Government Conducting Fraud Investigations into PPP and EIDL Recipients From COVID-19: Steps for Borrowers to Ensure Compliance

The U.S. government has recently escalated its efforts to investigate improper use of COVID-19 relief funds, with a particular focus on Paycheck Protection Program (PPP) loans, but also Economic Injury Disaster Loans (EIDL). Both the Small Business Administration (SBA) and the Treasury Office of Inspector General (OIG) are quietly investigating claims of fraud, misrepresentation, and technical noncompliance regarding these loans. Click: CARES Act Fraud Tracker for detailed information.

For small businesses that find themselves in the government's sights, it’s crucial to act quickly to understand and mitigate potential legal risks, which could include civil penalties under the False Claims Act or worse criminal prosecution.

PPP Loans: A Lifeline with Legal Risks

During the COVID-19 pandemic, the PPP offered vital financial relief to small businesses, enabling them to pay employees and cover essential expenses. However, the rush to secure funds, coupled with sometimes conflicting guidance, led many small businesses to adopt an “apply now, verify later” approach.

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To recap, the core eligibility requirements for PPP loans included:

- Qualifying Entities: Eligible applicants included small businesses, nonprofits, tribal businesses, and self-employed individuals.

- Operating Date: Businesses had to be in operation as of February 15, 2020.

- Employee Count: Generally, businesses with 500 or fewer employees could apply, factoring in employees across any affiliated entities.

- Certifying Necessity: Applicants had to certify that economic uncertainty made the loan necessary to sustain operations.

- Use of Funds: Loans could be used for payroll, mortgage interest, rent, and utilities, with payroll costs capped for higher-earning employees.

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Government Scrutiny Growing

Between April 2020 and May 2021, the government approved over 11.5 million PPP loans, totaling nearly $793 billion. Of this, more than 95% of the loans were forgiven, transforming them into essentially free money. However, the scale of the program has prompted concerns over fraudulent claims and misuse of funds.

In response, the Department of Justice (DoJ) has begun investigating instances where it suspects fraud or noncompliance. Many companies have already received notices or target letters under the False Claims Act, asking them to preserve extensive records related to their loan applications and financial status.

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COVID-EIDL Also Under Scrutiny

COVID-EIDL loans, which provided relief directly to small businesses impacted by the pandemic by the SBA, are subject to the same level of scrutiny as PPP loans. The SBA OIG and Treasury OIG have clear authority to audit and investigate the potential misuse of COVID-EIDL funds. This expanded focus is consistent with the U.S. government’s broader efforts to root out fraud and abuse across all pandemic-related financial relief programs. Both agencies were granted oversight powers under the Inspector General Act of 1978 and the Coronavirus Aid, Relief, and Economic Security(CARES) Act, giving them the jurisdiction to investigate fraud, waste, and abuse in federal programs like EIDL.

For example, the SBA OIG's 2022 Semiannual Report to Congress revealed billions of dollars in potential fraud across PPP and EIDL programs. Misuse of funds in these programs can trigger significant legal consequences, ranging from fines and repayment demands to criminal charges.

Authority and Sources

1. SBA Inspector General Authority: The SBA OIG operates under the Inspector General Act to conduct audits and investigations. The office has actively pursued fraud in COVID relief programs. Misuse or misrepresentation related to economic necessity, fund allocation, or eligibility could result in penalties.

2. Treasury Inspector General Oversight: Similarly, the Treasury OIG oversees COVID-related financial programs under the CARES Act. The OIG works to ensure that federal funds, including those distributed through EIDL, were obtained legitimately and used appropriately.

3. False Claims Act (FCA): The False Claims Act holds borrowers accountable if they provided false information in their EIDL loan applications. The act empowers both the SBA and Treasury to refer cases to the Department of Justice (DOJ) for enforcement, which can lead to hefty fines, treble damages, and even imprisonment in severe cases of fraud.

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Risk of Investigation and Compliance Steps

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Just as with the PPP loan fraud investigations, businesses that misrepresented their eligibility or misused EIDL funds are also at risk of government action. This includes borrowers who inflated their financial hardship or diverted EIDL funds for impermissible uses.

Borrowers who received EIDL loans should take these steps to prepare for potential investigations:

- Consult Legal Counsel: Businesses should engage legal counsel experienced in SBA investigations to help navigate potential issues and protect their rights.

- Document Compliance: Companies should gather all relevant documentation - loan applications, financial statements, and communications with the SBA - to demonstrate their compliance with program requirements.

- Self-Review: Conduct an internal audit to ensure that EIDL funds were used in accordance with the guidelines, identifying any discrepancies that might raise red flags in a government audit.

- Be Prepared for Audits: The SBA and Treasury OIG have increased their audits of COVID-related loans. Businesses must be prepared to show how they used the loan funds and provide the necessary documentation.

- Transparency: Clear communication within the company about the potential audit is crucial to maintaining trust and morale.

Conclusion

Both the SBA and Treasury Inspector Generals are empowered to investigate the misuse of COVID-EIDL loans, following similar trends already seen with PPP loan fraud investigations. Given the broad oversight powers granted under the CARES Act and the False Claims Act, small businesses must be prepared to defend their loan applications and fund usage if questioned by federal authorities.

By proactively gathering documentation, conducting internal reviews, and working with legal counsel, businesses can reduce their exposure to civil and criminal liability under the law.

This blog post is intended to provide general guidance and is not a substitute for professional legal advice.

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