CARES Act & PPP Fraud and Oversight Challenges

Nelson Mullins recently presented to the Association of Corporate Counsel’s South Carolina Chapter on enforcement actions underway regarding the CARES Act and Paycheck Protection Program (PPP) and best practices to prevent an investigation. There is, unfortunately, room for error, with both funds.

The purpose of PPP is to provide relief and support for small businesses at a 2-year, 1% fixed rate, with six months of deferred payment as long as the organization has less than 500 employees and completes certifications in good faith. This loan is eligible for loan forgiveness if it is used for payroll costs, mortgage costs, utility costs, and all employees/corporate leases are maintained.

Under the CARES Act, enacted in March 2020, $500 billion was put towards “Big Corporations” and $377 billion was put towards small business. These funds include emergency grants and forgivable loan programs, but with that comes the reporting requirements and oversight from Special Inspector General for Pandemic Recovery, the Pandemic Response Accountability Committee, and a Congressional Oversight Committee. The Provider Relief Fund under this same Act provides relief to hospitals and health care providers to aid in their coronavirus response. Failure by a provider that received a payment from the Provider Relief Fund to comply with any term or condition can subject the provider to recoupment of some or all of the payment.

These funds have produced massive expenditures by the government, which in turn will lead to aggressive government enforcement and interest in the plaintiff’s bar for years to come. There will certainly be oversight and prosecution of those who falsify Paycheck Protection Program (PPP) applications or misspend the funds. Private whistleblowers will be searching for their “pot of gold” under the False Claims Act (FCA).

As a heads up, some early warning signs of such an investigation are: Independent Audit under the Recovery Audit Contractor Program, many administrative demands, civil investigative demands, agent interviews, grand jury subpoenas, target or subject letters, and execution of search warrants.

Looking to recent history, to protect Troubled Asset Relief Program (TARP) funds from fraud, lawmakers created a 3-pronged approach to oversight with The Financial Stability Oversight Board (FSOB), a Congressional Oversight Committee, and a Special Inspector General for TARP funds (SIGTARP). Intensified scrutiny follows government bailouts, which leads to regulations being aggressively enforced under TARP. To date, 438 individuals have been criminally charged following SIGTARP investigations, with 381 convicted and 300 of these defendants (including 76 bankers and 92 bank borrowers) sentenced to prison. SIGTARP investigations have also resulted in enforcement actions against 24 companies, overwhelmingly in the banking and financial services industry. Enforcement continues to be robust more than a decade later. In 2019, the government recovered an additional $900 million from TARP offenders, bringing the total recovery to over $11 billion.

Today, stringent enforcement is initiated through the CARES Act, Paycheck Protection Program (PPP), and the False Claims Act.

In addition to the oversight approach outlined in the CARES Act, the SEC’s Division of Enforcement is also investigating “Certain Paycheck Protection Program Loan Recipients” to determine whether there have been violations of the federal securities laws. To that end, Enforcement is conducting a “fact-finding inquiry,” requesting that certain PPP loan recipients produce a variety of documents. While the primary focus of DOJ prosecutors appears to be the accuracy of representations made to the SBA to obtain the PPP loans, the SEC is apparently looking at PPP loans and related company disclosures from a different angle — perhaps with a view toward the veracity of disclosures being made to shareholders.

There are several precautionary measures that can be taken. A few of the recommendations we have (all are included in the PowerPoint linked below) are, as follows:

  • Businesses should know their history of compliance and anything that can create liability
  • A CARES compliance officer should be appointed
  • Ensure all major decisions are presented by senior management to its Board and approved
  • Trainings conducted by borrowers
  • Document everything
  • Set up a separate account for PPP proceeds

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