In its first enforcement action related to COVID-19 government aid programs, the Federal Reserve Board recently announced that it has fined New York-based Popular Bank $2.3 million for processing Paycheck Protection Program (PPP) loans that had significant indications of potential fraud and failing to report the potential fraud in a timely manner.
This groundbreaking fine indicates that the Federal Reserve plans to join the Department of Justice and other federal agencies in actively investigating fraud related to pandemic relief programs, and that financial institutions that processed potentially fraudulent loans are at risk for civil monetary penalties.
CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, provided emergency financial assistance through the PPP in the form of forgivable loans to businesses to cover payroll and other specified expenses. Lenders who originated PPP loans were entitled to receive a fixed fee from the Small Business Administration (SBA). That fee ranged from 1% to 5%, depending on the size of the loan.
From the outset, the government vowed to prevent recipients from fraudulently taking advantage of CARES Act programs. While initial investigations and prosecutions focused on individuals and companies that allegedly received fraudulent loans, the government appears to have broadened its focus to include lenders that distributed the funds.
The Federal Reserve Board
The Federal Reserve Board is charged with overseeing the central bank of the United States. The Board’s goal is to promote the effective operation of the U.S. economy. It is tasked with creating monetary policy to promote maximum employment, stable prices and moderate long-term interest rates in the U.S. economy. The Federal Reserve Board is also tasked with ensuring stability of the financial system and minimizing systemic risks through active monitoring and engagement with financial institutions. Importantly, the Board oversees consumer protection and community development through supervision, examination, research and analysis of emerging consumer issues and trends.
The Bank
As part of its normal functions, the Federal Reserve Board monitored lenders that were processing PPP loans during the COVID-19 pandemic. In this case, the bank processed six PPP loans totaling approximately $1.1 million that had indications of fraud. After processing the PPP loans, the bank self-reported the potential issue. The bank thereafter undertook substantial remediation related to its ineffective controls and flawed procedures that resulted in the fraud. The bank also fully cooperated with the investigation.
While the government has targeted numerous PPP borrowers who committed fraud, the fine against the bank represents one of the few times the government has taken any action against a lender. As we wrote previously in our prior alert, the Justice Department did settle a False Claims Act matter with a PPP lender. This most recent case demonstrates that the government will not hesitate to levy fines or potentially pursue criminal charges if it feels they are merited, and reinforces the point that lenders will continue to face government scrutiny.
Any bank that is concerned about potential PPP fraud exposure should consult counsel now and not wait to be contacted by law enforcement. Being proactive and self-reporting potential fraudulent conduct, rather than waiting for a government agency to contact you, can mean the difference between monetary civil penalties and criminal charges. Bank management and employees who believe they are mere witnesses may be exposing themselves and their colleagues to civil and criminal penalties by staying silent.
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