Michael J. Wynne: Anticipated Acceleration of the PPP Loan Fraud Crackdown

In an effort to stem the economic impact of COVID-19, the Paycheck Protection Program (PPP), provided $525 billion in loans, distributed to approximately 5.2 million companies between April 3, and August 8, 2020. PPP, which was part of the CARES Act, was intended to provide small businesses a modicum of relief and to incentivize them to maintain payroll to limit the extent and impact of unemployment. Now, many recipients of PPP loans are finding themselves under scrutiny. Opportunities for fraud are an expected outgrowth of the swift design and implementation of the PPP program, including the rapidly put together approval process. Undoubtedly, many exploited the system and received benefits to which they were not entitled. But there was also widespread misunderstanding about the program and its strictures and requirements. All of this in a time of urgency and frenzy. History may show that several individuals and businesses took unlawful advantage of the program. At the same time, many innocent beneficiaries will be swept up in the tangle and will have to account for decisions made last spring and early summer under overwhelming conditions.

While it may not be entirely clear where addressing suspected abuse will fall ultimately on the new administration’s Department of Justice priority list down the road, indications are clear this will be somewhere prominent on the radar. Cracking down on “waste, fraud, and abuse” is always a popular refrain.

The Small Business Administration’s Office of Inspector General has confirmed that there were strong indicators of widespread potential abuse and fraud in the PPP. The SBA alongside the IRS is already auditing loans in excess of $2 million, and the Justice Department has to date filed criminal charges against 65 PPP beneficiaries. The Justice Department has also taken action to freeze or recover over $30 million to date.

It is becoming clear that those most likely to be scrutinized are companies that were already substantially delinquent on taxes, companies that were established during the pandemic, and those that did not squarely fit the definition of a small business, that is, companies not falling under the 500-employee threshold. Other businesses that might be targeted are those that may be accused of hiring or retaining phantom employees or borrowers that were not strictly in need of the economic loan but took advantage of the program for personal financial gain. Certain of these have gained notoriety. Criminal charges have been brought against some who have used their PPP funds for lavish items such as jewelry and cars, to pay off student loans and mortgages, or to engage in some form of money laundering.

We can anticipate the states most likely to be targeted include Florida, Nevada, and Texas, all of which have been prominent areas on the receiving end of the program. The white-collar legal industry is keeping close watch on the tactics and trends in these investigations and prosecutions. It is certain to generate controversy and consternation for years to come.

If you or someone you know might be facing allegations concerning their participation in the PPP program, please contact us for a consultation.

– Michael J. Wynne