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Paycheck Protection Program (PPP): Civil Audits and Criminal Investigations

Millions of businesses, corporations, and sole proprietorships have obtained Paycheck Protection Program (PPP) loans since the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act last year.


Billions of dollars have been distributed in first-draw loans, and many businesses are now receiving second-draw loans as well.


There are requirements, however, both for an initial first-draw PPP loan and to qualify for a second-draw loan. Those requirements can be confusing – if you certify that your business qualifies and the SBA later discovers that your business does not qualify, you could be subject to civil or even criminal penalties.


What are some of the requirements, and how can you avoid a civil audit or criminal investigation based on the certifications that you make when applying for a Paycheck Protection Program loan?



Paycheck Protection Program (PPP) Loan Certifications


When your business applies for a Paycheck Protection Program loan, the SBA relies on good-faith certifications that you make during the application process, including your representations to the SBA that:

  • “Current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant;”

  • The funds will be used for acceptable purposes including payroll, mortgage, lease payments, or utility payments for the business;

  • All the information contained in the application and supporting documents is true and accurate;

  • The applicant is eligible to receive the loan under the SBA’s rules;

  • The applicant is 1) an independent contractor, 2) self-employed, 3) sole proprietor, or 4) has no more than 500 employees;

  • The applicant is not engaged in any illegal activities; and

  • The applicant has not received any other SBA loans that covered payroll costs or other allowable expenditures under the PPP loan.

After receiving the loan, businesses can then apply for loan forgiveness using an application that will ask for additional certifications.



PPP Loan Forgiveness Certifications


The loan forgiveness application will also include certain certifications that must be made by the borrower, including that:

  • More than 25% of the loan amount was not used for nonpayroll costs;

  • The funds were not knowingly used for unauthorized purposes;

  • Documentation submitted to the lender will match documentation submitted to the IRS and state agencies;

  • The borrower will submit additional documentation to the SBA upon request; and

  • The borrower has provided accurate and complete information in good faith.

If incorrect information was submitted as part of the loan application or the loan forgiveness process, 1) you may be required to pay back the loan, and 2) you may be subject to civil or criminal penalties.



Paycheck Protection Program (PPP) Civil Audits and Criminal Investigations


Although the SBA’s Paycheck Protection Program is primarily relying on lenders and your certifications when approving the loans, you may be subject to a civil audit before your loan is forgiven. If the SBA discovers that material misrepresentations were made during the application or forgiveness process, you may also be subject to a criminal investigation.

This highlights the need for legal counsel to advise your business as to whether you are in compliance with the SBA rules for PPP loan forgiveness, to assist with civil audits conducted by the SBA, and to help your business avoid civil or criminal penalties whenever possible.



PPP Civil Audits


When will the SBA conduct a civil audit?


Any borrower could be audited, but you are at higher risk if your loan was greater than $2 million, if you are a public company, or if there is inaccurate information in your loan application, forgiveness application, or the supporting documentation.


The Paycheck Protection Program FAQs on the SBA website provides some guidance for borrowers who are wondering what kind of review the SBA will conduct when they apply for loan forgiveness.


For example, question number 46 asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

The SBA’s response is that there will be a “safe harbor” for borrowers who received less than $2 million, and they “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”


If you have received a loan in an amount less than $2 million, you are less likely to be audited by the SBA. On the other hand, this underscores the importance of compliance and careful review of your loan applications and supporting documentation for companies who received a loan greater than $2 million – you are more likely to be audited before you can receive loan forgiveness.



What if I am Audited and the SBA Decides I Did Not Qualify for the PPP loan?


The SBA will most likely require repayment of the loan and may or may not pursue additional administrative or criminal penalties.


In the SBA’s response to question 46 on their FAQs, they state that if there was not “an adequate basis for the required certification concerning the necessity of the loan,” the SBA will seek repayment and the borrower will not be eligible for loan forgiveness.

If the borrower then repays the loan, the SBA says that they “will not pursue administrative enforcement or referrals to other agencies” – will should avoid the possibility of civil or criminal penalties.



PPP Criminal Investigations


Although it does not appear that the SBA will make criminal referrals or seek administrative penalties due to an inadequate “basis for the required certification concerning the necessity of the loan” if the loan is repaid, there are circumstances when a loan application or forgiveness application could result in criminal investigation.


There are many circumstances that could result in a criminal investigation, but most of the cases so far involve companies or individuals that the government believes knowingly engaged in fraud. For example, knowingly providing false information on the loan application or forgiveness application such as:

  • Submitting an application for a non-existent business,

  • Submitting an application for a business other than your own,

  • Misrepresentations in the supporting documentation,

  • Exaggerating payroll costs,

  • Claiming expenses that were never paid, or

  • Use of the loan proceeds for unauthorized expenditures (then certifying that the expenditures were authorized).

The Department of Justice has brought many cases already – in one example, six individuals in South Carolina and Georgia were charged with conspiracy, wire fraud, and making false statements for allegedly fraudulently obtaining around $3 million in PPP loans for five businesses.


In another example, an engineer in Texas was charged in federal court with wire fraud, bank fraud, false statements to a financial institution, and false statements to the SBA after claiming that his company had 250 employees (he had no employees).



How to Avoid Civil Audits or Criminal Investigation

The bottom line is, if you borrowed more than $2 million, you are likely to receive a civil audit. The key is to ensure that your business’s loan and forgiveness applications contain truthful information and that your supporting documentation is complete and accurate, to: 1) get loan forgiveness and avoid repayment, 2) avoid the potential for administrative actions and civil penalties, and 3) to avoid triggering a criminal investigation based on what may appear to be a fraudulent claim.

Please feel free to contact one of our Murray Lobb attorneys. Once we create a formal working relationship, our firm can provide you with the critical legal advice you require for all your business, corporate, or estate planning needs. We are also available to draft the various contracts and other documents you need while conducting your daily business activities.