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Paycheck Protection Program (PPP) Fraud & White Collar Defense

What are the charges and penalties for PPP loan fraud and misuse?

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As part of coronavirus relief, the federal government established the Paycheck Protection Program (PPP) in 2020 to provide billions of dollars in loans. Those loans would allow some businesses, non-profit organizations, sole proprietors, self-employed workers and independent contractors to continue paying wages even during the economic crisis of COVID-19.

But such loans are not “free money,” and those who use the program should be wary of PPP fraud cases arising.

Implemented by the U.S. Small Business Administration, the PPP is designed to provide some degree of economic relief to small businesses and other entities that have been harmed financially by the pandemic. Such businesses and entities were allowed to apply for low-interest private loans to cover their payroll and some other costs, including utilities, interest and rent.

Individual PPP loans cannot exceed $10 million, although each affiliate of a company is allowed to apply and receive its own separate PPP loan. The amount of the PPP loan should be about 2.5 times the applicant's average monthly payroll costs.

What are PPP payroll costs?

As for what PPP payroll costs cover, they include wages, salaries, cash tips, commissions, paid leave, housing allowance and severance pay, along with other compensations paid to employees. They also include taxes withheld from employees' wages and all local and state taxes assessed on compensation.

In addition, payroll costs include insurance and retirement benefits as well as group health benefits. They do not include an employer's portion of federal unemployment tax, Medicare tax or Social Security tax.

Approved payroll costs for a PPP loan are limited to $100,000 per year per employee.

Loan forgiveness can be gained

A PPP loan may be partly or fully forgiven if the business keeps its employee counts and employee wages stable. A business can apply for forgiveness on the loan at any time on or before the loan’s maturity date.

What qualifies a business for loan forgiveness?

That is often determined by what the loaned money was spent on, to what degree the business maintained or rehired employees and to what extent the business maintained the salary/wages and hours of its employees.

Total loan forgiveness cannot exceed the total amount of the PPP loan. However, loan forgiveness can be extended to all of a business’s payroll costs and can also cover non-payroll costs up to 66.67% of the amount the business spent on payroll costs.

Ineligible for loan forgiveness is the amount of the loan used for unallowable purposes. In fact, knowingly using loan proceeds for unallowable purposes is considered the white-collar crime of fraud.

Fraud can occur in PPP and other federal programs

Deliberately or unintentionally, the crime of fraud can occur in PPP and other federal programs that administer funds.

In the past, such programs that had fraud cases have included hurricane relief and the Troubled Asset Relief Program (TARP) run by the U.S. Treasury to stabilize the country's financial system, restore economic growth and mitigate foreclosures after the financial crisis of 2008.

According to Forbes magazine, the PPP program was set up to close many of the loopholes which were used to commit fraud during other federal programs.

Even so, some cases of PPP fraud—or “alleged” PPP fraud—still may arise.

If and when that happens, Texas business owners are advised to engage a knowledgeable and experienced Texas white collar crime defense lawyer to protect their legal rights.


It’s believed that the chief focus for criminal prosecution of alleged fraud cases will be what is considered outright fraud, rather than incorrect but genuine misunderstandings of the PPP program. Also, Forbes reports that prosecutors tend to pass on cases in which a business had competent legal counsel to advise them during the process.

However, fraud and abuse are expected to be focused on by the government post-funding. Such a focus will include investigative task forces and auditors.

It won’t help that a loan was relatively small or that the conduct of others was worse. If a PPP recipient comes to the federal government’s attention in a way that suggests PPP fraud, you can expect that case to be investigated. Loans may be forgiven in many other cases, but when the specter of fraud arises, federal authorities are likely to pounce.

When and where can PPP fraud arise?

As for when and where such PPP fraud can arise, that can include a variety of stages in the PPP loan process. This starts with the application process, when fraud can arise if a business is dishonest or not fully forthcoming in filling out its loan application.

PPP fraud also may arise if circumstances of the business change between the time of the application and the time of its approval. Businesses should be forthright in reporting such changes of circumstances.

Fraud for PPP loans can also occur when funds are not spent properly, when businesses fail to respond properly to government inquiries or requests for updates, and when businesses respond improperly to audits.

According to JD Supra, some problems may have arisen at the start, since businesses and the federal government acted quickly when the PPP program was launched, “perhaps without the normal care that would be exhibited when dealing with such large amounts of money.”

Businesses rightly perceived a limited time to act in order to receive much-needed funds, and such haste may have led to inaccuracies.

“Subsequent reporting indicates that some businesses receiving funding were not necessarily the intended beneficiaries of the Program,” JD Supra reports. “Other loans made under the Program were likely procured through misrepresentations and fraud.”


How to avoid PPP fraud

Businesses should keep in mind that there are federal bounties to reward whistleblowers who report misconduct involving federal programs. Whistleblower complaints should be taken seriously and not swept under a carpet of concealment.

Also, keep in mind that a start-up business in a highly regulated area may be more likely to draw attention for further government oversight. A PPP fraud investigation may arise as the result of an earlier, unrelated inquiry.

It’s vital that courts and regulators do not perceive, however unfairly, that your business has taken advantage of the pandemic in terms of greed or excess. Even after the COVID-19 crisis subsides, businesses that took PPP loans should avoid perks, executive bonuses (cash or equity), excessive marketing expenses, costly holiday parties, non-essential capital improvements and the use of such things as limos.

In fact, it’s suggested that executives take pay cuts and board members forego compensation for up to 1 year.

Businesses also should avoid any language in emails, texts or other formats referring to “free money” or “government handouts.” A PPP load should be strictly a matter of urgent need and not a way to take advantage of a government program designed for such needs.

In short, it should be clear to federal regulators that funds from a PPP loan were used for the purposes to which they were intended: keeping a business afloat during troubled times. That way, the funds’ use could be defended if the business eventually was investigated for PPP fraud.

Engage a PPP fraud defense lawyer

Even if you keep all these things in mind and administer your loan properly, circumstances could suggest otherwise and could place you in a federal investigation’s spotlight for PPP fraud. If that is the case, know that you can engage a skilled PPP fraud defense lawyer for Houston, The Woodlands, Conroe, Sugar Land and the rest of Harris County, Montgomery County and Fort Bend County.

Contact the Neal Davis Law Firm for a confidential legal consultation on your Texas PPP fraud case. Our law firm has won multiple awards and honors for white-collar crime cases. We’ve helped others—let us help you, too.

 

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