In July 2021, 22 people were arraigned in court on charges of engaging in fraudulent schemes to acquire more than $11 million in loans from the Paycheck Protection Program (PPP). The individuals used the loan proceeds to purchase jewelry, luxury vehicles, and other personal items.
According to court documents, the defendants submitted or aided in submitting loan applications on behalf of a dozen or more businesses that sought funding worth $800,000 each.
The accused individuals certified that the businesses were in operation as of February 15, 2020; that they had employees on their payroll; that they had paid the required payroll taxes; that the funding would go towards maintaining the payroll, retaining employees, making lease or mortgage interest payments, and paying for utilities; that the information provided in their applications was true. As it turns out, it was not.
What constitutes PPP loan fraud? What is the penalty? How can you report it? Here’s everything you need to know.
What Is the Paycheck Protection Program
The PPP is a loan program born out of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Initially worth $350 billion, CARES was intended to provide cash flow assistance to American businesses for eight weeks. In April 2020, the Paycheck Protection Program and Health Care Enactment Act expanded the program, injecting an additional $310 billion worth of funding.
The PPP Flexibility Act was later enacted to make some critical amendments to the original legislation. It gave individuals and businesses more time to spend the funds and made it easier to get the loans forgiven.
In December 2020, Congress enacted a second stimulus package that added $285 billion worth of funding to the PPP. Businesses that had exhausted funds from the initial Paycheck Protection Program loan they had obtained or experienced a decrease in revenue amounting to 25% or more could also apply for another round of funding.
On May 4, 2021, the Small Business Administration (SBA) stopped accepting PPP loan applications. Nonetheless, any lender designated as a Community Financial Institution (CFI) may still access funding.
Loan Eligibility Criteria
Unlike SBA economic injury disaster loans, PPP loans are far-reaching. Small businesses, independent contractors, sole proprietorships, and self-employed individuals can all apply for funding.
- Independent contractors are required to fill and submit Form 1099-MISC alongside Schedule C from their tax return showing their net earnings
- Sole proprietors also need to fill and submit Schedule C
- Self-employed individuals need to submit their payroll tax filings as reported to the IRS
Businesses need to show a revenue reduction of 25% or more to qualify for the second round of PPP funding. To demonstrate this, you would need to compare the revenue earned in any quarter in 2020 against the revenue earned during a similar period in the previous year.
What PPP Loans Can Be Used For
According to the federal guidelines, 60% of the loan must fund payroll costs and employee benefits.
Under the PPP, payroll costs include:
- Salaries, wages, bonuses, tips, and commissions, capped at $100,000 per annum per employee
- Employee allowances including sick leave, medical, family, parental, and vacation pay
- Insurance premiums and retirement benefits
- Local and state taxes assessed on compensation
- For sole proprietors or independent contractors, net earnings, income, commissions, or wages capped at $100,000 per annum per employee
Here’s what’s not covered:
- Payments to independent contractors
- Payments to C-corporation and S-corporation owners who are not on the payroll, such as payments to shareholders
The remaining 40% of the PPP loan can be spent on:
- Lease and rent payments
- Mortgage interest payments
- Operational expenditure such as accounting and software requirements
- Property damage not covered by insurance resulting from public disturbances
- Supplier costs
- Utility payments
- Worker protection expenditure related to COVID compliance
Adhering to these guidelines allows businesses to have the full value of the PPP loan forgiven, essentially transforming it into a tax-free grant. As part of the application process, applicants are asked to certify that they will spend the funds appropriately for their intended purposes. The misappropriation of these funds is tantamount to PPP loan fraud.
The Loan Application Process
Keep in mind that the SBA itself doesn’t lend businesses the money they need. They simply back the loan provided by the lender.
Part of the PPP loan application process requires businesses and individuals to verify the following:
- That the existing economic uncertainty makes it necessary to acquire a loan to support the business’ ongoing operations
- That the funds will go towards maintaining the payroll, retaining workers, or making lease, mortgage interest, and utility payments
- Documentation that indicates the number of full-time salaried staff or equivalent working in the business, payroll costs in dollar amounts, covered rent or lease payments, covered mortgage interest payments, and covered utilities for the 24 weeks after obtaining the loan
- An acknowledgment that the lender will calculate the loan amount the business qualifies for using the tax documentation submitted along with the application
- An affirmation that the tax documents submitted along with the application are identical to those submitted to the IRS
- That the business or individual has used up all the funds they received in the first PPP loan if they’re applying for a second round of funding
Businesses or individuals are required to provide bookkeeping/payroll records in support of the payroll expenses listed. That could include payroll tax filings, processor records, tax forms (Forms 940, 941, and W-3) from 2019 or 2020, Schedule C for sole proprietorships, and Form 1099-MISC records.
What Is PPP Loan Fraud
So far, we’ve looked at the PPP loan requirements, the documentation required, and guidelines on what the loan can be used for. If a business or individual submits false or inaccurate information or documentation in their application or certification, it constitutes PPP loan fraud. Even if a business meets the eligibility criteria but fails to abide by the predefined limits and requirements on how it can use those funds, it is also considered loan fraud.
A PPP loan fraud investigation will ultimately determine whether an individual will be charged with violating one or more of the guidelines provided in the program.
A violation includes, but is not limited to:
- Applying for loan forgiveness by submitting a false certification
- Being deceitful to agents during a PPP loan investigation or audit
- Loan stacking – applying for multiple PPP loans from different lenders
- Making false statements on the loan application
- Using the loan funds for unauthorized or improper use
PPP Loan Fraud Penalty
An individual charged with PPP loan fraud faces serious civil and criminal penalties. While a single loan fraud case may involve several criminal laws, a brief overview of the most common charges and their respective penalties is below.
Wire Fraud
This invokes 18 USC Sec. 1343 and involves using the phone or internet to defraud another party by making false promises or statements. The penalty depends on the total stolen money and could be up to 20 years behind bars.
Bank Fraud
This invokes 18 USC Sec. 1344 and is similar to wire fraud, only that in this case, it involves making false statements to a financial institution such as a bank. An individual found guilty of bank fraud could face a jail term of up to 30 years.
False Statements to a Financial Institution
This invokes 18 USC Sec. 1014 and makes it a federal crime to lie to a financial institution such as a bank. This involves providing false statements on a loan application form or falsifying documents submitted to a bank to qualify for a loan. Any individual found guilty of violating this law faces up to 30 years behind bars.
Conspiracy to Commit Fraud
This invokes 18 USC Sec. 1349. The law makes it a criminal offense to collude with others in violating or attempting to violate federal fraud laws, whether or not the individual in question actually obtains money, falsifies documents, or makes any false statement.
The penalty depends on the fraud crime the individual conspired to commit. For instance, a conviction for conspiracy to commit wire fraud carries a jail sentence of up to 20 years, while conspiracy to commit bank fraud carries a maximum jail term of 30 years.
How to Report PPP Loan Fraud
A business or an individual that engages in PPP loan fraud is in violation of the 1863 False Claims Act. The law was created to deter individuals from committing acts of fraud against the government and encourage people to report said fraudulent activities. The Act incentivizes private citizens to report instances of fraud committed against the government in what is popularly known as “qui tam” action.
The doctrine allows a False Claims Act whistleblower with evidence of fraud to bring a civil suit against an organization or individual and receive a percentage of the recovery amount. The precise amount that they can recover depends on whether the government intervenes in the suit.
The provisions of the Financial Institutions Reform, Recovery, and Enforcement Act allow the Attorney General to sue for fraud in cases that involve federally insured financial institutions. A FIRREA whistleblower can receive up to $1.6 million for information on PPP violations that result in the successful recovery of stolen funds.
Whistleblower protection laws also protect employees who report PPP loan frauds against retaliatory action by their employers. This means they cannot be terminated, demoted, or harassed for PPP whistleblowing to expose their employer’s fraudulent undertakings against the government.
PPP fraud denies eligible small enterprises of the funding they need to keep their businesses afloat. With that in mind, the US Department of Justice (DOJ) has instituted a policy dubbed “See something, say something” to help them identify instances of PPP fraud.
To report PPP loan fraud and economic injury disaster loan fraud, you can:
- Call the National Center for Disaster Fraud Hotline: 1-866-720-5721
- Fill the web complaint form on the DOJ website
- File a complaint with the SBA Inspector General Office
PPP Loan Fraud Red Flags
If you’re a company board member, executive, or owner, you will be personally liable if your company is found guilty of flouting any of the PPP rules and restrictions. To avoid the stiff penalties that come with a PPP loan violation, below are five red flags to keep an eye out for during an internal compliance audit.
1. Insufficient Documentation Substantiating the Loan Application
Federal investigators don’t just assess the loan recipient’s eligibility; they also check that the representations made in the application can be substantiated. For instance, under the PPP terms, a company should:
- Apply for the loan because it is “necessary” given the precarious economic climate
- Be eligible to participate in SBA programs, meaning no single shareholder has more than 20% interest, nor have they been convicted of a federal felony in the last five years
- Have less than 500 employees to qualify as a small business
2. Multiple Loan Applications to Different Lenders
The CARES Act only allows companies to obtain a single PPP loan from a single lender at a time. Obtaining or attempting to obtain multiple loans is illegal. Even if the company received only one loan, the fact that they submitted multiple applications could lead to criminal prosecution.
3. No Documented PPP Compliance Policies and Procedures
Not having documented policies and procedures to ensure ongoing compliance to PPP requirements is a red flag in fraud investigations and audits. Companies need to adhere to the CARES Act guidelines on how to use the funds and be able to account for expenditures.
4. Insufficient Documentation of Loan Expenditure
Like the compliance program, companies need to have solid documentation that demonstrates they used the PPP loan for authorized purposes only. More often than not, this goes beyond simply keeping a record of transactions. Doing so makes it difficult to defend against PPP loan fraud allegations.
5. Use of Loan Proceeds for Personal Expenses
The CARES Act explicitly prohibits the use of PPP loan funds for personal expenses. The line between business and personal expenditures can often get blurred. This opens you up to the risk of prosecution.
For instance, in cases where home-office expenses, vehicles, and travel-related expenditure, are involved, there needs to be a clear-cut line between the two.
Do you know anyone who may be committing PPP loan fraud? Chat online with a Laws101 attorney now.