Audits and Potential Criminal Liability for Paycheck Protection Program Fraud

fraud investigation

Secretary Mnuchin recently announced that the U.S. Treasury will audit every loan over $2 million given under the Paycheck Protection Program (“PPP”) established in response to the COVID-19 pandemic and its crippling effects on many businesses. In making these statements, Mnuchin also noted that businesses that applied for and took PPP loans they “shouldn’t have taken” may face criminal liability.

Audits to Identify Mismatch in Application Information

Audits of PPP loans will not be done holistically, teasing out the Harvards, Shake Shacks, and Ruth’s Chrises—the larger entities that presumably could have survived the pandemic while continuing to pay their employees absent government intervention—from the small businesses for whom the pandemic posed an existential threat. No, the audits will be as any other, number-driven and looking for specific mismatches between what was reported and reality.

Harvard, for instance, has an endowment of over $40 billion, yet it applied for and received emergency relief under the PPP. Is it at all probable that, of all places, the home of the most prestigious law school in the country did not do its due diligence before making its loan application? Conceivable, yes, but not likely.

“Fair” PPP Parameters Created a Race to Money, Favoring More Successful Businesses

The reality is that the PPP’s parameters did a poor job selecting for the businesses which would truly be unable to continue paying employees with an extended disruption in revenues. Essentially, those parameters were driven by the number of employees and a nebulous certification that the “[c]urrent economic uncertainty makes th[e] loan request necessary to support […] ongoing operations”; to the ignorance of earnings, cash available, or any other area or financial consequence. That may well have been by design, to be “fairer” in spirit by allowing more successful businesses to maintain their competitive advantages by obtaining the same relief as those in peril.

However, given the finite amount of monies allocated for the PPP, the practical effect was to create a race to a pool of money, in which race the same business Darwinism principles apply, such that the “fitter,” more successful businesses are better equipped to prepare and submit loan applications before the sole proprietors and other “mom and pop”-size businesses. Thus, Shake Shack gets $10 million, which it theoretically wouldn’t have had to repay if it had kept the loan, while, say, Joe’s Pizza gets nothing and goes bankrupt, all because it took Joe longer to fill out the paperwork than it did Shake Shack’s executives and/or lawyers.

What Businesses Might Be Audited?

The successful businesses that qualified and applied for a PPP loan need not fear criminal liability merely on the basis of their having been successful enough pre-COVID to have likely survived COVID without governmental support. The government would be hard-pressed to ever prove beyond a reasonable doubt that a certification that the “current economic uncertainty makes th[e] loan request necessary to support […] ongoing operations” was knowingly false. In all probability, those grievances will be confined to the court of public opinion.

The businesses that need truly fear a Treasury audit are those that fudged their numbers on applications (either with respect to the number of employees so that they qualified or with respect to the amount of payroll they were seeking to cover through their loans) and those that used PPP monies for an improper purpose (i.e., not payroll). In other words, the audits will try to ferret out the businesses and individuals who attempted to enrich themselves through the PPP by taking more than that to which they were entitled, thereby depriving other deserving businesses and their employees of those funds.

Potential Punishments for Businesses That Falsified Application Information

As noted in the application itself, such false statements may be punishable under several different statutes, including 18 U.S.C. § 1001 (false statements), 15 U.S.C. § 645 (small business aid fraud), and 18 U.S.C. § 1014 (loan application fraud). Convictions under these statutes carry penalties ranging from up to two years’ imprisonment and/or a fine of up to $5,000 for small business aid fraud under 15 U.S.C. § 645. In the case of loan application fraud under 18 U.S.C. § 1014, up to as much as thirty years’ imprisonment and/or a fine of as much as $1,000,000.

If you’re being investigated for a white collar crime related to an application for PPP, call Arseneault & Fassett, LLC at (973) 310-6664 or contact us online. Our New Jersey team will develop an innovative strategy to fight the accusations.

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