DOJ’s Focus on PPP Fraud and Some Investigative Considerations in Evaluating a Client’s Exposure to Prosecution

In the early days of the Coronavirus pandemic, Congress passed relief legislation authorizing unprecedented federal aid to states, businesses, and individuals.  In short order, a torrent of federal spending flowed.  While those days may seem long gone as initial relief dollars have dried up and Congress is now debating additional relief programs, the Department of Justice (“DOJ”) remains focused on investigating and prosecuting fraud schemes arising from relief programs rolled out at the beginning of the pandemic.[1]

One of the relief programs receiving special attention from DOJ is the Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA).  Through the PPP, participating banks lent money to qualifying businesses, which loans the SBA guaranteed.  Subject to certain conditions, the SBA agreed to forgive the loans.  Some of the key loan conditions included, for example: the requested loan was to be used to pay costs eligible for forgiveness (e.g., payroll, mortgage interest, rent and utility costs); payroll was to be capped at $100,000 per employee, annualized; the borrower was not to reduce salaries or hourly wages by more than 25 percent for any employee during the relevant period.[2]  To obtain the loan, the borrower had to sign and certify the PPP loan forgiveness application.

DOJ’s initial investigations of PPP fraud schemes have appeared to focus on the eligibility of borrowers (i.e., whether they had a real business with real employees, whether the size of the payroll matched representations in the loan application, etc.) and the use of the proceeds (i.e., whether the proceeds were spent on permissible items).  Thus far, DOJ’s prosecutions for PPP fraud have involved allegations of egregious misconduct.  As DOJ’s enforcement efforts continue, it is likely that DOJ will start bringing prosecutions concerning conduct that may be closer to the line and that may fall in gray areas.

Assessing a client’s exposure to prosecution for PPP fraud and a potential forfeiture action requires consideration of a multiplicity of factors, but the early PPP cases suggest a couple specific items must be analyzed.  To start, it is important to carefully analyze the borrower’s financial records.  If the investigation concerns the borrower’s eligibility to receive the PPP loan, then it would be helpful to compare the borrower’s books and records against statements in the PPP loan application to determine, for example, whether the borrower’s claimed payroll matches the loan application.  Further, if the investigation relates to the use of the loan funds, then it would likely be important to conduct a cash tracing analysis to verify the transactions at issue occurred and the timing of the transactions.  If the account has commingled funds (i.e., both fraud and non-fraud funds), then determining which tracing methodology to apply (e.g., intermediate balance, pro-rata, LIFO/FIFO, and so forth) would be critical.  Of course, conducting such investigation would likely require retaining a forensic accountant.

These are just some of the first steps our white collar and federal criminal defense team would want to take in evaluating a client’s exposure to a PPP fraud prosecution.  Later blog posts will delve into some of the PPP fraud cases that the government has already indicted—frequently with substantial fanfare and publicity.



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