Are You Prepared? Audits & Investigations Under the Paycheck Protection Program

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Earlier today, presidential candidate Joe Biden underscored the intense focus surrounding Paycheck Protection Program loans when he tweeted, “Let me be clear: My Administration will review every single stimulus loan given to big companies and political insiders. We will find any dollar taken corruptly, we will come get it, and we will punish the wrongdoers.”

Congress created the PPP, part of the CARES Act and administered by the Small Business Administration (SBA) and Treasury Department, to provide relief to small businesses in dire need of financial support during the COVID-19 pandemic. Thousands of businesses applied for and secured PPP loans to help get them through this unprecedented time in our nation’s history. Criticism of the PPP soon festered, however, after it became public that several large, profitable companies, including Shake Shack and the Potbelly Corporation, had received PPP loans.

A key requirement for obtaining a PPP loan is that a borrower must make a good faith certification that the loan is “necessary…to support the [borrower’s] ongoing operations… .” 15 U.S.C. § 636(a)(36)(G)(i)(I). While Potbelly and Shake Shack quickly returned the funds to the PPP, speculation abounds regarding whether other companies appropriately received the much-needed financing. Thus, on April 28, 2020, the Treasury Department announced its intent to exercise significant oversight over the PPP loan forgiveness process, stating that every loan exceeding $2 million would be subject to an audit:

We have noted the large number of companies that have appropriately reevaluated their need for PPP loans and promptly repaid loan funds in response to SBA guidance reminding all borrowers of an important certification required to obtain a PPP loan. To further ensure PPP loans are limited to eligible borrowers, the SBA has decided, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, in addition to other loans as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. Regulatory guidance implementing this procedure will be forthcoming.[1]

A deadline of May 14, 2020 (extended from May 7, 2020) looms for companies to return funds they do not need (for whatever reason), to avoid a finding that their loan applications were submitted in bad faith.

You Received a PPP Loan – What Should You Prepare For Next?

The government is gearing up to wield its considerable oversight authority over the loan forgiveness process, and given the substantial number of loans subject to review, that oversight will likely continue for an extended period of time. To conduct the process, the SBA and Treasury Department will rely upon the Pandemic Response Accountability Committee, an oversight body established by the CARES Act which possesses subpoena power and the authority to conduct hearings. See P.L. 116-136, § 15010(b). The Committee is tasked with “promot[ing] transparency” and preventing “fraud, waste, abuse, and mismanagement,” id., and is compromised of the inspectors general from various federal departments. The CARES Act also created a Special Inspector General for Pandemic Recovery to direct and coordinate the PPP loan forgiveness process.

Specific guidance regarding how companies should prepare to respond to the process remains forthcoming, but the Treasury Department has already stated that “it is unlikely that a public company with substantial market value and access to capital markets [could] make the required certification in good faith.”[2] Moreover, the SBA has promulgated interim rules which specify, among other things:

  • at least one thing businesses must prove during the loan forgiveness process is that the PPP funds were used for purposes eligible for forgiveness, such as payroll (itself subject to further conditions) and/or other items such as rent and utilities,[3] and
  • if a company fails to prove its need for the PPP loan, not only will the loan not be forgiven, but the company will be at risk of criminal liability.[4]

The government is already employing austere measures to enforce the integrity of the PPP. On May 5, 2020, the Department of Justice initiated a criminal action against two individuals accused of defrauding the CARES Act by unlawfully obtaining a PPP loan. The case is the US v. Staveley, case number 1:20-mj-34, in the U.S. District Court for the District of Rhode Island. This is the first criminal case filed related to the PPP, and notably, it involved a loan of approximately $500,000 – well below the $2 million threshold subject to audit.[5]

Takeaways and Recommendations

Companies should be extremely cognizant of the PPP audit process, which will ramp up imminently. The May 14, 2020 deadline to return unneeded PPP funds is likely to remain in place, as it has already been extended. In the meantime, companies should strive to remain organized, strictly maintain corporate protocols, and preserve all business-related documents concerning the PPP loan received.

There is considerable public attention surrounding the PPP due to the previous inability for smaller borrowers to get access to limited PPP funds. Because of the spotlight on the program and with the presidential election approaching, companies should assume the Trump Administration will follow through on its pledge to audit the vast majority of PPP loans and bring federal criminal charges if warranted. As a result, regardless of who wins in November, this issue will not go away any time soon.  

Thus, if you believe that you may be at risk of an audit or investigation or have already received a subpoena, or want informed guidance on how to prepare now for what may come later, it is strongly advised that you contact counsel immediately.

[1] Joint Statement (excerpt) of US Treasury Secretary Steven T. Mnuchin and Small Business Administrator Jovita Carranza, available here.

[2] FAQ, Question 31, available here.

[3] 85 Fed. Reg. 20813 (Apr. 15, 2020) (revising 13 C.F.R. pt. 120).

[4] Id. at 20814.

[5] For more information on this case, see the Arent Fox Investigations Blog on May 8, 2020, available here.


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