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Paycheck Protection Program fraud and the need for whistleblowers to report it

The Small Business Administration’s Paycheck Protection Program (PPP) is a crucial Covid-19 relief effort that is highly vulnerable to fraud – making it important that whistleblowers report fraud and help protect those funds. The PPP was created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which Congress enacted in March 2020…

The Small Business Administration’s Paycheck Protection Program (PPP) is a crucial Covid-19 relief effort that is highly vulnerable to fraud – making it important that whistleblowers report fraud and help protect those funds.

The PPP was created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which Congress enacted in March 2020 to provide emergency financial assistance for businesses to deal with the staggering economic impact of the Covid-19 pandemic and keep employees on the payroll. Congress authorized a total of $670 billion for the PPP, making it the largest program to help businesses under the CARES Act.

To expedite the disbursement of funds, SBA allowed lenders to rely on borrower certifications to determine borrowers’ eligibility. Self-certification, however, raises the potential for fraud.

As of June 12, 2020, SBA had processed through private lenders over 4.6 million guaranteed loans totaling $512 billion to small businesses and other organizations adversely affected by Covid-19. That total excludes lenders’ fees, which cost SBA about $2 billion.

With so much money at stake and so many loans issued, the SBA needs the help of whistleblowers to provide information about PPP-related frauds.

So far, DOJ has announced charges in more than a dozen cases of potential misuse of PPP funding involving more than $65 million in PPP loans.

How the SBA’s Paycheck Protection Program loans work

The CARES Act authorized up to $349 billion in forgivable loans to small businesses for job retention and related expenses through the PPP. The program was designed to provide loans to small businesses to help them keep employees on the payroll.

In April 2020, Congress appropriated an additional $321 billion for the PPP.

The PPP allows qualifying small businesses and other organizations to receive loans with a maturity of two years and an interest rate of  1%. PPP loans, however, may be forgiven provided that employers retain or rehire employees.

PPP loans are made by lenders but are fully guaranteed by the SBA. Minimal loan underwriting – such as confirming receipt of borrower certifications – is required from lenders. This leaves the program susceptible to fraudulent applications.

Two key points about PPP funds:

  • PPP loans must be used for payroll costs, interest on mortgages, rent and utilities.
  • PPP loans may be forgiven if businesses spend the money on these expenses within a set period of time and dedicate at least 60 percent of the loan proceeds towards payroll expenses.

How to report PPP fraud – whistleblowers’ role

Government funding intended to alleviate the devastating economic impact of the coronavirus pandemic is vulnerable to fraud.

Whistleblowers can play a crucial role in stopping these kinds of schemes and ensuring that CARES Act funding, including PPP loans and other pandemic relief assistance, is used for its intended purposes.

“This kind of fraud reaches deep into the community by diverting critical funds intended to help struggling businesses survive and help people hold onto their livelihoods,” said Hannibal “Mike” Ware, inspector general of the US SBA, in a press release. “It is unconscionable that anyone would attempt to steal from the community using the CARES Act to line their own pockets during this national crisis.”

In cases where fraud involves government funds – such as loans issued under the PPP – the False Claims Act may apply. The False Claims Act incentivizes whistleblowers to sue individuals and entities defrauding the government and recover funds on the government’s behalf. The government investigates the allegations in qui tam lawsuits and decides whether to join the case and prosecute.

The False Claims Act protects whistleblowers from employment retaliation. Those who suffer demotion, job termination and other forms of retaliation may sue and collect compensation, damages and attorneys’ fees.

Whistleblowers who file “qui tam” lawsuits under the False Claim Act are entitled to rewards of 15% to 30% of the funds recovered as a result of their case.

[If you know of fraud involving PPP loans or other covid-19 relief funds and would like to discuss how to proceed while protecting yourself and earning a reward, contact Phillips & Cohen for a free, confidential consultation.]

Recently alleged PPP fraud cases and enforcement – examples

  • The owner of a Texas wedding planning company was charged with fraudulently seeking over $3 million in SBA PPP loans. In applying for the loans, Fahad Shah of Murphy, Texas, claimed he had 120 employees, when he had none. Shah received over $1.5 million in PPP loans, which he allegedly funneled into personal investments, home mortgage payments and the purchase of a Tesla.
  • A Houston funeral director was arrested and charged with fraudulently seeking over $13 million in PPP loans for a business that did not exist, falsifying his identity, misrepresenting the number of employees and payroll expenses, and submitting falsified tax and bank documentation. He received over $1.6 million of the $13 million for which he applied.
  • A Hollywood film producer was charged with bilking $1.7 million out of the SBA’s PPP after he applied for a PPP loan to support payroll expenses for three film production and distribution companies. After receiving a $1.7 million PPP loan, he allegedly pocketed the money to pay off credit card bills, car loans and other personal expenses.
  • A Georgia reality TV personality, Maurice Fayne – who starred in Love & Hip Hop: Atlanta – was arrested for an alleged PPP fraud scheme after applying for a loan for his company, Flame Trucking. After certifying that the loan would be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments for his company, he was granted a loan of over $2 million. He allegedly used nearly three-quarters of the government loan to purchase jewelry – including a Rolex watch, a diamond bracelet and a 5.73-carat diamond ring.

[Read more about how whistleblowers can spot and safely report covid-19-related fraud in our guide.]

Businesses that have received PPP loans

The Treasury Department and SBA disclosed on July 6, 2020 information about borrowers that have received PPP loans of $150,000 or more, including the number of jobs supported by the loans.

The disclosure reveals the names of more than 661,000 business that received loans over $150,000. The agencies did not reveal the specific amounts of the loans, but slotted disbursed loans into five size categories: $150,000-$350,000, $350,000 – $1 million, $1 million – $2 million, $2 million – $5 million, $5 million – $10 million.

Loans of $150,000 or more account for over three-quarters of the funds lent through the PPP program. Over 4,800 loans were issued in the largest category, between $5 million and $10 million. About 86% of the issued loans are worth less than $150,000. Information about the borrowers for the smaller loans remain undisclosed for now.

PPP loans larger than $150,000 have allegedly helped businesses retain over 31,456,000 jobs, and all PPP loans combined have helped support over 51 million jobs.

Approximately $30 billion worth of PPP loans were cancelled and are not included in the data.

Whistleblower attorneys for PPP fraud cases

If you are aware of fraud involving PPP loans or any other type of fraud involving covid-relief payments or government funding, consulting with an experienced whistleblower attorney before reporting the fraud is an important way to learn how to protect yourself and how to get a whistleblower reward.

Phillips & Cohen is the nation’s most successful law firm representing whistleblowers, with more than $12.3 billion recovered as a result of its cases. The firm’s whistleblower attorneys have won more than $1 billion in rewards for their clients. Contact us for a free, confidential consultation.

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