Millions of businesses, corporations, and sole proprietorships have obtained Paycheck Protection Program (PPP) loans since the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act last year.
Billions of dollars have been distributed in first-draw loans, and many businesses are now receiving second-draw loans as well.
There are requirements, however, both for an initial first-draw PPP loan and to qualify for a second-draw loan. Those requirements can be confusing – if you certify that your business qualifies and the SBA later discovers that your business does not qualify, you could be subject to civil or even criminal penalties.
What are some of the requirements, and how can you avoid a civil audit or criminal investigation based on the certifications that you make when applying for a Paycheck Protection Program loan?
Paycheck Protection Program (PPP) Loan Certifications
When your business applies for a Paycheck Protection Program loan, the SBA relies on good-faith certifications that you make during the application process, including your representations to the SBA that:
PPP Loan Forgiveness Certifications
The loan forgiveness application will also include certain certifications that must be made by the borrower, including that:
Paycheck Protection Program (PPP) Civil Audits and Criminal Investigations
Although the SBA’s Paycheck Protection Program is primarily relying on lenders and your certifications when approving the loans, you may be subject to a civil audit before your loan is forgiven. If the SBA discovers that material misrepresentations were made during the application or forgiveness process, you may also be subject to a criminal investigation.
This highlights the need for legal counsel to advise your business as to whether you are in compliance with the SBA rules for PPP loan forgiveness, to assist with civil audits conducted by the SBA, and to help your business avoid civil or criminal penalties whenever possible.
PPP Civil Audits
When will the SBA conduct a civil audit?
Any borrower could be audited, but you are at higher risk if your loan was greater than $2 million, if you are a public company, or if there is inaccurate information in your loan application, forgiveness application, or the supporting documentation.
The Paycheck Protection Program FAQs on the SBA website provides some guidance for borrowers who are wondering what kind of review the SBA will conduct when they apply for loan forgiveness.
For example, question number 46 asks, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”
The SBA’s response is that there will be a “safe harbor” for borrowers who received less than $2 million, and they “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”
If you have received a loan in an amount less than $2 million, you are less likely to be audited by the SBA. On the other hand, this underscores the importance of compliance and careful review of your loan applications and supporting documentation for companies who received a loan greater than $2 million – you are more likely to be audited before you can receive loan forgiveness.
What if I am Audited and the SBA Decides I Did Not Qualify for the PPP loan?
The SBA will most likely require repayment of the loan and may or may not pursue additional administrative or criminal penalties.
In the SBA’s response to question 46 on their FAQs, they state that if there was not “an adequate basis for the required certification concerning the necessity of the loan,” the SBA will seek repayment and the borrower will not be eligible for loan forgiveness.
If the borrower then repays the loan, the SBA says that they “will not pursue administrative enforcement or referrals to other agencies” – will should avoid the possibility of civil or criminal penalties.
PPP Criminal Investigations
Although it does not appear that the SBA will make criminal referrals or seek administrative penalties due to an inadequate “basis for the required certification concerning the necessity of the loan” if the loan is repaid, there are circumstances when a loan application or forgiveness application could result in criminal investigation.
There are many circumstances that could result in a criminal investigation, but most of the cases so far involve companies or individuals that the government believes knowingly engaged in fraud. For example, knowingly providing false information on the loan application or forgiveness application such as:
In another example, an engineer in Texas was charged in federal court with wire fraud, bank fraud, false statements to a financial institution, and false statements to the SBA after claiming that his company had 250 employees (he had no employees).
How to Avoid Civil Audits or Criminal Investigation
The bottom line is, if you borrowed more than $2 million, you are likely to receive a civil audit. The key is to ensure that your business’s loan and forgiveness applications contain truthful information and that your supporting documentation is complete and accurate, to: 1) get loan forgiveness and avoid repayment, 2) avoid the potential for administrative actions and civil penalties, and 3) to avoid triggering a criminal investigation based on what may appear to be a fraudulent claim.
Please feel free to contact one of our Murray Lobb attorneys. Once we create a formal working relationship, our firm can provide you with the critical legal advice you require for all your business, corporate, or estate planning needs. We are also available to draft the various contracts and other documents you need while conducting your daily business activities.
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