While the COVID-19 pandemic may feel like a distant memory for many, its effects continue to reverberate for others—particularly for businesses that obtained loans through the Paycheck Protection Program (PPP). Whether forgiven or not, these loans remain subject to scrutiny. The Small Business Administration (SBA) and the Department of Justice (DOJ) can pursue criminal or civil charges against individuals involved in PPP loan fraud for up to ten years after the offense. Borrowers should ensure they maintain all relevant documentation and engage legal counsel immediately upon receiving a subpoena or document request to mitigate risks.
1. Records Retention and Statute of Limitations
PPP forgiveness applications require borrowers to retain all documentation supporting their initial loan application, including certifications of the loan’s necessity and eligibility (such as gross receipt reduction certifications for Second Draw PPP Loans, if applicable). Borrowers were also required to keep records supporting their loan forgiveness applications and demonstrating compliance with PPP requirements for six years after the loan was forgiven or repaid in full. However, lenders are required to keep all data for up to 10 years, which is the full statue of limitations for any investigation or claw-back of PPP funds. Authorized SBA representatives, including the SBA Office of Inspector General (OIG), may request access to these files during this period. We anticipate that any final loan review decisions—such as those denying, revoking, or “clawing back” loan forgiveness—will be initiated within this six-year timeframe and can be appealed to OHA. Technically, however, as alluded to above, the SBA has given itself the ability to “undertake a review at any time in SBA’s discretion.” Relevant here, the SBA may bring any criminal charge or civil enforcement action alleging a borrower engaged in fraud with respect to a covered loan (First or Second Draw) must be filed no later than ten years after the offense was committed. Enforcement actions have not slowed, with multiple settlements coming over the last few months, including one dealing with the application of SBA’s affiliation principles.
2. General PPP First Draw Compliance
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- Eligibility Requirements: Businesses are generally eligible to apply for First Draw PPP Loans if (i) the business has 500 or fewer employees, (ii) the business meets the SBA employee-based or revenue-based size standard for the industry in which it operates (if applicable), or (iii) the business is a certain qualifying, tax-exempt nonprofit organization. Borrowers were required to certify they met the size eligibility requirements, taking into account the SBA’s affiliation rules.
- Maximum Loan Amount: In calculating the maximum loan amount a borrower could obtain, borrowers were required to (i) aggregate their payroll costs from the last twelve months for employees whose principal place of residence is the U.S., (ii) subtract any compensation paid to an employee in excess of an annual salary of $100,000, (iii) calculate average monthly payroll costs, (iv) multiply the average monthly payroll costs by 2.5, and (v) add the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020, less the amount of any ‘‘advance’’ under an EIDL COVID–19 loan.
- Payroll Costs: Payroll costs include compensation to employees in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums and retirement; payment of state and local taxes assessed on compensation of employees; and, for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.
- Forgiveness: Costs incurred or paid to employees during the chosen Covered Period (either the standard Covered Period or the Alternative Payroll Covered Period) are forgivable, with exceptions (e.g., compensation to owners of the company). Something that trips many up is that payroll costs up to the $100,000 annualized cap will be forgivable—amounts paid to employees over that cap are not. Non-payroll costs were also forgivable, but cannot exceed 25% of the total loan forgiveness amount.
- Borrower Certifications: All borrowers, whether they realized it or not, made several certifications in their loan applications, including that: (i) the loan amount for which forgiveness is sought “was used to pay costs that are eligible for forgiveness[,]” i.e., “payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments”; (ii) the proposed forgiveness amount “includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions”; (iii) at least 75% of the forgiveness amount requested was used to pay payroll; and (iv) the amount of forgiveness sought “does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner . . . .”
- Eligibility Requirements: Businesses are generally eligible to apply for First Draw PPP Loans if (i) the business has 500 or fewer employees, (ii) the business meets the SBA employee-based or revenue-based size standard for the industry in which it operates (if applicable), or (iii) the business is a certain qualifying, tax-exempt nonprofit organization. Borrowers were required to certify they met the size eligibility requirements, taking into account the SBA’s affiliation rules.
3. Subpoenas and Civil Investigative Demands (CIDs)
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- Civil and Criminal False Claims Act Liability (FCA): The FCA is the government’s primary vehicle for recovering federal funds obtained or retained by fraud. PPP loan forgiveness primarily implicates false claim and false statement liability. Under the civil FCA (31 U.S.C. § 3729), a violation occurs when any person knowingly or recklessly “presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the government or knowingly or recklessly “makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . .” In addition, liability exists where a person knowingly or recklessly “makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money . . . to the Government . . . .” Because PPP loans involve money received from—and ultimately not paid back to—the government, the statements made by a loan recipient to obtain forgiveness are critical to determining whether an FCA violation occurred. A violation of the FCA may result in triple damages, plus an additional statutory penalty per violation. Importantly, the FCA also includes a criminal component. Under certain circumstances, the same false statements made to the government to obtain PPP loan forgiveness could be used by the government to seek a criminal conviction.
- Subpoenas and CIDs: Three key steps should be taken after receiving a request for PPP-related documents from the DOJ, SBA, or SBA OIG.
- Civil and Criminal False Claims Act Liability (FCA): The FCA is the government’s primary vehicle for recovering federal funds obtained or retained by fraud. PPP loan forgiveness primarily implicates false claim and false statement liability. Under the civil FCA (31 U.S.C. § 3729), a violation occurs when any person knowingly or recklessly “presents, or causes to be presented, a false or fraudulent claim for payment or approval” to the government or knowingly or recklessly “makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim . . . .” In addition, liability exists where a person knowingly or recklessly “makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money . . . to the Government . . . .” Because PPP loans involve money received from—and ultimately not paid back to—the government, the statements made by a loan recipient to obtain forgiveness are critical to determining whether an FCA violation occurred. A violation of the FCA may result in triple damages, plus an additional statutory penalty per violation. Importantly, the FCA also includes a criminal component. Under certain circumstances, the same false statements made to the government to obtain PPP loan forgiveness could be used by the government to seek a criminal conviction.
First, create and maintain a paper trail, as all borrowers were required to do for six years from the date of the loan being forgiven or repaid in full. Incomplete or inaccurate record keeping and insufficient record retention are among the greatest pitfalls a company can face when responding to a subpoena or document request. Even if a company has done everything right, it may nevertheless face substantial risk without written proof, and a perceived lack of documentary evidence can lead to service of additional subpoenas, wide-ranging interviews or depositions, or worse, in-person investigations by governmental authorities.
Second, lawyer up. Responding to a subpoena can be a complicated endeavor, implicating complex and varied areas of the law and carrying with it damaging ramifications from both public relations and financial perspectives. As soon as a subpoena or CID is received or anticipated, a company should seek out skilled and experienced counsel to represent it.
And third, remedy the problem areas. Although it is easy to treat subpoenas and investigations as “out of sight, out of mind,” once the response to the subpoena has been delivered to the requesting party, the task is not complete. If done properly, the company’s compilation and production of documents should, and likely will, identify some of the company’s areas of vulnerability. Counsel should offer practical solutions to cure these problem areas, and the company should take action on those recommendations, implementing new or updating old policies and procedures to satisfy the changing political and legal landscape.
4. Conclusion
DOJ is ramping up its efforts to bring actions against borrowers who fraudulently applied for and received forgiveness on their PPP loans. At first, they went after the low-hanging fruit like those borrowers who used the money to buy expensive cars and go on elaborate vacations. Now, the DOJ is interested in the questions of fact and law that go to the heart of the SBA’s affiliation rules. This will be no small task given the constantly changing guidance, rules, and laws during the time of loan applications and loan forgiveness applications. Bottom line: upon receiving a subpoena or CID related to your PPP loan, or any government contract related matter, PilieroMazza recommends engaging with counsel as early as possible in the process.
If you have concerns about your PPP loan and potential FCA implications, or any other PPP loan matter, please contact Cy Alba, Daniel Figuenick, or another member of PilieroMazza’s False Claims Act or Audits & Investigations teams. Remember to listen to our podcast, Ex Rel. Radio, for the latest updates and insights on the FCA.
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Looking for practical insights on gaining a competitive advantage through a deeper understanding of the government’s compliance requirements? Check out PilieroMazza’s podcasts “GovCon Live!” and “Clocking in with PilieroMazza.”
