Navigating PPP Loan Forgiveness Risks: Part 1 — Borrowers
This is Part 1 of an article series. Part 2 is available here.
Over the past several months, the U.S. Department of Justice has brought charges against more than 50 individuals over various Paycheck Protection Program fraud schemes. Likewise, the U.S. Small Business Administration has said repeatedly — and said so again at the beginning of October — that it plans to review all loans of more than $2 million and that these reviews will focus on borrowers' good faith.
Against that backdrop, many borrowers are in the process of preparing, certifying and submitting their PPP loan forgiveness applications. To avoid costly investigations and allegations of misconduct, borrowers need to consider the statements they make to the SBA carefully as they calculate, document, certify and submit their applications.
In this two-part article, we discuss potential pitfalls and provide recommendations for avoiding potential criminal ramifications for borrowers, lenders and third parties as they navigate issues related to the forgiveness of PPP loans.
This first installment analyzes potential DOJ investigations and prosecutions related to forgiveness applications from the viewpoint of PPP borrowers, and the second installment will be from the perspective of lenders and third parties.
PPP Loans Facing Scrutiny
On Aug. 10, borrowers who received loans issued under the PPP were able to begin submitting applications to the SBA seeking full or partial forgiveness of those loans. Borrowers need to remain vigilant to protect against fraud and misuse of the funds.
In June, the U.S. Senate confirmed the appointment of an Office of the Special Inspector General for Pandemic Recovery, which has authority to conduct audits and investigations of PPP loans. Moreover, the DOJ and SBA have reportedly earmarked significant resources to investigate and bring criminal prosecutions for PPP loan fraud.
In particular, in March, Attorney General William Barr directed the 94 U.S. attorneys' offices around the country to prioritize the investigation and prosecution of coronavirus fraud schemes, and days later, Deputy Attorney General Jeffrey Rosen issued an internal memorandum directing each U.S. attorney's office to appoint a coronavirus fraud coordinator to serve as the legal counsel for the district on matters relating to the coronavirus.
As of September, federal prosecutors have brought criminal charges across the country against more than 50 people alleging more than $175 million in PPP fraud schemes.
Borrowers Must Remain Vigilant
In general, fraud is hard to prove: Prosecutors need to establish an ongoing scheme to defraud and need to show that a defendant exhibited a criminal intent to defraud. To be sure, statements by insiders at businesses, email chains and other records can help the government prove that a fraud was committed.
Nonetheless, when an executive whose company received PPP funds makes up the existence of employees working for the business, or shows up to work driving a new sports car, or is caught at strip clubs, the criminal indictment virtually writes itself.
Frequently, though, borrowers who did not set out to commit a crime find themselves sitting across from FBI agents. Often, borrowers who ultimately commit fraud start with good intentions and clear business purposes.
Then, something happens.
The business or a key executive suddenly stumbles — a key business milestone is missed. Optimistic sales projections do not pan out, but operating expenses keep rising. Perhaps the funds are not used to buy sports cars or party at strip clubs, but they are used in ways not authorized by the PPP in an effort to cover up the problems and keep the business operating. Those cases are more difficult for the government to prove.
Borrowers need to be aware that the PPP loan forgiveness application was drafted in a way to simplify for the government the investigation and prosecution of the misuse of PPP funds.
The application contains a page of certifications that an executive or owner of the borrower — typically the business' CEO, chief financial officer or comptroller — must attest are all true before the government will forgive the loan. In one certification, the certifying individual is attesting that the information in the application, including the other certifications, is true and correct.
The individual also attests to knowing that making any false statement on the application form is a criminal offense punishable by a term in federal prison. Tie that certification together with the very first certification, which requires the borrower's representative to attest that the PPP funds distributed to the business were used in accordance with the requirements of the program.
The borrower's representative is certifying that the funds were used as required by the program, that this statement is true, and that the representative knows that if the funds were used for any other purpose than what was permitted under the program, he could be prosecuted for lying and, if convicted, sent to prison.
All that is left for the government to prove is that the funds were used in some unauthorized way — not even some overtly illegal way — and that the certifying representative knew or should have known that fact.
Even more, another certification asks the borrower's representative to acknowledge that if the funds were used for some unauthorized purpose, the government could pursue criminal fraud charges against the borrower.
Some anti-fraud statutes require the government to prove that the fraudster knew that his conduct was against the law or at least wrong. This element is called willfulness and typically is very difficult for the government to prove. By signing the second certification, the borrower's representative is establishing the willfulness element for the government, making a criminal fraud prosecution that much easier.
Considerations for Borrowers to Avoid Serious Problems
With these points in mind, borrowers and their certifying representatives ought to consider the following when seeking forgiveness of PPP loans.
Think before you sign.
Above all else, borrower representatives need to understand how all of the borrowed PPP funds were used before submitting any application for forgiveness.
If the borrower used a portion of funds in some unauthorized way, that mistake often can be remedied. But knowing about the issue and then sweeping it under the rug by certifying a forgiveness application creates more problems — problems that are significantly more difficult to correct after the fact.
Go back to the original PPP loan application.
A lot has happened since the start of the PPP, and it may be that borrowers have forgotten some of the details they provided regarding PPP eligibility, such as business size and the necessity for the PPP loan. What was said initially cannot be changed, of course, but a review of the application may identify areas that may need explanation and context.
Do not rush.
Although loan forgiveness applications can be filed now, the deadline for filing an application is much longer. Loan forgiveness applications must be filed within 10 months of the end of the period covered by the loan. The exact deadline will vary from business to business based on factors, such as whether the business chose an eight-week or 24-week period.
Although some businesses may want to wrap things up and put the PPP behind them, there is no need to rush. The PPP and guidance about the PPP have evolved over time and will probably continue to do so. Waiting may allow a business to have more information about the loan forgiveness process.
Keep in close touch with your lender.
The PPP is new for everyone, and at the time of this article, many lenders are not even accepting loan forgiveness applications. Lenders still need to develop procedures for processing and evaluating loan forgiveness applications, and while all lenders will need to meet standards set by the SBA, different lenders likely will handle applications differently.
Make sure that you are meeting your lender's specific requirements; any deviation could lead to a suggestion of willful concealment or dishonesty on your part. On the other hand, carefully documenting communications with your lender and following their requirements can be a powerful defense in a government investigation.
Document everything and keep your documents together.
Government investigations are built through witness recollections and documents. Many times — fairly or not — the absence of documents supporting a witness's recollection will lead prosecutors to believe that the witness is lying or covering something up.
You need to be able to document your positions and you do not want to be in a position of trying to collect and reassemble documents many months after an event.
Limit statements to law enforcement.
If a law enforcement agent approaches you — particularly if you are approached at 6 a.m. at your home — do not try to talk your way out of the situation. At that moment, the government agent probably knows more than you do about the matter and almost certainly knows more than you might think the agent knows.
You are never required to speak with a law enforcement officer in a setting like that, and you're entitled to have an attorney with you if you do choose to speak.
Consider corporate liability.
The PPP forgiveness application requires certifications by people, not businesses, and the government can prosecute those people for lying on the applications. But the government is not limited to prosecuting people. The government also can prosecute corporate entities and other business for the crimes of their officers, directors and employees, subject to certain prudential considerations.
As deadlines approach for borrowers to submit their PPP forgiveness applications, they should carefully consider potential issues before they sign their name to a certification or talk to law enforcement in order to avoid potentially triggering fraud investigations, or worse yet, criminal liability.
“Navigating PPP Loan Forgiveness Risks: Part 1 — Borrowers,” by Paul H. Tzur, William E. Lawler III, Martin Teckler, and Grant E. Buerstetta was published in Law360 on November 9, 2020.
 Statement of William B. Shear, COVID-19 Loans Lack Controls and Are Susceptible to Fraud, Testimony Before the Subcommittee on Investigations, Oversight, and Regulations, Committee on Small Business, House of Representatives available at www.gao.gov/assets/710/709912.pdf (Oct. 1, 2020).
 Meet the Inspector General, Special Inspector General for Pandemic Recovery, available at www.sigpr.gov/about-sigpr/meet-inspector-general.
 Remarks by Acting Assistant Attorney General Brian Rabbitt, PPP Criminal Fraud Enforcement Action Press Conference, available at www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-rabbitt-delivers-remarks-ppp-criminal-fraud (Sept. 10, 2020).
 News Release, San Diego Woman Created Fake "Employees" to Swindle CARES Act Funds; Pleads Guilty to Federal Fraud Charges, available at www.justice.gov/usao-sdca/pr/san-diego-woman-created-fake-employees-swindle-cares-act-funds-pleads-guilty-federal (Sept. 2, 2020).
 News Release, Florida Man who Used COVID-Relief Funds to Purchase Lamborghini Sports Car Charged in Miami Federal Court, available at www.justice.gov/opa/pr/florida-man-who-used-covid-relief-funds-purchase-lamborghini-sports-car-charged-miami-federal (July 27, 2020).
 News Release, Texas Entrepreneur Charged with Spending COVID Relief Funds on Improper Expenses Including Lamborghini and Strip Club, available at www.justice.gov/opa/pr/texas-entrepreneur-charged-spending-covid-relief-funds-improper-expenses-including (Aug. 4, 2020).
 Principles of Federal Prosecution of Business Organizations, Justice Manual §9-28.000, available at www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations.