Legal Alert

PPP Participants Should Prepare For Vigorous Oversight

by the White Collar Defense/Internal Investigations Group
April 23, 2020

With significant government intervention comes significant government oversight. That is the message coming from Capitol Hill and the Executive Branch concerning the Payroll Protection Program (PPP), a Small Business Administration (SBA)-implemented loan program intended to assist small businesses with meeting payroll needs.

As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress initially allocated $349 billion to the PPP. That figure is set to increase by $310 billion if the relief package approved by the Senate on April 21, 2020 becomes law. A business is eligible for a PPP loan that is 2.5 times the business’s 2019 average monthly payroll, not exceeding $10 million. This loan can be forgiven in full, but the business must meet specific criteria and retain its payroll. Eligible small businesses applying for a loan must make specified certifications concerning their payroll history and uses of the loan proceeds and must retain current payroll levels to be eligible for loan forgiveness. The program is administered through active Small Business Administration 7(a) Lender or any federally insured depository institution, federally insured credit union, or any Farm Credit System.

With a stimulus program of this size, fraud—potentially rampant fraud—is a near certainty. Acknowledging as much, as well as “multiple reports of companies abusing the program,” U.S. Sen. Marco Rubio (R-Fla.), Chairman of the Senate Committee on Small Business and Entrepreneurship, released a statement that his panel will be aggressive in overseeing the PPP. He stated: “[t]his Fall, the Senate Committee on Small Business and Entrepreneurship will conduct aggressive oversight into the use of the PPP. If companies are not forthcoming, the committee will use its subpoena power to compel cooperation.”

Sen. Rubio’s statement—echoed by Congressional leaders from both Houses and parties—follows revelations that borrowers, including many large public companies, not strictly meeting the PPP eligibility requirements have exploited loopholes in the program to obtain millions in loans. Indeed, according to government accounting, $99.7 billion was granted to public companies with a market capitalization over $100 million. On the lender side, large banks have faced intense criticism that their administration of the PPP has favored such large existing bank clients to the exclusion of smaller businesses, which the PPP ostensibly was intended to benefit most.

And Congress is not alone in warning potentially undeserving loan recipients that consequences could follow their receipt of stimulus funding intended for small businesses. U.S. Treasury Secretary Steven Mnuchin and Brian Benczkowski, Assistant Attorney General of the U.S. Justice Department’s Criminal Division, both made public statements on Tuesday, April 22, 2020, threatening companies with investigation if they receive PPP loans without a legitimate need for them. Central to any potential investigations of such recipients is a self-certification in the PPP loan application applicants make that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” Mr. Mnuchin stated, “I think a lot of these big companies, it’s questionable whether they can make that certification; I think they should review it.” However, companies might have an opportunity to avoid potential criminal investigation if they re-review their loan applications, determine sufficient need did not exist for the loan, and return the money: “There will be no liability to Treasury and the SBA. ....If they don’t, then they could be subject to investigation.”

With such public focus on the PPP, it should come as no surprise that Congressional leaders, Treasury officials, and law enforcement are expressing a commitment to ensuring the proper and intended functioning of the program. And, as Messrs. Mnuchin and Benczkowski’s comments demonstrate, Congress is merely one of several arenas where borrowers and lenders’ compliance will be intensely scrutinized, including the SBA itself, the Department of Justice, the IRS, and the CARES Act Inspector General, to name a few. Strict compliance and ongoing adherence to PPP terms and conditions will be critical.

If you have questions concerning compliance with the PPP or need assistance relating to compliance or oversight issues, please contact David Axelrod, Terence Grugan, Marjorie Peerce, or Henry Hockeimer.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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