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Discover actionable tips for small businesses facing SBA audits, including compliance and legal strategies for COVID PPP and EIDL loans. Contact us today.
Book a Consultation CallThe 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.
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.
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.
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.
Risk of Investigation and Compliance Steps
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.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
The clients are personally guaranteed an SBA 7(a) loan. The SBA referred the debt to the Department of Treasury, which was seeking payment of $487,981 from our clients. We initially filed a Cross-Servicing Dispute, which was denied. As a result, we filed an Appeals Petition with the SBA Office of Hearings and Appeals asserting legal defenses and supporting evidence uncovered during the discovery and investigation phase of our services. Ultimately, the SBA settled the debt for $25,000 - saving our clients approximately $462,981.
Clients obtained an SBA 7(a) loan for $324,000 to buy a small business and its facility. The business and real estate had an appraisal value of $318,000 at the time of purchase. The business ultimately failed but the participating lender abandoned the business equipment and real estate collateral even though it had valid security liens. As a result, the lender recouped nearly nothing from the pledged collateral, leaving the business owners liable for the deficiency balance. The SBA paid the lender the 7(a) guaranty money and was assigned ownership of the debt, including the right to collect. However, the clients never received the SBA Official 60-Day Notice and were denied the opportunity to negotiate an Offer in Compromise (OIC) or a Workout directly with the SBA before being transferred to Treasury's Bureau of Fiscal Service, which added an additional $80,000 in collection fees. Treasury garnished and offset the clients' wages, federal salary and social security benefits. When the clients tried to negotiate with Treasury by themselves, they were offered an unaffordable repayment plan which would have caused severe financial hardship. Clients subsequently hired the Firm to litigate an Appeals Petition before the SBA Office & Hearings Appeals (OHA) challenging the legal enforceability and amount of the debt. The Firm successfully negotiated a term OIC that was approved by the SBA Office of General Counsel, saving the clients approximately $205,000.
Small business sole proprietor obtained an SBA COVID-EIDL loan for $500,000. Client defaulted causing SBA to charge-off the loan, accelerate the balance and refer the debt to Treasury's Bureau of Fiscal Service for aggressive collection. Treasury added $180,000 in collection fees totaling $680,000+. Client tried to negotiate with Treasury but was only offered a 3-year or 10-year repayment plan. Client hired the Firm to represent before the SBA, Treasury and a Private Collection Agency. After securing government records through discovery and reviewing them, we filed an Appeals Petition with the SBA Office of Hearings & Appeals (OHA) court challenging the SBA's referral of the debt to Treasury citing a host of purported violations. The Firm was able to negotiate a reinstatement and recall of the loan back to the SBA, participation in the Hardship Accommodation Plan, termination of Treasury's enforced collection and removal of the statutory collection fees.
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