Perhaps the most significant risk area for borrowers is how they use the proceeds. The CARES Act allows loan proceeds to be used for any allowable use identified in the SBA 7(a) loan program; however, borrowers who want to obtain loan forgiveness must use the loan proceeds for specific costs:
- payroll costs and benefits
- mortgage interest
Forgiveness is available if the proceeds are 1) used primarily (75 percent or more) to cover payroll costs over the eight-week period following when the loan is made, with any remaining amounts used for the qualifying costs above, and 2) employee count and compensation levels are maintained for the eight-week period after funds are disbursed.
The PPP lays out specific costs that are legitimately considered payroll costs. Per-employee payroll costs may not exceed $100,000. Payroll costs can include costs for employee vacation, parental, family, medical and sick leave. There is a question as to whether bonuses qualify as payroll costs eligible for forgiveness. The payroll costs must relate to U.S.-based employees.
Given that the loan in effect converts to a partial grant through forgiveness, this aspect of the PPP will be audited and strictly enforced. Treasury guidance notes with emphasis that “if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges …”
It is not just the recipient who may be subject of enforcement; all participants should be cautious. Loan recipients may not provide the money to non-applicants, shareholders, members or partners for unauthorized uses. SBA’s final rule admonishes that “If one of [the borrower’s] shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use” – and affiliates who participated in the loan transaction might also be implicated. This may come in the form of a direct charge for fraud or for conspiracy.
As discussed more fully in another Holland & Knight alert (see “Oversight and Investigations Related to COVID-19 Pandemic Spending and Federal Programs,” ), Congress recognized that fraud is an inexorable byproduct of rapidly deployed federal funding. It therefore included a prefabricated enforcement regime in the CARES Act consisting of a tripartite of newly created entities: Office of the Special Inspector General for Pandemic Recovery; Pandemic Response Accountability Committee, which is a cross-agency committee of inspectors general; and a Congressional Oversight Commission. These entities will work in conjunction with the U.S. Department of Justice, agency inspector generals, audit entities such as the U.S. Government Accountability Office and even whistleblowers to identify fraudulently obtained PPP loans.
Companies that have obtained or that are considering a PPP loan or loan forgiveness should heed the forthcoming enforcement vanguard and carefully assess their eligibility. Companies that run afoul of the PPP rules when seeking the loan or forgiveness may find themselves facing civil, or even criminal, enforcement.
Criminal and Civil Liability
The PPP application identifies several criminal statutes that are violated by the provision of false information: 18 U.S.C. § 1001 (false statements to federal officials), 15 U.S.C. § 645 (misrepresentation of size status) and 18 U.S.C. § 1014 (false statements to a lending institution). This highlights some, but not all, of the statutes that could be used in a criminal action. no credit check payday loans Crossville TN Expect to also see cases brought under the more commonly used provisions: 18 U.S.C. § 287 (criminal false claims), 18 U.S.C. § 1344 (bank fraud), 18 U.S.C. § 1341 (mail fraud), 18 U.S.C. § 1343 (wire fraud) and 18 U.S.C. § 371 (criminal conspiracy). These provisions regularly appear in cases involving fraud under other SBA loan programs. In instances where a loan was obtained through bribes or kickbacks, expect to see cases brought under 18 U.S.C. § 215 (bank bribery).