view of what you are doing day to day in your business and consequently, with your PPP loan money. Your interactions with your bank are watched closely and if you set off suspicions, the bank will file a suspicious activity report. My speculation is that with large banks these are done routinely and more frequently than with small hometown banks. Banks are in a prime position to assist investigators at the grass roots level and to monitor the conduct of your small business.

For example, if you are a small business in receipt of a PPP loan and are doing your personal banking at the same place, they are able to monitor how much if any of that money is going into a personal account and how that money is being spent. If your business accounts are mixed with your personal accounts, even if no illegal conduct is occurring, you may send a red flag and draw an investigation.

third trigger clue: employees and/or information holders

Call them Whistleblowers, unhappy employees, disgruntled vendors or former customers, these are the information holders who could call the SBA hotline and report allegedly suspicious activity. An investigation can be triggered by a simple phone call to the SBA. The SBA, in its semi annual report to Congress covering activity between April 1, 2020 and September 30, 2012, reported a staggering increase in hotline calls. During this reporting period, the hotline received 104,913 complaints. That is 100 times more than the total of 742 complaints received in all of 2019 . Of course, not all of these complaints are valid. It is commonly understood that some embittered information holders may stir the pot and bring the watchful eye of the government to your business. For tips on how to avoid these types of pitfalls, see my post here.

As always, don’t get behind the ball. When in doubt, take the time to get qualified, professional advice and avoid unnecessary scrutiny.

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