By Sarah Wirskye, JD, MBA, CPA
Civil and Criminal Prosecutions
There is no shortage of criminal statutes under which these cases can be prosecuted. These include those cited in the PPP applications for false statements (18 U.S.C. §§645, 1001 and 1014) and others including wire fraud, mail fraud, submitting false claims to the government, conspiracy and many more. So far, indicted cases have egregious facts and often include allegations of conduct such as manufacturing bank statements and tax documents for non-existent businesses and employees.
However, borrowers who do not engage in such blatant fraud may also find themselves the focus of a government investigation. Most of the PPP fraud cases will likely be brought under the false claims act (“FCA,” 31 U.S.C. §§3729-3733). The FCA imposes liability on a defendant who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” for federal funds, conspires to do the same and other conduct related to submitting a false claim to the government. 31 U.S.C. § 3729(a). Notably, the intent standard for a FCA case is “knowledge,” which is lower than most criminal statutes, and therefore, easier for the government to prove.
Steps to Take Now for Protection in a Future Government Investigation
The basis for criminal and civil prosecutions will be the certifications in the PPP applications. Therefore, it is critical that a borrower ensure that the certifications are, and continue to be, accurate, and if not, proactively address potential issues. Right now, while most initial applications have been submitted, most borrowers have an opportunity to assess their situation before submitting the PPP loan forgiveness application, or an initial application under the December 2020 legislation.
- Audit financial representations. The financial calculations can be tricky, particularly for those without an accounting background. There are several certifications related to financial data and accurately calculating the loan and forgiveness amounts. Borrowers should review the representations and calculations and verify that they are (1) accurate, (2) substantiated with backup documentation, and (3) consistent with other documents such as tax filings.
- Audit use of PPP proceeds and implement accounting controls. There are limited, authorized uses for PPP funds, which include payroll and some business mortgage interest, rent, lease and utility payments. The borrower is certifying that the funds were properly used in the forgiveness application. If it has not already been done, a borrower should implement accounting controls to ensure proper use.
- Verify the accuracy of other certifications. Some of the representations are straight forward, however the representation regarding necessity is ripe for FCA prosecutions. This certification states that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The government may take a different view of “necessity,” particularly for businesses where the principals are highly compensated, or if a change in circumstances results in a more profitable 2020 than anticipated at the time the application was submitted.
- Document everything. All representations and certification should have contemporaneous backup documentation. This could include bank statements, tax returns, calculations and possibly employee affidavits. The statute of limitations for most federal criminal white collar criminal statutes is 5 years and can be up to 10 years under the FCA. It is much more difficult to document a defense years later after memories fade and employees have left.
- Proactively address misconduct. If there are issues, the borrower should retain counsel to assess the best option based upon the degree of misconduct, individuals involved, amount of money and other factors. Options may include repaying the funds to the entity, repaying some or all of the loan proceeds to the government, utilizing Small Business Administration disclosure procedures, self-disclosing to the DOJ and other measures. Counsel should also address how to best deal with bad actors, if any, to minimize the chances of a former, disgruntled employee filing a FCA action.
- Retain counsel. Ideally, a borrower should retain counsel to guide them through the above steps because counsel will know what the government will be examining in an investigation. Also, counsel’s internal investigation is likely protected under the attorney client privilege. If there is a government investigation, it is imperative that the borrower engage counsel. Self-help at that point could result in additional criminal charges, for obstruction of justice and in other areas, even if there is no pending criminal investigation.
The best protection against PPP fraud investigations is to ensure that the certifications are initially, and continue to be, accurate, and that one has the ability to prove it if needed. Obtaining funds from the government is a highly regulated area and well-intentioned individuals can find themselves in a federal investigation if they are not careful. The government will undoubtedly continue to examine potential PPP fraud using the same techniques used in white collar criminal and civil fraud cases. There is simply too much money and potential for abuse for the DOJ to not do so.