As former federal prosecutors, the authors have investigated and prosecuted individuals who committed various crimes relating to TARP funding and other crisis aid. With the passage of the U.S. CARES Act and more than $349 billion in Paycheck Protection Program (PPP) loans now available to small businesses through the SBA 7(a) Loan Guaranty Program, many companies will be applying for PPP loans to help mitigate the significant effects of COVID-19 on their businesses. As companies apply for PPP loans, the authors offer some real-world observations and recommendations based on their experience.

• The government has learned from the fraud relating to TARP, Katrina, and other federal programs. The PPP application form tries to close many of the loopholes people threaded in the past, and reviewers/auditors/Inspectors General will know where to look.
• The signer of the certification is verifying the truth of the application. That person needs to have done his or her due diligence and ask questions to verify that the information is correct. The extent of required due diligence will depend on the context, of course, but the signer should not simply rely on information provided by others unless it is reasonable to do so, and he or she must never minimize or ignore inaccurate or suspect information. For example, the signer is certifying representations relating to a 20% holder’s criminal history. While an email confirmation is likely sufficient for a well-known VC fund, for less-well known entities it would be better to at least run a Google search on that holder. For individuals, better still would be to also use the company’s “new employee” background check service to run a quick criminal history check, even if the holder is a past or present founder or employee.
• The primary focus for criminal prosecutions will be on outright fraud, not incorrect but genuine misunderstandings of the PPP. Relatedly, prosecutors frequently pass on cases when companies had competent counsel advising them during the process.
• Employees v. independent contractors. Be careful certifying the company has fewer than 500 employees if it has a significant number of independent contractors. The law in this area is in flux (especially in California with the passage of AB 5), and you will not want to be in a position of having to argue that you “thought” your contractors did not count against the limit.
• Fraud and abuse will be a strong focus of the government post funding. There will be auditors and investigative task forces; the usual prosecution thresholds will not apply, thus no fish will be too small for the net. While the government will not be able to investigate every recipient, and of course dollar amounts and the degree of fraud matter, once a recipient comes to the government’s attention (and this can happen in multiple ways), the fact that the loan was relatively small, or the conduct of others was more egregious, will not mean the recipient will get a pass.
• Assume there will be random as well as targeted reviews of PPP recipients. Be ready for it.
• Avoid any appearance of self-dealing. Prosecutors will be hyperattentive to related-party transactions.
• The fraud/problems may happen at any stage, including: (a) the application; (b) assessing whether to take the loan if approved (have circumstances changed?); (c) spending of the funds; (d) responding to government questions/updates; and (e) responding to audits. Have a process in place for all five stages staffed with the right person for the job, comply with that process and document it, save the documentation, and be diligent at all stages. Remember that federal bounties exist to reward whistleblowers who report misconduct involving federal programs, so if a mistake has been made, do not try to hide it. And take any whistleblower complaints, or potential ones, very seriously.
• Review all prior loan/lines of credit applications, representations to landlords, decks shown to VCs, etc. Your PPP application should be consistent with those prior representations, or you need to be able to explain the difference.
• If you are a start-up in a highly regulated area, think hard about soliciting further government oversight. Many investigations are the result of an unrelated inquiry. If you do not really need the money, it might be wiser to take a pass.
• Optics matter:
  • Regulators and courts will not be sympathetic to recipients who are in any way perceived (however unfairly) to have taken advantage of this crisis.
  • As prosecutors, we preferred cases where there was clear evidence of greed/excess. Avoid executive bonuses (cash in particular, but equity, too), perks, excessive marketing expenditures, non-essential capital improvements, expensive holiday parties, limos/private planes, etc. -- even after the crisis passes.
  • Make sure the money goes where it is supposed to, and that you would have no concerns defending the use of the funds if investigated down the road.
  • Consider having executives take a pay cut, and having board members forego their compensation for 6-12 months. If possible, and notwithstanding that “money is fungible,” use other funds to pay executives and board members.
  • If, in the last 12 months, the company raised significant funds, paid large bonuses, issued large executive grants, or made significant capital improvements (particularly if unrelated to building a design or manufacturing facility), that is all the more reason to seriously evaluate the cost-versus-benefit of applying for funds that may, down the road, be referred to as “government handouts.”  
  • Avoid bad emails/Slack messages/texts. No jokes about government funding, and avoid using terms like “free money.” And if you know that there are already such emails or text messages floating around your company, discuss it with legal before applying.
  • Keep a low profile in regard to receiving the funds. If the company is named in the press or by Congress as an example of abusing the intent of the act, expect a government inquiry.
• All of these must be considered and evaluated in conjunction with current guidance at the time, and any relevant regulations published.

Dave Callaway, Derek Cohen, and Grant Fondo have investigated and prosecuted individuals who committed various crimes relating to TARP funding and other crisis aid. In particular, Dave, as the Chief of the Economic Crimes Unit of the U.S. Attorney’s Office, supervised  the NDCA TARP prosecutions, and Derek, as Deputy Chief of the Fraud Section for the Department of Justice, supervised a number of investigations in conjunction with the Special Inspector General for TARP (“SIGTARP”).