Fraud, Waste, and Abuse in The Age of COVID-19

The United States is experiencing a health, safety, and financial disaster like nothing truly seen in our lifetimes. As always with tragedy, there will be opportunists looking to exploit the government response.

One month ago, the Coronavirus Aid, Relief, and Economic Security Act,[1] created a Paycheck Protect Program (“PPP”) to assist small businesses and hard-hit industries in weathering the economic fallout from the Coronavirus pandemic.[2] The loans are meant to cover some payroll costs and a portion of rent, mortgage payments, and utilities. Demand was so high that the funds dried up after only two weeks.[3] This week, the federal government turned the spigot back on, increasing the fund to $659 billion.[4]

When companies apply for the PPP they must prove eligibility.  For example, they must certify to the lender that

  • They were in operation on February 15, 2020 and had employees for whom it paid salaries and taxes;
  • Current economic uncertainty makes the loan necessary to support its ongoing operations;
  • The funds will be used to retain workers and maintain payroll or to make mortgage, lease, and utility payments; and
  • The company has not already received another SBA loan under the program.[5]

Applicants must also provide to the lender documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of covered expenses necessary for the next eight weeks.[6] The applicant must also certify that the information it submits with its application is true and accurate, but the fact that funding levels are tied to expenses provides a tempting opportunity to defraud the government.

Many large high-profile companies have faced public scrutiny for taking advantage of this program, meant in theory to help struggling small businesses and industries hit particularly hard by the shutdown.[7] Many of these companies, the argument goes, cannot truthfully certify that they need the loans or that they do not already have access to other loans under the program.  The U.S. Treasury Department has given companies until May 7th to return funds they did not qualify to receive.[8]

Whether or not companies must repay the loans depend upon their compliance with certain criteria.  Upon application, the loans may be forgiven in whole or in part so long as:

  • Proceeds will be used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8-week period after the loan is made; and
  • Employee and compensation levels are maintained.[9]

When seeking forgiveness, companies must submit documents verifying the number of full-time equivalent employees and pay rates, as well as payments on eligible mortgage, lease, and utility obligations.  Again, they must certify in those requests that the documents are true and that they used the forgiveness amounts to keep employees and make eligible mortgage/rent and utility payments.[10] Companies suffering from the economic fallout of this pandemic may be tempted to knowingly misrepresent information in order to obtain loan forgiveness.

The U.S. Treasury Department makes clear that, if a business misuses PPP funds, it will be directed to repay the monies.[11] If the business knowingly used the funds for unauthorized purposes, the business will be subject to additional liability including charges for fraud.  The Small Business Association may go after shareholders, members, or partners for unauthorized use of funds.  On March 16, 2020, U.S. Attorney General William Barr issued an interim memorandum within the Department of Justice, directing all U.S. Attorneys to prioritize and “remain vigilant in detecting, investigating, and prosecuting wrongdoing related to the [COVID-19] crisis.”

Whistleblowers who work for companies seeking PPP funds may discover that the companies have knowingly falsified documents or misrepresented their business operations in order to unlawfully qualify for the program or for loan forgiveness.  When this happens, federal law provides persons with knowledge of the wrongdoing with an opportunity to “blow the whistle.”  Under the False Claims Act, they may file a lawsuit as “relators” on behalf of the federal government, a process which triggers an investigation and potentially litigation.[12] If the action results in the government recovering funds, the whistleblower may be eligible to receive a portion of the funds, anywhere between 15–30%.

The PPP program is barely one month old. These lawsuits are kept secret until the conclusion of the investigation.  Because of this, it will take some time before we learn just how rampant fraud and abuse has been with the program and just who was brave enough to shine a light on the problem. If you have information about PPP fraud, Nichols Kaster may be able to help you blow the whistle. Contact us today.

[1] Pub. L. No. 116-136, 134 Stat. 281 (March 27, 2020).

[2] U.S. Treasury Dep’t, Paycheck Protect Program (PPP) Information Sheet: Borrowers [hereafter “Information Sheet”].

[3] Lisa Desjardins, “It took 13 days for the Paycheck Protection Program to run out of money. What comes next?” (Apr. 16, 2020).

[4] The Paycheck Protection Program and Health Care Enhancement Act, Pub. L. 116-139, 134 Stat. 620 (Apr. 24, 2020).

[5] U.S. Small Business Admin., Interim Final Rule, Docket No. SBA-2020-0015, Pt. III.t, 85 F.R. 20811 (Apr. 2, 2020) [hereafter “Interim Final Rule 1”]; Information Sheet, supra.

[6] Information Sheet, supra. 

[7] Nathan Vardi, “Public Companies Rush to Repay Paycheck Protection Program Loans Amid Government Pressure,” Forbes (Apr. 23, 2020).

[8] Victor Reklaitis, “Treasury gives big public companies until May 7 to return loans meant for small businesses,” MarketWatch (Apr. 23, 2020).

[9] Information Sheet, supra. 

[10] Id.

[11] Interim Final Rule, supra pt. III.s.

[12] 31 U.S.C. § 3729, et seq.

Photo by Shot by Cerqueira on Unsplash