Scrutiny of federal relief funds is expected to be intense as evidenced by the decisions of two prominent companies to quickly return loans they had secured under the Paycheck Protection Program (PPP) in the wake of criticism that the funds should have gone to needier companies.

Businesses considering a PPP loan should be aware that Congress created a special oversight mechanism designed to ferret out fraud in the relief package and ensure that all loans were pursued in good faith. The Trump administration has specifically vowed to audit all loans over $2 million.

Time is quickly running out for businesses considering a similar path. A deadline of May 7, 2020 was recently set for participants in the PPP program to repay their loans in full to avoid any future determination of bad faith.

Good Faith Certification

Established in the Coronavirus Aid Relief and Economic Security Act (CARES Act), the PPP is a new loan program administered by the Small Business Administration (SBA). The program’s extensive eligibility requirements include a mandate that borrowers assess their “economic need” for a PPP loan under the standards established by the CARES Act.

Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers under PPP still must certify in good faith that their loan request is necessary. Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

Businesses with substantial market value and access to capital markets will likely not be able to make the required certification in good faith. A company must be prepared to demonstrate to the SBA its basis for its certification.

Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020, will be deemed by the SBA to have made the required certification in good faith.

Pandemic Response Accountability Committee

The CARES Act also established oversight bodies to monitor the use of relief funds disbursed to people and businesses.

The CARES Act created an oversight body called the Pandemic Response Accountability Committee and granted the Committee subpoena power. The Pandemic Response Accountability Committee is charged with preventing and detecting fraud, waste, abuse, and mismanagement of funds. Further, the Committee is authorized to conduct randomized audits to identify any potential fraud.

Additionally, pursuant to the CARES Act, the Special Inspector General for Pandemic Recovery has a duty to conduct and coordinate audits and investigations related to loans. The Special Inspector General will likely focus on fraud as it relates to obtaining funds through the CARES Act loans.

The powers granted to the Committee and the Special Inspector General will likely lead to investigations of private companies that received funds through the Act. The government will be looking to determine whether companies have acted in accordance with the responsibilities set out by the Act, and appropriately received and used the funds pursuant to the CARES Act. Individuals suspected of making false statements or failing to disclose material facts to receive overpayments of funds are authorized to be prosecuted pursuant to the CARES Act.

While the federal government has slowed investigation into some white-collar related crimes, it is certainly allotting its resources to COVID-19 related crimes. There will likely be an increase in investigations and subsequent prosecutions of fraud related to funds received through the CARES Act. It will be extremely important for businesses to comply with their obligations pursuant to the CARES Act. Businesses should take steps to protect themselves from the risk of government investigations. Company decisions about how to spend the relief funds will mostly certainly be inspected by the government later.

Audits of All Loans Over $2 Million

In addition to the above mentioned investigations and audits, the government announced on April 28 that it will investigate every loan for more than $2 million given under the PPP. Because the PPP was designed for small businesses, the government wants to ensure that the program was not used to benefit public companies that had liquidity. The audits of the loans will come before they can be forgiven.

The government reiterated on April 28 that companies that made false certifications could face criminal liability and other consequences. Potential penalties include criminal prosecution, denial of loan forgiveness and harsh civil fines.

If you need guidance on how to comply with the CARES Act and the return or use of relief funds, or have already received a subpoena, correspondence or any form of contact is made through any governmental investigative body, immediately contact counsel.