May 5, 2021
Joseph H. Langerak, IV
Member, Stoll Keenon Ogden PLLC
Why the Government is Investigating Loans
According to the Select Subcommittee on the Coronavirus pandemic, nearly $84 billion in coronavirus crisis loans might be fraudulent. The Memorandum to the Select Subcommittee from the Congressional Staff blames poor implementation of basic oversight controls at the outset of the programs and failure to recognize risk of fraud. At the same time, the new administration appears ready to crack down on inappropriately obtained loans. In fact, the recent American Rescue Plan invests $142 million for watchdogs to hunt for fraud in the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program.
Throughout the initial implementation of the small business lending programs, businesses and banks attempted to adapt to the new guidelines, all the while trying to determine a borrower’s eligibility for the applicable program. Due to the unprecedented and unfolding pandemic, businesses and banks found it difficult to forecast borrowers’ financial conditions in determining eligibility. The result was a rush to ensure borrower financial stability in loan programs that, to a certain extent, were made all the more unclear as a result of the the Small Business Administration’s (SBA) shifting and imprecise guidance. It remains unclear whether the informal guidance issued by the SBA, in the form of FAQs, were, or are, even permissible to rely upon as law and compliance guideposts. Therefore, many businesses that acted in good faith may still be subject to government investigations. The U.S. Department of Justice (DOJ) has already started investigations and prosecutions involving public funds obtained through PPP and EIDL.
A recent staff memo from the Select Subcommittee noted the following key findings regarding the investigations:
- $626 million: Funds seized or forfeited as a result of civil and criminal investigations involving the EIDL and PPP programs by the DOJ, less than 1% of the nearly $84 billion in potential fraud identified in these programs.
- 1.34 million: Referrals for suspected fraud in EIDL loans and advances from SBA to the agency’s Inspector General.
- 148,525: Hotline complaints received by the SBA Office of Inspector General (OIG) relating to PPP or EIDL, a 19,500% increase over prior years.
- 212: Open SBA OIG investigations regarding EIDL or PPP as of March 18, 2021.
- 32: Law enforcement and other federal and state agencies investigating small business fraud in pandemic relief programs.
Agencies Conducting the Investigations and What They’re Looking For
Federal investigations into the propriety of PPP loans may originate from a myriad of sources. The SBA’s Office of the Inspector General may seek information relating from borrowers and lenders regarding PPP loans. So too may the United States Department of Justice or United States Attorneys Offices. These federal agencies may act through investigative agencies like the Federal Bureau of Investigation, United States Secret Service, Internal Revenue Service, and others. Federal investigations may result in the issuance of grand jury subpoenas for records or testimony to borrowers and lenders alike.
The federal government may investigate whether the borrower properly spent the PPP funds borrowed, as well as whether the borrower was even eligible for the PPP loan in the first place. For example, investigations into suspect PPP loans often involve allegations that small businesses used the PPP funds for impermissible purposes such as vacations, luxury cars, jewelry, or personal expenses. Additionally, investigations continue into less apparent or egregious circumstances such as (i) exaggeration of payroll costs, (ii) use of funds in other impermissible business expenses, or (iii) knowingly exaggerating poor market or performance conditions to render the borrower eligible for a loan it should not have received.
In all likelihood, the potential violation of certifications made in connection with obtaining or seeking forgiveness of the loans is what will provide the most exposure to the borrowers. The certifications may include the following representations:
- Proceeds will be used only for business-related purposes;
- The borrowers’ economic uncertainty makes the loan necessary;
- The funds will be used to retain and pay workers or make tenancy (mortgage, lease, or utility) payments;
- The loan actually paid for eligible costs and include payroll costs equal of at least 60% of the amount sought to be forgiven amount; and
- The forgiveness reflects any reductions in work force.
What to do if You Receive a Request for Information from the Government
The question borrowers and banks need to prepare for is: What do I do if I receive a subpoena or request for information from the government concerning a PPP loan.
The answer is: first, contact your counsel immediately. Responding to a subpoena or investigative request for information is a task that should be taken with the utmost seriousness. Involving a trusted advisor to guide you through the process is imperative. You should not do anything before you talk with counsel because doing so may create new evidence that could be used against you, regardless of actual liability for any wrongdoing.
You should develop and set in motion a strategy with your counsel to respond to the government, which may include the following:
- Issuing a litigation hold within your organization requiring your team members to preserve all documents, data, and information that may relate to the specific PPP or EIDL loan, including not altering, modifying, or deleting data;
- Informing your financial partners and accountants;
- Starting to critically review the documents and information submitted to your bank, if you are a borrower, to ensure they were accurate.
- Evaluating the business and economic needs that existed for the funds and management decisions to obtain the funds for this particular loan; and
- If the borrower has not kept the loan funds in a segregated account, documenting the use of the funds.
- If you are a bank, ensuring that you followed all of the document retention requirements for issuing PPP loans and that your compliance with the Bank Secrecy Act is up to date.
Again, the foregoing options should only be set in motion with the advice of counsel.
Other entities that do not have potential liability but were involved in the PPP or EIDL loan process may also be subpoenaed in these investigations. This can certainly include banks and accounting firms. This is especially true in the case of grand jury subpoenas. Grand jury subpoenas are often served on companies that have no liability, but have information deemed relevant by the government for an investigation. In these scenarios, your counsel can often establish a dialogue with the government authority conducting the investigation and discuss the scope of the subpoena and any extensions required in responding.
Finally, it is expected that a wave of whistleblower actions will be brought in connection with PPP and EIDL loans, including claims under the False Claims Act. These cases are also known as qui tam cases. Consequently, companies should consider whether a government investigation reflects allegations on the part of their own employees regarding potential wrongdoing.
There are strict employment and related federal laws on how you are allowed to deal with such scenarios, and they are complex. The last thing a company needs is an obstruction charge to compound a potential existing federal charge. As a result, many companies will conduct an internal investigation to evaluate the situation and exposure.
Contact an Attorney, Implement a Plan, and Don’t Panic
In closing, if you find yourself involved in an investigation into a PPP loan, you can reduce your risk by immediately contacting counsel and actively implementing a plan on how to respond. Receiving a subpoena or request for information from the government is indeed a frightening prospect, but don’t panic. By implementing the measures described above, you will be placing yourself in a much better position than most.
Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.
If you would like to discuss the Paycheck Protection Program, the opportunities therein for your business, or other business-assistance programs available due to the COVID-19 pandemic, please contact SKO’s SBA Loan Team led by Jamie Brodsky (502-568-5473) and Brad Keeton (502-568-5439).
Our firm’s Business Litigation practice provides strategic advice to businesses and professionals faced with disputes, lawsuits, arbitration and other conflicts. We help manage disputes on the front end with guidance on sound business practices. For conflicts that could not be resolved early, we help clients through even the most complex, high-stakes disputes with a careful, focused and strategic approach.
Please also be sure to consult the Stoll Keenon Ogden Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state, and local governments in response to the Coronavirus pandemic.