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3 Aug 2020

5 Reasons Why PPP Loan Fraud Will Be a Growth Area for Years to Come

The short life of the Small Business Administration’s Paycheck Protection Program (PPP) has been all about speed. As the COVID-19 pandemic paralyzed the economy in March 2020, the federal government hurriedly created the PPP loan program to rescue small businesses.

Within three weeks, the program burned through its initial supply of $350 billion. By mid-July, 4.9 million loans worth more than $500 billion had been issued through the PPP. Almost as quickly as that money went out the door, the federal government began prosecuting recipients of the forgivable loans for bank fraud and other crimes. While most white-collar cases take months or years to develop, the government brought its first 15 PPP cases within just weeks of the passage of the CARES Act, which created the loan program. “The rapidity with which these initial PPP cases were investigated and charged is highly unusual,” say lawyers from Fox Rothschild.

But the ultimate story of the PPP will be a marathon, not a sprint. If history is any guide, PPP-related cases will be in the court system for years to come. TARP, the Troubled Asset Relief Program, was another measure to inject liquidity into our financial system at a perilous time—the Great Recession of 2008. That was 12 years ago, and fraud cases growing out of it are still being resolved today.

Beyond the TARP analogy, here are five additional reasons to expect PPP cases to continue well into the future.

1. Limited Safeguards in Place

Haste makes waste, the proverb goes. And indeed, in the government’s rush to get money to businesses, it sacrificed safeguards that would have prevented fraud. That was the conclusion of the Government Accountability Office anyway, which stated in a report that: “Because of the number of loans approved, the speed with which they were processed, and the limited safeguards, there is a significant risk that some fraudulent or inflated applications were approved.”

Relatedly, the government changed the rules governing PPP loans “at times even daily,” including on the critical issue of the circumstances under which they would be forgiven, which may have encouraged bad actors to take advantage of the chaotic environment.

2. All Substantial Loans to be Audited

Of course, the government will only find PPP fraud if it looks for it. But the current administration has made a very public pledge to audit every PPP loan in excess of $2 million. That’s a small fraction of all PPP loans (just 30,000), but they account for nearly a quarter of all loan money disbursed. That many audits are sure to uncover plenty of wrongdoing—and take plenty of time to get through.

3. Many Government Bodies Looking for Fraud

The Justice Department has been active in bringing PPP-related prosecutions, but it is hardly the only government body looking into the matter. The CARES Act, which created the PPP, also created two entities to investigate fraud: a congressional Pandemic Response Accountability Committee, to detect mismanagement of relief funds and a Special Inspector General for Pandemic Recovery, to audit and investigate relief programs—including the PPP.

Beyond those authorities and the Small Business Administration itself, many federal and state agencies have been looking into PPP loan fraud, including the FBI, Federal Deposit Insurance Corporation, Federal Housing Finance Administration, Federal Reserve, Internal Revenue Service and the U.S. Postal Inspection Service.

4. Long Statutes of Limitations

The CARES Act does not contain its own civil or criminal enforcement provisions. Instead, like other government programs, it relies on existing federal statutes to limit fraud, theft and other wrongdoing in connection with its programs. Those statutes cover a lot of ground. Already, the DOJ has filed PPP-related criminal complaints under the following laws:

  • Aggravated Identity Theft (18 U.S.C. § 1028A)
  • Attempt (18 U.S.C. § 1349)
  • Bank Fraud (18 U.S.C. § 1344)
  • Conspiracy (18 U.S.C. § 371 and 18 U.S.C. § 1349)
  • Making False Statements to the Small Business Administration (SBA) (18 U.S.C. § 1014)
  • Making False Statements to an FDIC-Insured Bank (18 U.S.C. § 1014)
  • Making False Statements to Federal Agents (18 U.S.C. § 1001)
  • Tax Evasion (26 U.S.C. § 7201)
  • Wire Fraud (18 U.S.C. § 1343)

Some of these laws have statutes of limitations as long as ten years, meaning the federal government will have plenty of time to bring PPP-related cases.

5. Employees Can Bring Whistleblower Claims

It’s not just the government that loan recipients have to worry about. Under the False Claims Act, private citizens can bring PPP loan fraud whistleblower actions when they know that an entity submitted a false claim for money to the government. A false PPP loan application could trigger liability under that statute. Whistleblowers get to keep 15 to 30 percent of all money ultimately recovered, which means that employees of organizations that cheated on their PPP applications have a strong motivation to bring these actions.

We can expect, then, to see PPP litigation in the courts for many years to come—hopefully, long after the pandemic that gave rise to it is eliminated.