The Justice Department is directing considerable resources towards reclaiming funds from the Paycheck Protection Program (PPP) that were either wrongly obtained or forgiven without proper grounds. As a result, businesses that had their PPP loans forgiven might find themselves implicated in a False Claims Act (FCA) investigation. This could lead to penalties amounting to three times the total loan amount in addition to other penalties, and individuals might even face substantial custodial sentences.
Borrowers might be shocked to discover that actual knowledge isn’t necessary to “knowingly” present false information; merely signing documents without fully reading them could suffice. This scenario raises the risk of facing the FCA’s severe penalty system which allows the government to pursue triple damages along with other penalties. Moreover, individuals could face criminal felony charges that could result in up to five years in prison.
To mitigate these risks, in-house counsel and legal advisers conducting internal audits or navigating federal investigations should be aware of several key issues:
‘No-Show’ Employees
The Justice Department is scrutinizing PPP borrowers who included family members on their payrolls without those individuals actually working. This practice, commonplace among small and medium-sized businesses, could attract FCA liability.
FTE Calculations
To qualify for loan forgiveness, a borrower needed to demonstrate that a minimum threshold of expenses was allocated to payroll costs during the covered period. This proof was often provided through a Schedule A, which detailed employee identifiers, compensation, and average full-time equivalent (FTE) calculations. Errors in FTE calculations can be a fertile ground for FCA investigations.
Affiliation Rules
The Treasury Department emphasizes that “the power to control” is a critical factor. This control can mean common ownership or decision-making authority among multiple ventures, potentially disqualifying them from PPP eligibility. Affiliated borrowers that, when combined, exceed PPP’s eligibility criteria might be liable, presenting another pitfall for FCA liability.
Employee Compensation Caps
The PPP capped individual employee compensation at $46,154 for any given covered period, including overtime. Borrowers who received forgiveness for salaries exceeding this cap might also face FCA issues.
Employee-Owner Caps
Compensation for employee-owners with more than 5% ownership was capped significantly lower, either at two and a half months’ worth of 2019 compensation or $20,833 across all borrowers, whichever was less. This rule was designed to prevent windfalls, placing family-owned businesses with overlapping ownership particularly at risk.
The FCA’s permissive scienter standard, coupled with verifications submitted with every loan forgiveness application, implies that even well-meaning borrowers could find themselves under scrutiny. Detailed understanding and meticulous compliance with these provisions are critical for practitioners advising clients on PPP-related issues.
For further reading on this topic, visit the full article on Bloomberg Law.
Jeffrey Hoffman and Gabriel Altman of Windels Marx Lane & Mittendorf contributed to this analysis.