SBA Part Eight: CARES Act Enforcement Risks Associated With SBA Loan Programs and How to Avoid Them
*The original article published on April 23, 2020 has been updated to reflect changes as of June 15, 2020.
Businesses who have received funds under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Paycheck Protection Program (PPP) or Small Business Administration (SBA) Disaster Loan program should take care to ensure their deployment of the funds is in compliance with the terms of the CARES Act and related guidance. With this historic financial assistance comes increased oversight by the government which will likely lead to an increase of enforcement actions against fund recipients. Congress provided the Office of the Inspector General $25 billion, pursuant to Section 1107 of the CARES Act, to fund its monitoring of the use of proceeds for these SBA programs.
When applying for a PPP loan, borrowers make various certifications, in good faith, acknowledging that funds will be used in a very precise manner. (See SBA alerts Part Four, Part Five, Part Six, Part Nine, Part Ten, Part Eleven, Part Twelve, and Part Thirteen for specifics). When those funds are misused, the borrower will be asked to repay the funds, and in some instances may face enforcement actions, as described below. Some certifications include:
- The uncertainty of current economic conditions makes the loan request necessary to support the ongoing operations of the eligible recipient.
- 60% of the loan proceeds will be used to retain workers and maintain payroll, with 40% of loan proceeds used to make mortgage interest payments, lease payments and/or utility payments for obligations that existed as of Feb. 25, 2020.
- The eligible recipient does not have an application pending for a PPP loan for the same purpose and duplicative of amounts applied for or received under a covered loan.
- During the period beginning on Feb. 15, 2020, and ending on Dec. 31, 2020, the eligible recipient has not received amounts under Section 7(a) of the Small Business Act for the same purpose and duplicative of amounts applied for or received under a covered loan.
- The information provided in the application and all supporting documents and forms is true and accurate in all material respects.
- The recipient acknowledges that knowingly making a false statement to obtain a guaranteed loan from SBA is punishable under the law, including under 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000 and, if submitted to a federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
- The borrower acknowledges that the lender will confirm the eligible loan amount using relevant documents and records of the borrower. The borrower acknowledges that they understand and agree that the lender can share any tax information that the borrower provided with SBA's authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with an SBA loan.
Enforcement of the CARES Act
Section 1109 of the CARES Act authorizes criminal penalties under existing laws for fraud or other misconduct in seeking or using SBA programs under the CARES Act. The Department of Justice (DOJ) has already announced that it will “prioritize the investigation and prosecution of Coronavirus-related fraud schemes” and has created a hotline for whistleblowers to report suspected fraud (See Enforcement by the DOJ Related to PPP Loans for additional information). Attorney General William Barr has also directed U.S. Attorneys to appoint a “Coronavirus Fraud Coordinator” in each district. This person is responsible for coordinating enforcement and conducting public outreach and awareness. The DOJ’s oversight and enforcement activities will be supported by the CARES Act’s three-prong oversight structure:
- The President will appoint an Office of Special Inspector General for Pandemic Recovery to scrutinize the actions of the Treasury secretary in distributing funds under the CARES Act and has subpoena authority. (Section 4018).
- The Pandemic Response Accountability Committee has oversight to prevent fraud, waste and abuse and mismanagement in the implementation of relief programs. This Committee, among other responsibilities, will “expeditiously report [...] to the Attorney General any instance in which the Committee has reasonable grounds to believe there has been a violation of federal criminal law.” (Section 15010).
- The Congressional Oversight Commission was created to oversee the implementation of the act by the Treasury and the Federal Reserve and to assess the effectiveness of the programs on the financial well-being of the people and economy. The commission may hold hearings and take testimony in the preparation of its reports to Congress. (Section 4020).
Potential Landmines in Applying for and Accepting CARES Act Funding
False Claims Act
Because the potential for fraud and abuse involving large government programs is high, companies who have accepted CARES Act funding will be subject to heightened scrutiny, including their compliance with the False Claims Act (FCA). The FCA imposes liability on any person who knowingly submits a false claim to the government or causes another to submit a false claim to the government or knowingly makes a false record or statement in order to have a false claim paid by the government. 31 U.S.C. § 3729 et seq.
For many years the DOJ’s chief tool to investigate and prosecute fraud against the government has been the FCA, which also allows whistleblowers to initiate federal anti-fraud lawsuits on behalf of the United States (qui tam). It is anticipated that whistleblower activity will significantly increase in the wake of the CARES Act. The plaintiffs’ bar has already expressed a willingness to commence this effort, calling on the DOJ to form a task force to monitor and investigate FCA cases under the CARES Act.
The DOJ’s actions will likely be similar to those efforts taken in connection with the Troubled Asset Relief Program (TARP) implemented in the wake of the 2008 financial crisis. Those actions were extensive and resulted in billions of dollars in FCA recoveries for the government. Potential exposure under the FCA includes treble damages, steep monetary penalties and payment of attorneys’ fees.
Other potential enforcement mechanisms include the Securities and Exchange Commission (SEC), State Attorney Generals and the Internal Revenue Service (IRS), all of which have interest in overseeing compliance with the CARES Act and the impact it will have on our economy.
Companies should appreciate the risks they assume by applying for and accepting government funding under the CARES Act. False or partially true certifications made by companies seeking government funding could lead to enforcement actions if made fraudulently or with the knowledge that they were false. Some examples include:
- Falsely claiming the company has fewer than 500 employees to qualify for the loan.
- Falsely claiming the COVID-19 crisis hurt business to qualify for the loan.
- Inflating average monthly payroll costs to get more loan money (Note that payroll costs cap at $100,000 per employee).
- Falsely claiming all the loan money will go toward qualified expenses (payroll, rent and mortgage interest, utilities) in order to get the loan forgiven.
- Not disclosing if employees leave (thereby reducing payroll expenses) in order to get more of the loan forgiven.
Borrowers need to take additional care to ensure they are complying with the terms of their loans and should consider enhancing compliance and finance resources to track and monitor their compliance. Some best practices include:
- Internal policies and recordkeeping to memorialize every step taken during the process. This includes tracking the underlying bases for each of the required certifications, and any changes to the business that occur during this timeframe.
- Ensuring that all statements in CARES Act loan applications are truthful and not contradicted by statements made in previous filings and documents.
- Avoid commingling the funds and track how the funds are used. See SBA alerts Part Four, Part Five, Part Six, Part Nine, Part Ten, and Part Thirteen for extensive discussion on the use of loan proceeds under the PPP.
- Ensuring that effective reporting systems are in place to identify potential compliance issues and take them seriously, including whistleblower reports.
If there is any uncertainty about CARES Act compliance, it is wise to seek guidance from legal counsel. Taft’s lawyers are working through these complex issues diligently and are available to assist with any questions that may arise.
Additional guidance related to the loan forgiveness portion of the PPP loan has been issued in the form of Interim Final Rule on Loan Forgiveness on May 22, 2020. See SBA Part Fourteen.
Optics matter and, as we have seen in recent media coverage of entities that were in fact eligible for the program pursuant to a few exceptions built into the statute, people feel very strongly about who gets these funds and will feel equally as strongly about how they are used. Hence, it is easy to assume that regulators, investigative journalists and courts will not be sympathetic to a recipient they believe has taken advantage of these programs and not played by the rules. See SBA alerts Part Nine, Part Ten, Part Eleven, Part Twelve, and Part Thirteen for additional information.
Please contact one of our SBA Task Force or Litigation Team members if you need assistance.
Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.
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