Knowledge and Insights

Regulatory and enforcement actions are expected to increase in the foreseeable future as a result of the substantial number of businesses that applied for and received funds under the Small Business Administration’s (SBA) Paycheck Protection Program (PPP). Recipients of the PPP loans should be mindful of the legal risks the borrowers and/or organization may face by obtaining this financial relief.

The government provides protection for whistleblowers when reporting allegations that borrowers have falsified information or engaged in unlawful activities. The False Claims Act (FCA) allows the government and whistleblowers to file claims against individuals and/or businesses that defraud the government by means of submitting false claims or certifications. The FCA also provides a financial incentive for whistleblowers to report any wrongdoing by filing a lawsuit, including obtaining SBA PPP funds under false pretenses. As a result of this protection and financial incentive, the PPP may create a liability under the FCA.

Recently the Department of Justice (DOJ) has reviewed loan applications with the intent of looking for criminal fraud and has stumbled upon various red flags. The DOJ’s reviews consist of determining whether the applicants engaged in material misrepresentations of information. Further, depending on the loan amount received, PPP loan recipients may also be audited or reviewed by the SBA with a focus on determining the borrower’s eligibility for receipt of the funds and the use of the PPP loan proceeds.

Legal protections and incentives may increase the number of whistleblower complaints filed against companies alleging fraudulent actions and misuse of government funds. The US Department of Justice has already investigated various fraud schemes related to the PPP including misuse of funds as follows, just to name a few:

• Purchasing items such as luxury vehicles and jewelry
• Falsifying employee records including misrepresenting employees and payroll expenses
• Seeking loans under businesses that do not exist

Given the current concern over the program as it relates to the loan proceeds and use of funds, PPP loan recipients should be proactive in taking efforts to support loan eligibility and use of funds. Despite the anticipated surge in complaints, there are steps that PPP loan recipients can take to mitigate the risk of an unfavorable audit or potential scrutiny. Such steps include:

• Retain all supporting documentation to support certifications made as part of the loan application process as well as any analysis used to conclude on the necessity of the loan
• Document, document, document! Ensure you have the appropriate documentation for:
  • Legal advice received as it relates to the application and use of proceeds
  • Good faith efforts made to comply with the requirements set forth under the program
  • Use of the funds received
• Seek additional legal guidance as necessary

Mercadien practitioners can assist borrowers in proactively determining the appropriate measures to take to assess whether loan expense data and underlying support accurately reflects the use of proceeds.  Our team can also provide forensic accounting and investigative consulting support in the event whistleblowers report alleged criminal activity or claims are filed against an individual or organization. Contact Frank Pina, CPA at [email protected] or 609-689-2319 for more information.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.