What are the Red Flags for PPP Loan Fraud? - Federal Lawyer (2024)

PPP fraud, Criminal Law & Process

Dr. Nick Oberheiden is nationally recognized with his knowledge of PPP loan laws
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Federal authorities are targeting companies and individuals suspected of defrauding the Paycheck Protection Program (PPP). Are you at risk? Below are some red flags that could trigger an investigation.

The federal Paycheck Protection Program (PPP) is subject to a whole host of rules and restrictions. Acknowledging PPP loan applicants’ compliance burdens (and the limited information that was initially made available to applicants), the U.S. Small Business Administration (SBA) offered a grace period within which companies could return improperly obtained PPP loans without penalty. However, this grace period has expired, and now the SBA Office of Inspector General (SBA-OIG), the U.S. Department of Justice (DOJ), and other federal agencies are aggressively targeting companies suspected of engaging in PPP loan fraud.

If your company received a PPP loan, is it at risk? Are you personally at risk as a company owner, board member, executive? These are significant questions, and they are questions that you need to answer sooner rather than later. When the SBA-OIG or DOJ launches an investigation, executing an effective and timely defense is imperative. To this end, all companies that received PPP loans would be well-advised to proactively conduct an internal PPP compliance investigation. At Oberheiden P.C., we are actively representing companies with regard to PPP compliance during the coronavirus pandemic, and we are representing companies in PPP loan fraud audits and investigations as well.

10 Red Flags for PPP Loan Fraud (Look for These During Your Company’s Internal PPP Compliance Investigation)

Despite the fact that the Paycheck Protection Program was launched in March 2020 with the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, federal authorities have already identified several hallmarks of PPP loan fraud. Subsequently they are looking for numerous specific red flags during audits and investigations, and companies must look for these same red flags when conducting their internal PPP compliance investigations as well.

Here are 10 red flags for PPP loan fraud:

1. No Documentation to Substantiate Representations in the Company’s PPP Loan Application

Companies are required to make a number of affirmative representations during the PPP loan application process. Under the terms of the program, for example, companies must represent that:

• They are applying for a PPP loan because, “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;” and,
• They have fewer than 500 employees, qualify as a “small business concern” under Section 3 of the Small Business Act, or meet one of the limited number of other PPP eligibility standards; and,
• Their owners are eligible to participate in SBA programs such as the PPP (i.e. no owner of a 20% or greater interest has been convicted of or pleaded guilty to a federal felony within the past five years).

During a federal PPP loan fraud audit or investigation, federal agents will not just be looking to assess loan recipients’ eligibility, but they will also be looking to determine whether companies have documentation on hand to qualify the representations they made in their PPP loan applications.

2. Multiple PPP Loan Applications Submitted to Different Lenders

Under the CARES Act, companies are only eligible to receive one PPP loan from one lender at a time. Obtaining more than one PPP loan (or “stacking” PPP loans) is prohibited, and companies that applied with multiple lenders could face allegations for attempting to stack PPP loans. Even if only one PPP loan was obtained, attempting to obtain more than one loan can still lead to criminal prosecution. Under 18 U.S.C. § 1349, individuals and companies charged with attempt can face the same penalties that apply to the “successful” completion of a criminal offense (i.e. bank fraud, making false statements to an FDIC-insured financial institution, or making false statements to the SBA).

3. No Adoption of PPP Compliance Policies and Procedures

Along with its application requirements, the CARES Act also establishes requirements for how companies use, and account for the use of, PPP loan funds. Subsequently, upon receiving PPP loans (or, ideally, in anticipation of receiving a PPP loan), companies should adopt policies and procedures that are designed to ensure continual PPP compliance. It will be viewed as a red flag for fraud in the event of an SBA audit or an SBA-OIG or DOJ investigation if a company does not have documented policies and procedures for PPP compliance.

4. No Establishment of a Separate PPP Loan Account

A crucial aspect of the PPP is that companies are only allowed to use the funds they receive for specific authorized purposes. These purposes include the payment of payroll and related expenses, the payment of insurance premiums, the payment of rent and mortgage interest under pre-existing obligations, and the payment of business utility bills. In order to account for all disbursem*nts from their PPP loans, companies should deposit their loans into distinct accounts, and they should not commingle their PPP loan funds with any other company assets.

5. No Documentation (or Inadequate or Incomplete Documentation) of PPP Loan Expenditures

When making use of PPP loan funds, companies should extensively document their expenditures in order to demonstrate that they have used their PPP loans for authorized purposes only. In many cases, this will require more than merely recording the transaction itself. Like with compliance program documentation, inadequate documentation of PPP loan expenditures will be viewed as a red flag for fraud, and it can place companies in a hard position when it comes to defending against federal fraud allegations.

6. Use of PPP Loan Funds for Personal Expenses

Under the terms of the PPP, utilizing loan funds for personal expenses is expressly prohibited. The DOJ has already initiated multiple federal cases against individuals alleged to have converted PPP loan funds for personal use, and in these cases the defendants are facing hefty fines and years, if not decades, of federal imprisonment. While egregious and clear misuse of PPP loan funds presents a clear risk, expenditures that blend business and personal purposes (i.e. payments for travel, vehicles, and home office expenses) can also create risk.

7. Inadequate or Questionable Documentation Submitted in Support of Loan Forgiveness Certification

Another key aspect of the PPP is that loans issued under the program are eligible for forgiveness if they are used entirely for authorized purposes. When seeking forgiveness, companies are required to provide documentation, and they must affirmatively certify as to the accuracy of this documentation and as to compliance itself. Inadequate or questionable documentation submitted in support of a request for PPP loan forgiveness is another huge red flag, and companies accused of submitting fraudulent forgiveness requests can face a variety of federal charges.’

8. Newly-Formed Business Entities, New Debt Obligations, and Other Atypical Business Activities

Other red flags for PPP loan fraud include atypical business activities such as forming new business entities and entering into new debt obligations. Federal auditors and investigators will view these types of activities with skepticism, and as potential evidence of an attempt to either fraudulently obtain a PPP loan or use PPP loan funds for unauthorized purposes. Again, thorough documentation is imperative, and companies must ensure that all relevant internal personnel are clear about the types of activities that can increase the company’s risk of liability in the event of a PPP loan fraud audit or investigation.

9. Evasiveness or Inability (or Unwillingness) to Produce Documentation of PPP Compliance

Evasiveness and inability (or unwillingness) to produce documentation of PPP compliance is a major red flag for fraud as well. For federal authorities such as the SBA-OIG and the DOJ, this includes suspect activity from any and all company personnel who are involved in responding to the government’s inquiry; and, for companies, this includes evasiveness from employees during internal PPP compliance investigations. This is based on the adage that where there is smoke, there is fire–– if someone seems concerned about what might be found, there is usually a reason why.

10. Other Issues Pertaining to Substantiation, Documentation, and Compliance

Lastly, along with all of the red flags for PPP loan fraud discussed above, there are various other issues that can tip off federal authorities during audits and investigations as well. In order to ensure that no one at your company raises questions for federal authorities unnecessarily, it is imperative to rely on the advice and representation of experienced federal counsel.

At Oberheiden P.C., our attorneys and former federal agents are intimately familiar with the federal auditing and investigative processes. We can use our experience to help reduce your company’s risk (and your personal risk) to the fullest extent possible, and we encourage you to contact us for a free and confidential assessment of your company’s legal needs.

Oberheiden P.C. | Compliance and Defense Counsel for PPP Loan Recipients Nationwide

Are you or your company at risk for facing allegations of PPP loan fraud? To speak with one of our senior federal compliance and defense attorneys in confidence, call 888-680-1745 or request a free PPP risk assessment online now.

Last Updated: 2024-03-05