The U.S. Department of Justice (DOJ) is investigating cannabis and marijuana-related businesses that allegedly took COVID-19 relief loans in violation of federal rules, with third-party actors leveraging a whistleblower policy that allows them to reap a portion of settlement awards for reporting on the cannabis companies.
In 2020, when former President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law, the federal Small Business Administration (SBA) referred to previous guidance to indicate that businesses “engaged in any illegal activity” under federal law are generally ineligible for Paycheck Protection Program (PPP) forgivable loans. The SBA further stated: “Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.”
According to Marijuana Moment, there are now up to 100 active cases being investigated by the DOJ for possible PPP violations, including both businesses involved in the production or sale of marijuana as well as ancillary companies that are not plant-touching. Though the majority of these cases are not public, the DOJ has sent letters notifying businesses either directly or indirectly associated with the state-legal marijuana industry that they are being reviewed for possible violations of the federal False Claims Act (FCA).
The FCA is a whistleblower law that imposes criminal penalties (fines and imprisonment) as well as civil damages, disgorgement, and other remedies in situations where federal funds (such as SBA funds) are obtained by false or fraudulent means – including based on alleged false certifications of eligibility for PPP loans. Under the FCA, private third parties that report PPP violations on behalf of the government through a qui tam lawsuit may be entitled to 15 to 30 percent of the proceeds from any settlement agreement. One public example of this scenario played out this March when Docklight Brands, a Seattle-based business that develops and sells hemp-derived products and licenses certain marks for use in connection with state-licensed cannabis products, agreed to pay back double the amount of the $494,719 PPP loan it falsely certified eligibility for in September 2022.
“Those seeking vital assistance from SBA’s pandemic response programs must comply with the requirements,” Special Agent in Charge Weston King of the SBA's Office of Inspector General's Western Region said in the DOJ press release. Sidesolve LLC, a company that specializes in facilitating whistleblower complaints of alleged PPP loan fraud, filed the qui tam lawsuit against Docklight Brands and subsequently secured $148,416.70 of the settlement funds – the maximum 30 percent under the FCA.
Any business that took PPP loans and works either directly in the production or distribution of cannabis or provides services in connection with the state-legal marijuana industry faces substantial risk of a potential FCA claim. Companies facing this circumstance should consult with counsel to evaluate their individual situation.
