PPP Loan Prosecutions Appear to Be in the Technical Non-Compliance Phase

On March 27, 2020, the CARES Act was signed into law to provide emergency financial assistance to Americans suffering the economic effects caused by the COVID-19 pandemic, including in the form of forgivable loans to small businesses for employee retention and other specified expenses through the Paycheck Protection Program (“PPP”). The PPP allowed qualifying small businesses and other organizations to receive unsecured loans at an interest rate of 1%, but required that the proceeds be used mainly for payroll costs (originally 75% of loan proceeds, but reduced to 60%), mortgage interest, rent, and utilities. The interest and principal could be forgiven as long as the proceeds were spent within a certain time period (originally eight weeks after loan disbursement, but revised to 24 weeks after loan origination or December 31, 2020) and were used mainly for payroll expenses.

Inevitably, the immediate need of many small businesses in the early days of the pandemic, the vague and/or confusing requirements for loan eligibility, ever-changing directives from the government, and the need to get the money to the recipients as quickly as possible created the potential for the issuance of PPP loans to recipients who did not meet all of the requirements of the PPP. In some instances, bad actors took advantage of these factors to obtain PPP loans to which they knew they were not entitled. At the other end of the spectrum, well-meaning businesses took PPP loans for funds that they desperately needed as a result of COVID-19 under the honest, but perhaps mistaken, belief that they met all requirements. Thus, ineligible loans were the result of conduct running the gamut from outright fraud — such as creating sham companies and falsifying employment records to support fraudulent loan applications — to inaccurate certifications of compliance with loan requirements that were often the subject of ambiguous rules.

In May 2021, the U.S. Department of Justice (“DOJ”) announced the establishment of a “COVID-19 Fraud Enforcement Task Force.” An April 2024 report from that task force states that the DOJ has initiated “criminal charges against 3,500 defendants, civil enforcement actions resulting in more than 400 civil settlements and judgments, and more than $1.4 billion in seizures and forfeitures.”

Until recently, the DOJ had largely set its sights on the former class of ineligible loans, often pursuing the fraudsters criminally.¹ As we noted in May 2021, most of those early “cases have involved straightforward frauds, e.g., providing false information in loan applications, falsifying the numbers of employees and payroll costs, submitting multiple applications to different lenders, and diverting the funds to personal use and lavish expenditures.” And we questioned “[w]hether these types of cases are so numerous that they will consume most of the government’s efforts, or whether the government [would] begin to focus its investigative efforts on” more challenging theories of ineligible loans, such as allegedly inaccurate “certifications of economic necessity.”

Three years later, having largely consumed the low-hanging fruit of straightforward frauds, DOJ now seems to have turned its attention to more complex cases involving compliance with the Small Business Administration’s (“SBA”) PPP regulations, including allegations that PPP loan applicants falsely certified compliance with certain requirements of the PPP that were material to loan funding and forgiveness and that PPP lenders failed to detect these inaccurate certifications:

• May 13, 2024: DOJ announced the settlement of allegations that a now-bankrupt PPP lender (Kabbage, Inc.) defrauded the PPP and violated the FCA. DOJ noted, among other things, that “the Cares Act/SBA required participating PPP lenders to confirm borrowers’ average monthly payroll costs by reviewing the payroll documentation submitted with the borrower’s application.” Relevant to these requirements, DOJ alleged and Kabbage “admitted and acknowledged that Kabbage double-counted state and local taxes paid by employees in the calculation of gross wages; failed to exclude annual compensation in excess of $100,000 per employee; and improperly calculated payments made by employers for leave and severance.” In addition, “[t]he United States alleged that Kabbage was aware of its errors as early as April 2020, yet Kabbage failed to remedy all incorrect loans that had already been disbursed and continued to approve additional loans with miscalculations.” In resolution of the FCA claims related to these allegations, the government received a $63.2 million (of a total $120 million) general unsecured claim in Kabbage’s bankruptcy proceeding.
• May 9, 2024: DOJ announced that a borrower agreed to pay $425,710 to resolve allegations that it violated the FCA through its receipt of more PPP funds than it was entitled to receive and later forgiveness of that loan. The excess loan allegedly resulted from the borrower’s failure to cap the annual salary of several employees at $100,000 when calculating its average payroll. The press release does not quantify the impact of this alleged failure on the amount of the PPP loan that was obtained and forgiven.
• April 26, 2024: DOJ announced that it settled for $2.5 million plus interest a whistleblower claim under the FCA that a construction company and its owner obtained PPP loans and an Economic Injury Disaster Loan to which the company was not entitled by falsely certifying that the owner had not been convicted of a felony involving fraud within five years of submitting the loan applications.
• March 23, 2024: DOJ announced the $1.99 million settlement of a whistleblower case alleging that a PPP borrower obtained a $1.2 million PPP loan and forgiveness of that loan through false certifications “that it was not an ‘an entity created in or organized under the laws of the People’s Republic of China’ and that no such entity owned or held 20 percent or more of the economic interest in” the borrower.
• March 11, 2024: DOJ announced a $989,438 settlement of an FCA whistleblower complaint over a forgiven PPP loan obtained by a company whose certification of eligibility for its $494,719 PPP loan was allegedly false because of its involvement with cannabis businesses that remain illegal under federal law.
• December 11, 2023: DOJ announced that a commercial roofing contractor and its nationwide network of roofing and disposal companies agreed to pay $9 million to resolve an FCA whistleblower complaint involving $6,705,700 in forgiven PPP loans. The government noted that “[s]ubject to limited exceptions, only businesses that employed 500 or fewer employees were eligible to receive a PPP loan.” It alleged that “[u]nder applicable SBA rules . . . , applicants were required to include employees of all affiliated companies when determining eligibility” and that each roofing company affiliate’s application failed to do so, rendering false their certifications of eligibility for all of the forgiven PPP loans.
• December 7, 2023: DOJ announced a $2.29 million settlement of a whistleblower case involving a forgiven PPP loan totaling $2 million for which the borrower allegedly was not eligible as a required registrant under the Foreign Agent Registration Act.
• October 11, 2023: DOJ announced a $9 million settlement of a whistleblower FCA complaint involving a forgiven $6,282,362 PPP loan obtained by an automotive management company. The government alleges that the recipient of the forgiven loan falsely certified that it was a small business with fewer than 500 employes because the management company “shared common operational control with dozens of automobile dealerships across the country, and [the management company] and its affiliates had more than 3,000 employees in total.”
• September 28, 2023: DOJ announced that six businesses agreed to pay $534,630 to resolve allegations that they violated the FCA in connection with 10 forgiven PPP loans in unspecified amounts. The government contended that the “businesses falsely certified that they were eligible for the PPP loans, when in fact they were categorically ineligible because, in the last seven years, one of their owners had defaulted on a prior SBA loan and caused a loss to the government.”
• June 9, 2023: DOJ announced the $1.05 million settlement of FCA allegations related to forgiven PPP loans totaling $400,000. The recipient of the loans is a subsidiary of a publicly traded company listed on the Tokyo Stock Exchange that, together with its various subsidiaries, has over 15,000 employees and revenues that increased steadily between 2019 and 2021. In connection with its settlement, the subsidiary admitted, among other things that:
  • It knew that it was not eligible for PPP loans because, with its affiliates, it had more than 500 employees.
  • In 2020, it applied for and received a $250,000 PPP first-draw loan, and subsequently obtained loan forgiveness and retained that $250,000, by falsely certifying that it met the company size restrictions necessary to be eligible for a PPP first-draw loan.
  • In 2021, it applied for and received a $150,000 PPP second-draw loan, and subsequently obtained loan forgiveness and retained that $150,000, by falsely certifying that it met the company size restrictions necessary to be eligible for a PPP second-draw loan. It also falsely certified that it had a decrease in revenue in excess of 25% from 2019 to 2020 when, with its affiliates, its revenue from 2019 to 2020 had increased.
  • As a result of its false claims and false statements, it received and retained $400,000 in PPP funds to which it was not entitled.
• April 3, 2023: DOJ announced a $2.24 million settlement of a whistleblower case involving a forgiven PPP loan totaling $2 million for which the borrower allegedly was not eligible as a required registrant under the Foreign Agent Registration Act.
• March 21, 2023: DOJ announced a $325,000 settlement of alleged violations of the FCA and Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”) related to a PPP loan forgiveness application. That case, initiated by a whistleblower, involved two related companies that operated separate resorts and obtained separate PPP loans. The government alleged that one of the companies certified in its application for forgiveness of its PPP loan “that it used a portion of its PPP loan to pay wages of [its own] employees, when in fact, some of the employees to whom it claimed to have paid wages were actually [the related company’s] employees whom [the applicant] did not employ or pay.”
• March 13, 2023: DOJ announced that two nonprofit organizations agreed to pay a total of $225,887 to settle FCA allegations relating to PPP loans that the organizations were not eligible to receive and had repaid in full in December 2020. The two entities were allegedly ineligible for the PPP loans that they received because they were among certain nonprofit organizations that were not eligible to receive a PPP loan under the rules applicable at the time of the loans. The government alleged that the “organizations knew or should have known they were ineligible to receive their PPP loans, and that they caused the [SBA] to pay lender fees to the bank that processed the loans.”
• February 1, 2023: DOJ announced that three companies agreed to pay a total of $530,000 to settle whistleblower claims that they violated the FCA by receiving and retaining duplicate PPP loans. One of the companies agreed to pay $430,000 in connection with a duplicate loan for which it improperly sought and received forgiveness. The other two companies agreed to pay their loans in full to their lenders, relieving the SBA of liability to the lenders for the federal guaranties on these duplicate loans. Those companies each agreed to pay $50,000 in civil damages and penalties.
• January 9, 2023: DOJ announced a settlement with four agricultural companies and their owner stemming from allegations that they obtained excess PPP loans by improperly including non-employee contract workers who were employed by other, unrelated entities. The inclusion of the non-employees resulted in approximately $1.8 million in excess PPP funds, which the companies had previously repaid to the lender. The companies additionally agreed to pay approximately $400,000 in FCA damages and penalties and $200,000 in civil penalties under FIRREA.

Unlike the more straightforward cases on which we previously reported that involve sham companies and false documentation, these false certification cases — particularly those focused on certifications of compliance with ambiguous and complex rules — are more challenging for the government. That is because, among other things, to impose liability under the FCA, the government must show not only that the defendant’s certification did not comply with program requirements, but also that the defendant “knew” that its certification did not comply with program requirements — meaning that the defendant acted with actual knowledge, deliberate ignorance, or reckless disregard.

The Supreme Court of the United States recently addressed the “knowingly” requirement of the FCA in the context of ambiguous rules in United States ex rel. Schutte v. SuperValu, Inc., 598 U.S. 739 (2023). “The FCA’s scienter element refers to [a defendant’s] knowledge and subjective beliefs — not to what an objectively reasonable person may have known or believed.” Id. at 749.

[T]he FCA’s standards focus primarily on what [a defendant] thought and believed. First, the term “actual knowledge” refers to whether a person is “aware of” information. [citations omitted.] Second, the term “deliberate ignorance” encompasses defendants who are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement’s truth or falsity. [citations omitted.] And, third, the term “reckless disregard” similarly captures defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.

Id. at 751. What matters is “what the defendant thought when submitting the false claim — not what the defendant may have thought after submitting it.” Id. at 752. Proof that a defendant’s certification of compliance with a requirement was “knowingly” false is complicated when that requirement “is, on its face, less than perfectly clear.” Id. at 752. But even when “terms, in isolation, may have been somewhat ambiguous, that ambiguity does not preclude [a defendant] from having learned their correct meaning — or, at least, becoming aware of a substantial likelihood of the terms’ correct meaning.” Id. at 753. To determine whether a defendant “knowingly” disregarded the correct meaning of an ambiguous requirement, then, courts and juries will consider things like whether the defendant received notice of the correct interpretation, how the defendant itself interpreted the ambiguous language at the time it acted, whether the defendant sought to clarify the ambiguous requirement, and whether the defendant acted in a way that indicates it believed its actions were not compliant with the correct interpretation (e.g., whether it attempted to conceal its actions). Id. at 753-54.

AGG’s Observations

• In the context of a hastily implemented program with no history and quickly changing guidance like the PPP, proving that a particular borrower “knowingly” made a false certification of compliance with ambiguous program requirements may be challenging. That is particularly true given the economic stresses of the pandemic that necessitated the PPP in the first place, as well as the limited time and opportunity to investigate any ambiguous provisions before the application period ended.
• One of the settlements above involved a lender, and the government faulted the lender for failing to detect borrowers’ false certifications through documents submitted by the borrowers. In an Interim Final Rule issued on April 15, 2020, the SBA required lenders, among other things, to “[c]onfirm the dollar amount of average monthly payroll costs for the preceding calendar year by reviewing the payroll documentation submitted with the borrower’s application.” At the same time, the Interim Final Rule assured that “[t]he lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.” The Interim Final Rule also indicated that lenders “that relie[d] on such borrower documents and attestation from a borrower” would be held harmless. The recent lender settlement introduces an unstated caveat to that assurance: lenders that systematically inflated loans by failing to apply program rules to accurate borrower documentation, even after allegedly becoming aware of their calculation errors, are not immune from liability.
• It is certainly the case that a borrower and lender could simultaneously be at fault — the former for knowingly making false certifications and the latter for knowingly failing to investigate and detect the false certifications. However, if a borrower who allegedly made a false certification of compliance with program requirements also submitted accurate documentation through which the lender could (and should) have detected the (alleged) inaccuracy of that certification, that would be strong evidence that, at a minimum, the borrower did not “know” its certification was incorrect. The recent lender settlement indicates that the government expected lenders to play a crucial and proactive fraud prevention role in the program by using the borrower-supplied documentation to confirm borrowers’ average monthly payroll costs.
• A number of the settlements announced above were below the two times actual damages that are typical of FCA settlements. The two FARA-related settlements were for just a shade (about 12%) over the amount of the loans. Those lower-than-normal settlement amounts may be a reflection of the challenges of proving that the borrower “knowingly” falsely certified compliance with program requirements.
• A number of the DOJ’s recent enforcement actions involve the PPP loan recipient’s eligibility under the SBA’s enterprise size standards. During the first round of PPP loans, a business was eligible for a PPP loan if it was a “small business concern” as defined by the SBA, met the SBA’s “alternative size standard,” or if it had fewer than 500 employees. In assessing eligibility, SBA regulations require that the PPP applicant’s “affiliates” be consolidated with the applicant. Thus, the applicant’s net worth/net income is considered in combination with the net worth/net income of its affiliates in determining whether the alternative size standard is satisfied. The SBA’s regulations provide that “concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.” The regulations also provide that the SBA’s ability to determine that an affiliation exists is broad: “In determining whether affiliation exists, SBA will consider the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation.” These are fact-intensive issues that leave considerable room for the government to allege noncompliance with SBA rules. But such ambiguity can also make it difficult for the DOJ to make an FCA case.
• Many of the settlements resolved cases that were initiated by a whistleblower case, and there were some serial whistleblowers. In addition, DOJ highlighted four of these settlements in its February 22, 2024, report on FCA settlements and judgments for FY 2023. Accordingly, whistleblowers and DOJ are likely to continue bringing such cases based on alleged false certifications of compliance with technical PPP requirements.

For more information, please contact AGG Government Investigations partners Glenn Hendrix, Tenley Carp, or Jerad Rissler.

AGG’s Government Investigations attorneys have successfully represented companies and individuals, including public company executives, in civil and criminal investigations before the U.S. Department of Justice and U.S. Attorney’s Offices nationwide, the Securities and Exchange Commission (“SEC”), the Food and Drug Administration (“FDA”), the Environmental Protection Agency (“EPA”), the U.S. Department of Agriculture (“USDA”), and many other federal and state regulatory and enforcement agencies. We frequently represent clients in parallel civil and criminal investigations and in regulatory proceedings. We also assist our clients in developing and providing a coordinated response to the internal and public concerns that accompany these matters, including helping them respond to media interests and address reputational concerns.

[1] Read AGG’s publications on these cases: Flirting With Disaster: SBA Inspector General Warns of “Serious Concerns” of Fraud in Coronavirus Disaster-Relief Loan Program in New Report; Where Did the Money Go? The Government’s Review and Investigative Plans for PPP Loan Fraud Take Shape; The Beginning of a Wave? First Civil Fraud Settlement Against Recipient of PPP Funds; Update: The Growing Wave of PPP Loan Prosecutions; What We Can Learn From Recent PPP Loan and COVID Fraud Cases.