Q& A
Fraud Will Be A ‘Significant Problem’ With SBA’s Paycheck Protection Program Treasury Secretary Mnuchin announced plans to scrutinize the largest recipients of emergency small business loans and indicated potential criminal penalties for big companies that misrepresent their financial situation to secure the money. How prevalent of an issue is fraud with the PPP program? Do you think it will be a major issue?
Terence M. Grugan
Terry Grugan is a whitecollar defense lawyer with the Philadelphia-based law firm. Grugan has represented countless businesses that have been the target of government investigations for fraud. He spoke with Banking Mid Atlantic about the potential fraud and liability associated with the Small Business Administration’s Paycheck Protection Program.
Photo by Bill Oxford on Unsplash
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Based on historical experience with government spending programs, we can expect fraud to be a significant problem with the PPP, as it likely will be with other components of the COVID-19 stimulus bills. Though it is impossible by the very nature of fraud to know with certainty its general scope, experts estimate that anywhere from 3-10% of all government spending is subject to fraud. The PPP will be no different. What will set it apart are two characteristics of it that make it (and the other stimulus spending programs) unique: (1) the speed with which it was enacted and money disbursed under it; and (2) the incredible scrutiny it is and will continue to be under. As to the first characteristic, because the CARES Act was crafted and passed and money disbursed under it so quickly, there are likely features of it that will be exploited that might not otherwise have existed had the legislation been subject to typical legislative scrutiny. In fact, we are seeing this occur already with public companies and other large borrowers who probably were not intended recipients applying for and receiving PPP loans. The legitimacy of those loans will be evaluated according to how “necessary” they were for the recipients to receive. While from a lay standpoint we all may have an idea what “necessary” means, from a legal standpoint and, certainly from a criminal standpoint, which Constitutionally requires real precision, that standard is notably vague. The second feature in many ways relates to the first:
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there has been a great deal of scrutiny over these bills already as we are in the throes of this crisis. Once the crisis has passed and the check comes due for these programs, there will be an additional level of scrutiny both by regulators and the public to ensure these funds went where they were supposed to go. Are only big companies going to be targeted? What do you think the threshold is going to be? How big does a company have to be to grab the government’s attention? The size of a recipient may drive government oversight to some extent, but it won’t be the only determinative factor. Regulators, whether the SBA while auditing loans or the IRS when analyzing corporate tax returns, or other agencies, will be looking for red flags that might indicate fraud. If it appears that a company retained loans while its payroll decreased, the government will likely target that company. If it appears that a company had sufficient liquidity, yet still applied for and received a loan, the government will likely target that company. If there is evidence a company overstated its number of employees in its loan application, the government will likely target that company. These are only examples and we can be sure investigators will look for any indicator that a company took money from the PPP under false pretenses. What type of penalties do you envision against companies that misrepresent their financial situation? If the government believes that a company made misrepresentations to receive a PPP loan, it will not hesitate to pursue criminal charges. While a company itself is a legal entity that can face criminal, civil, and administrative penalties, the individuals running the company who made the
