Protect Yourself from PPP Enforcement

May 2, 2020

The U.S. Small Business Administration (SBA) has issued a supplemental interim final rule regarding the Paycheck Protection Program (PPP) to reinforce its supplemental guidance issued on April 23, 2020. In these, SBA warned unqualified borrowers who do not "need" the loan that they could be subject to legal action.

Key Takeaways

  • PPP loans are going to be audited and borrowers may face enforcement scrutiny. Main areas of risk include: 1) necessity for the loan, 2) size eligibility, 3) amount of loan requested and 4) use of loan proceeds.

  • SBA wants borrowers to seriously consider their certification that the loan was "necessary" to support ongoing operations. Companies with alternative access to capital need to justify their determination that the loan was in fact necessary.

  • Borrowers can return funds, which in retrospect may not have been "needed" per the PPP rules, by May 7, 2020, without penalty.

  • Past and future borrowers must also consider the impending wave of potential criminal investigations and civil proceedings.

Does the business need the loan? 

Loans under the PPP program are intended to keep struggling businesses afloat during the COVID‑19 crisis. The PPP application requires a certification that the "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant."

This does not mean that the business had to demonstrate likely foreclosure to qualify. Nor does the business need to demonstrate that it had no other means of obtaining credit. Treasury expressly stated that it was waiving "the usual SBA requirement that [the applicant] try to obtain some or all of the loan funds from other sources."

Although applicants were not required to seek credit elsewhere or otherwise show likely closure before applying, SBA and enforcement agencies will be scrutinizing the perceived need for the funding. Post-issuance reviews seem likely to focus on whether the applicant had sufficient cash reserves, had access to capital from related sources, issued projections showing limited impact during the COVID-19 crisis, or was otherwise in a strong financial position prior to applying for the loan or loan forgiveness.

A recent public outcry has the SBA questioning the loans going to large, public companies.

In its supplemental FAQs issued on April 23, SBA urged borrowers to "review carefully the required certification" regarding necessity of the loan. SBA's interim final rule gave borrowers a "limited safe harbor" window of opportunity, until May 7, 2020, to return funds that in retrospect they should not have received. SBA indicated it would deem the original certification as made in good faith – in other words, ignore the mistaken certification and forego civil, or even criminal, enforcement down the road – if the funds are returned within that time frame.

Documentation Recommendations

If, after a reconsidering the need for the funds, borrowers elect to retain the funds, they should take steps now to document their need. This documentation of the company's justification for seeking a PPP loan – if current, accurate and complete – could provide helpful support for the company's good faith basis for making the "necessity" certification, if this is questioned in the future.

  1. Collect and maintain records of the company's employee count and hour requirements, pre-COVID-19 operations and subsequent decline. 
  1. Document the cost of and access to capital, cash on hand, budget forecasts and other metrics of financial performance will help to mitigate the inevitable enforcement scrutiny down the road. 
  1. Prepare an internal memorandum summarizing the nature of the current economic uncertainty – both current and foreseeable – that makes the PPP loan request necessary to support ongoing operations.
    1. The analysis should consider the consistency of current and future revenue from business activity, net assets of the business and the availability of cash reserves, access to alternative sources of financing and capital markets, and how detrimental it would be to the company to access these alternative resources.

Criminal and Civil Liability

The PPP application identifies several criminal statutes that are violated by the provision of false information: 18 U.S.C. § 1001 (false statements to federal officials), 15 U.S.C. § 645 (misrepresentation of size status) and 18 U.S.C. § 1014 (false statements to a lending institution). This highlights some, but not all, of the statutes that could be used in a criminal action. Expect to also see cases brought under the more commonly used provisions: 18 U.S.C. § 287 (criminal false claims), 18 U.S.C. § 1344 (bank fraud), 18 U.S.C. § 1341 (mail fraud), 18 U.S.C. § 1343 (wire fraud) and 18 U.S.C. § 371 (criminal conspiracy). These provisions regularly appear in cases involving fraud under other SBA loan programs. In instances where a loan was obtained through bribes or kickbacks, expect to see cases brought under 18 U.S.C. § 215 (bank bribery).

Enforcement will also occur through the civil False Claims Act, 31 U.S.C. § 3729 et seq. (FCA). Violation of the FCA exposes offenders to treble damages and per-claim penalties in excess of $21,000. The FCA does not require specific intent to defraud the government. Liability can attach for recklessly disregarding the rules. It is for this reason that the statute will be deployed widely during the fund and chase enforcement regime.

Return What Is Not Yours to Keep and Maintain Records of Unwavering Detail

Aside from cases of true criminal intent, most of the scrutiny on the PPP loans will be viewed through the lens of the FCA. It will be applied towards companies that did not need the loan financially and failed to return the funds. It may also apply to companies that realized they were not in fact eligible size-wise or used the funds for unauthorized purposes without returning the money.

Borrowers will need to document the purposes for which the loan was spent and provide a detailed accounting in order to obtain loan forgiveness. Our PPP Tracking and Forgiveness Spreadsheet is a wonderful tool for this endeavor.

Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in this document may change daily. Please feel free to reach out to us if you have any questions.  

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