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Last Updated on: 28th July 2023, 07:20 pm
Alright, so you know how we’ve been talking about the Paycheck Protection Program (PPP) and its move towards loan forgiveness, right? Well, federal law enforcement has put its magnifying glasses on and started to really take a deeper look into the original PPP loan applications for any signs of fraudulent activity. Now, here is something to chew on – a recent study from August 2021 highlighted that nearly 15% of all PPP loans, which adds up to an eyebrow-raising $76 billion, show potential fraud indicators. Crazy, huh?
KEY POINTS: Increase in Fraudulent PPP Loan Applications, Potential Indications of Fraud Tripping off Alarm Bells
We’re not done yet though. Word around the water cooler is that we’re likely to uncover more PPP fraud instances during the loan forgiveness review process. This could include fraud that slipped through the cracks when they filed the original loan applications or even during the forgiveness application. You don’t want to mess around with this – those found guilty of PPP loan fraud could end up behind bars.
Up until now, the eyes of PPP loan fraud investigations have been trained on the initial loan applications, scrutinizing the details provided to bag these loans. But things are changing. We’re seeing a gradual shift towards a more in-depth investigation of loan forgiveness applications. This scrutinizes representations made under oath regarding usage of the PPP loan funds. Heck, there was even a case where a guy tried to fake his own death to make off with millions from PPP loan fraud!
KEY POINT: Shift of Focus from Loan Applications to Loan Forgiveness
Here’s a head’s up – if you’re seeking PPP loan forgiveness, brace yourself for an even more detailed dive into your loan forgiveness application than happened with your original loan application. Why? Well, the DOJ is beefing up its enforcement team to handle the growing fraud and potential fraud cases. They’ve even set up a COVID-19 Fraud Enforcement Task Force. Word is out that the Fraud Section of the DOJ is shopping for at least one more senior trial attorney to handle PPP loan fraud and other COVID-19 fraud cases.
Moving on to more serious stuff – what does PPP fraud look like and what could potentially land you in hot water? We’re talking about fudging details on the initial application, using loan money on unapproved items, stealing someone’s personal information to snag a loan, and even fibbing during loan forgiveness applications. Let’s not forget lying to the feds during audits or investigations. It’s not a pretty picture; you could end up repaying the loan with interest at best…or facing criminal charges at worst.
KEY POINT: Criminal Allegations and Penalties
A quick reminder of the key information: PPP fraud can lead to serious charges such as bank fraud, wire fraud, mail fraud, making false statements to federal agents or financial institutions, money laundering, and tax evasion. Remember, falsifying information in your applications or applying on behalf of non-existent companies could result in conspiracy to commit fraud, which can carry a maximum prison sentence of five years according to 18 U.S. Code § 371. If they pin it as conspiracy to commit wire fraud, you might be looking at up to 20 years – you don’t want that on your record!
KEY POINT: Up to 20 Years in Prison for Conspiracy to Commit Wire Fraud
Long story short; if you’re a PPP loan recipient, you better make sure you know the criteria for loan forgiveness and that you’re using the funds in the right way. If you misuse government funds through PPP fraud, you’re looking at possible criminal charges and time in the slammer. Feds aren’t messing around and they’re coming down hard on PPP fraudsters. Stick to the program’s rules and regulations, and you should be able to sleep at night.
It’s been quite a journey for companies during the COVID-19 pandemic, hasn’t it? Navigating the rough seas of falling revenues and mounting costs, companies like yours relied on the lifesaver provided by the government: the Paycheck Protection Program (PPP). This program provided over $792 billion in forgivable loans to nearly 11.5 million companies.
KEY POINT: Over $792 Billion in PPP Loans Distributed
PPP borrowers right now might be taking a sigh of relief as lenders approve their loan forgiveness applications and clear up their balances. However, let me tell you – the PPP rollercoaster ride isn’t over yet. Government agencies like the SBA can still review the forgiveness application and reassess the decision at any time within a span of five to six years, depending on the size of the loan. Watch out, loans over $2 million might be given a closer, harder look in the coming years.
We haven’t even started on how PPP participation might complicate succession events for owners. They are responsible for making sure the company sticks to the PPP loan terms and if a reassessment occurs, the borrower is still on the hook. When drafting succession terms, it’s crucial to clearly say who carries the risk of a reassessment.
Now, let’s touch on M&A (Mergers and Acquisitions). You’ll need to navigate this carefully if you’ve got PPP loans lingering. The SBA’s October 2020 Procedural Notice on Changes in Ownership is clear that the lender and possibly the SBA must approve a change in ownership. You might want to consider setting up an escrow account for the outstanding PPP loan balance or accumulating a minority interest to dodge transaction delays.
Once the new owners step in, if the PPP loan hasn’t been forgiven, they’re in charge of complying with the PPP requirements, including making sure funds are used for authorized purposes only. If the forgiveness application hasn’t been submitted, the new owner is liable for providing supporting documents to demonstrate compliance.
Moving forward, to avoid audit risks, make sure your due diligence requests highlight COVID relief programs. Be sure to have all necessary paperwork during audit periods. Remember, audit risks include loan forgiveness, program eligibility, and even loan sizing. When you’re reviewing risks associated with forgiveness, you’ll want to consider what expenses were made and when they were incurred or paid. No more than 40% of the forgiveness amount can come from non-payroll expenses.
Loan sizing can be tricky, too. Potential snags include including independent contractor payments, miscalculating average monthly payroll, or overestimated amounts related to owners. Tread carefully with eligibility requirements. Those revolving around the number of employees, affiliated entities, and employment of foreign employees can potentially trip you up, especially if your loan exceeds $2 million. Ensure someone on your due diligence team who knows the ins and outs of PPP is on hand to navigate potential audit risks.
KEY POINT: Audit Risks Extending Beyond Forgiveness to include Eligibility and Loan Sizing
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