Recent Paycheck Protection Program (PPP) enforcement trends suggest that the US Department of Justice (DOJ) has begun focusing on False Claims Act (FCA) enforcement actions centered on PPP applicants’ technical compliance with more complex PPP rules and regulations. This is a shift from the DOJ’s prior PPP enforcement focus on combatting less technical, more clear examples of alleged fraud.

On February 22, 2024, at the Federal Bar Association’s 2024 Qui Tam Conference, the DOJ announced it recovered $2.7 billion via a record 543 FCA settlements and judgments in its fiscal year 2023. Roughly half of these matters (270) related to PPP loans, amounting to over $48.3 million in recoveries. During the Qui Tam Conference, assistant US attorneys from across the country also highlighted that PPP enforcement actions have been a significant priority and they expect their offices to continue to see cases investigating alleged PPP fraud.

THE PPP PROGRAM

The Paycheck Protection Program, originally established by the CARES Act at the outset of the COVID-19 pandemic in March 2020 and subsequently renewed through the Consolidated Appropriations Act in December 2020, permitted eligible businesses to receive two-year loans with 1% interest worth up to 2.5 times their average monthly payroll to cover expenses for payroll, group healthcare benefits, mortgage interest or rent, utilities, and interest on previously incurred debt. Businesses that used PPP loan proceeds for permissible purposes were eligible for up to 100% loan forgiveness.

The requirements for loan eligibility during the second round of funding in early 2021 (Second Draw) were more restrictive than during the initial round of funding in 2020 (First Draw). During the First Draw, a business was eligible for a PPP loan if it was a “small business concern,” met the Small Business Administration’s (SBA’s) “alternative size standard,” or if it had fewer than 500 employees. Businesses with more than 500 employees might also be eligible, however, if they did not exceed the SBA’s size standard for their NAICS industry, which could reach as high as 1,500 employees. During the Second Draw, eligibility was limited to businesses with no more than 300 employees and with a 25% reduction in gross receipts between 2019 and 2020.

During both the First and Second Draw, businesses also were required to apply the SBA’s affiliation rules set forth in 13 CFR § 121.301, certify that economic uncertainty made the loan necessary, disclose all owners of 20% or more of their equity, and meet other eligibility requirements.

EARLY PPP ENFORCEMENT EFFORTS

The DOJ’s initial PPP enforcement actions largely brought criminal charges (such as bank fraud, wire fraud, and making false statements to financial institutions) against individuals who committed alleged clear examples of fraud in connection with the PPP. For instance, some of these cases involved individuals who

• applied for loans for businesses no longer in operation[1] (and in some cases, for entities that never existed);[2]
• misrepresented the applicant’s number of employees; [3]
• used loan proceeds for impermissible purposes, including purchasing jewelry,[4] cars,[5] cryptocurrency,[6] and travel;[7] or
• ran or participated in loan “rings” to facilitate submission of false applications.[8]

The DOJ continues to aggressively pursue these types of cases. By way of example, in February, a jury convicted two individuals for bank fraud, wire fraud, and money laundering, among other charges, in connection with a scheme through which they submitted falsified documents to obtain over $11 million in PPP loans on behalf of 14 businesses that did not actually exist.[9]

CIVIL ENFORCEMENT ACTIONS

In parallel with its criminal enforcement, the DOJ has also pursued civil FCA actions related to PPP applications. The DOJ announced the first civil FCA settlement stemming from PPP conduct in January 2021. The applicant made false statements that it was not in bankruptcy in order to receive PPP funding. As part of the settlement, the company repaid its $350,000 PPP loan in full and the company along with its president/chief executive officer paid a combined $100,000 in damages and penalties.[10]

Whistleblowers have been and will continue to be influential in assisting the DOJ’s FCA efforts related to the PPP. The first PPP-related FCA settlement arising from an intervened qui tam complaint settled in September 2022.[11] The whistleblower alleged that the company impermissibly received two First Draw PPP loans. The government intervened in the case and the company ultimately repaid its second loan in addition to roughly $20,000 in penalties.

RECENT ENFORCEMENT TRENDS AND OUTLOOK

While the DOJ will continue to seek criminal charges against individuals who commit PPP fraud, recent trends suggest the DOJ has been prioritizing investigating and bringing FCA claims. These cases likely are targeting more complex businesses and turn on the technical requirements and rules governing PPP eligibility. Below are a few areas of enforcement.

Affiliation Rules

One issue that has attracted attention is the SBA’s affiliation rules. To determine eligibility for PPP funding, applicants had to assess whether they had any “affiliates.” Determining an applicant’s affiliates, particularly when the business is a member of a larger corporate family, is highly fact-dependent and requires complex assessments of business and legal relationships between entities. A technical reading of the SBA’s affiliation rules in effect at the time could deem two entities “affiliates” based on certain factors such as ownership, common management, stock options, and identity of interest.

Certain exemptions applied for restaurants and hotels, franchises, and companies receiving financial assistance through Section 301 of the Small Business Investment Act.

Affiliation requirements can pose challenges to PPP eligibility for entities that are part of a larger corporate family or owned by private equity firms. Hedge funds and private equity firms were ineligible for PPP funding because they are “primarily engaged in investment or speculation.” 85 Fed. Reg. 23,450, 23,451 (Apr. 28, 2020). Private equity firms’ portfolio companies, however, were not barred from receiving PPP funds.

Two recent settlements highlight the DOJ’s increased focus on FCA violations stemming from the affiliation rules.

• In October 2023, the DOJ announced a $9 million FCA settlement stemming from a qui tam suit with the corporate parent of over 40 car dealerships.[12] Although the dealerships themselves qualified for PPP funding based on the franchise exemption to SBA affiliation rules, the parent entity could not rely on that exemption, and was required to consider each franchise’s employees when calculating its total headcount. After taking into account those entities’ employees, the parent had more than 3,000 employees and was therefore ineligible for the nearly $6.3 million PPP loan it received.
• In another settlement stemming from a qui tam suit announced in December 2023, a roofing company paid $9 million to settle FCA claims after it and its affiliates received $6.7 million in PPP loans.[13] The whistleblower alleged that each PPP applicant was an affiliate of other members of the roofing company’s corporate family, and their collective size rendered them ineligible for PPP funding.

Businesses facing challenges to their interpretation of the affiliation rules should attempt to demonstrate their good faith efforts to comply with the complexity of the rules in order to negate the FCA’s demanding scienter standards. Contemporaneous communications may shed light on how the individuals responsible for the loan application analyzed the affiliation rules and bolster a company’s claim that it did not act with recklessness, deliberate ignorance, or actual knowledge, as required to establish a violation of the FCA.[14]

Any FCA case based on alleged violations of the affiliation rules will turn on the unique facts and relationships between purported affiliates. In sharp contrast to previous PPP enforcement efforts that largely focused on outright lies on applications (e.g., submitting applications on behalf of businesses that did not exist) or obvious misuse of PPP proceeds (e.g., using funds to purchase jewelry and cars), these cases will turn on highly technical issues.

Certification of Need

Both the First and Second Draw PPP applications required an applicant to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Applicants were required to consider their business activities and ability to access other sources of funding when making this certification. SBA guidance again allowed lenders to rely on a borrower’s certification regarding the necessity of the loan, and any entity (together with affiliates) that received less than $2 million in First Draw funding was deemed to have made the required certification in good faith.

Similar to cases arising out of the correct application of the SBA’s affiliation rules, enforcement actions based on the accuracy of the applicant’s economic need certification will also turn on fact-intensive analyses. This, too, will mark a shift away from more straightforward cases of fraud the DOJ has previously pursued.

Any business whose certification is challenged should work to recreate its economic outlook and condition at the time it submitted its loan application.

FUTURE OUTLOOK

The increasingly broadening scope of the DOJ’s PPP investigations and enforcement actions based on compliance with more complex and technical PPP rules and requirements will likely target more sophisticated businesses. Given the complexity and changing nature of the PPP loan eligibility requirements, companies have a number of traditional FCA defenses available.

[1] Office of Public Affairs, US Department of Justice, Minnesota Man Charged with COVID-Relief Fraud and Money Laundering

[2] Office of Public Affairs, US Department of Justice, Seattle Software Developer Pleads Guilty to Wire Fraud for COVID-Relief Fraud Scheme

[3] Office of Public Affairs, US Department of Justice, Texas Man Charged with COVID-Relief Fraud, False Statements and Money Laundering

[4] Office of Public Affairs, US Department of Justice, Reality TV Personality Charged with Bank Fraud

[5] Office of Public Affairs, US Department of Justice, Florida Man who Used COVID-Relief Funds to Purchase Lamborghini Sports Car Charged in Miami Federal Court

[6] Office of Public Affairs, US Department of Justice, Texas Man Charged with COVID Relief Fraud

[7] Office of Public Affairs, US Department of Justice, Businessman Pleads Guilty to Paycheck Protection Program Fraud

[8] Office of Public Affairs, US Department of Justice, Nine Charged with $24 Million COVID-Relief Fraud Scheme

[9] Office of Public Affairs, US Department of Justice, Two Individuals Convicted for $11M COVID-19 Relief Fraud Scheme

[10] Office of Public Affairs, US Department of Justice, Eastern District of California Obtains Nation’s First Civil Settlement for Fraud on Cares Act Paycheck Protection Program

[11] Office of Public Affairs, US Department of Justice, First-Ever Paycheck Protection Program False Claims Act Whistleblower Case in Which the United States Intervened Against the Borrower Settles

[12] Office of Public Affairs, US Department of Justice, Victory Automotive Group Inc. Agrees to Pay $9 Million to Settle False Claims Act Allegations Relating to Paycheck Protection Program Loan

[13] Office of Public Affairs, US Department of Justice, National Roofing Company Settles PPP Fraud Allegations for $9 Million

[14] A subsidiary of a Japanese company settled FCA claims in June 2023 based in part on its incorrect application of the affiliation rules. Along with its affiliates, it had more than 500 employees. The settlement agreement quoted an email from the company’s chief financial officer, who doubted the company was eligible for a PPP loan based on the SBA’s affiliation rules. See Office of Public Affairs, US Department of Justice, San Mateo Company To Pay More Than $1,000,000 For Improperly Seeking And Obtaining Paycheck Protection Program Loans.

[View source.]