Apr 8, 2020

White Collar Considerations in the CARES Act Paycheck Protection Program Loans

White Collar CARES Act

The recently passed CARES Act provides for billions of dollars in economic assistance to millions of individuals and businesses negatively affected by the ever-evolving and escalating toll of the Covid-19 pandemic. While one of the laudable goals of the Act is to quickly get money into the hands of the people and businesses who need it most, the government has already begun allocating resources for prosecuting both the unscrupulous, who take advantage of the available programs, and the unwitting, who fail to adhere to the reporting and eligibility requirements.

Even before the passage of the CARES Act, Attorney General William Barr sent a Memo announcing that the Department of Justice will “prioritize the investigation and prosecution of Coronavirus-related fraud schemes.” Hundreds, if not thousands of white-collar indictments stemming from outright fraud will certainly result from the DOJ’s efforts, but what about those who make false statements without malicious or fraudulent intent? Could they still be subject to prosecution? In short, yes.

False statements made to government agencies can be prosecuted under a variety of statutes depending on the circumstance of the offense, but for purposes of the CARES Act reporting requirements, 18 USC § 1001, 18 USC § 1014, and 15 USC § 645  are likely most appropriate.

Paycheck Protection Program Loans

Paycheck Protection Program loans (“PPP loans”) under the CARES Act provide certain small businesses with funds to cover payroll costs, benefits, mortgages, rent, and utility expenses incurred between February 15, 2020 and June 30, 2020. (A timely primer of the PPP loan program, including certification requirements, may be accessed here.) Funds may also be used for some costs associated with conversion or expansion, including acquisition of land, material, supplies, equipment and working capital.

If your business applies for a PPP loan under the CARES Act, the application itself is made to a local lender or bank who is responsible for verifying that your business:

  1. was in operation on February 15, 2020,
  2. had employees and paid those employees’ salaries and payroll taxes, and
  3. the average monthly payroll costs.

How lenders verify those expenses is largely left up to individual lenders, but it is inevitable during this time of crisis certain representations will be hastily made and without the benefit of robust definitions and direction from the SBA.

Examples

Consider the potential implications of the following hypothetical situations.

A tax-advisory business with 400 full-time employees was in the process of onboarding 150 seasonal employees to handle the yearly tax season when the pandemic hit. Some, but not all, of the seasonal employees had been entered into the corporate payroll by February 15, though some of the paperwork had not been finalized, meaning the date certain employees were on the payroll could be inputted into the system so that the business qualifies as a small business with fewer than 500 employees as required under the Act. Could filling in the official start dates for the seasonal employees open up the company and its managers to charges for making false statements in their loan applications?

A marketing company with 12 employees is run by a former accountant who pays herself a $99,000 salary as president of the company, but also a $7,000 a month fee for doing the payroll, taxes, and financial accountings in her capacity as a CPA. If she seeks loan forgiveness both for her salary and for her consulting work, is she making a misrepresentation of her total compensation in violation of the $100,000 per employee cap?

A café with 25 employees pays a monthly mortgage to an 18% owner in the café who owns the building housing the café though a mortgage held by his single member LLC. Is the 18% owner considered a principal of the café and therefore the café cannot use PPP funds to pay the mortgage under the CARES Act? What if the 18% owner is also paid a yearly business consulting fee that would take the total compensation being paid to him through consulting fees and mortgage payments above $100,000?

Criminal Implications

18 USC § 1001 makes it a crime punishable by up to 5 years in prison to make any “materially false, fictitious, or fraudulent statement or representation” or to make or use “any false writing or document.” Perhaps even more appropriately here, 18 USC § 1014 prohibits knowingly making a false statement for the purpose of influencing certain federal agencies or federally insured financial institutions, and permits punishment of a fine of up to $1,000,000 and 30 years in prison. These statutes will likely be of paramount importance in the coming weeks and months as small business owners make reports to the SBA and their local financial institutions in order to take advantage of the loans and grants available. In all three hypotheticals, the business owners are opening themselves up to potential investigations and liability if they “fudge the numbers” in order to qualify for these loans, are not transparent with their lenders, or if they are not proactive in amending any filings they make with their lenders, should official guidance on application of the PPP program change.

While the enforcement and interpretation of the PPP loan program are fraught with an untold number of unknowns, a few things are certain. First, the government will not hesitate to prosecute those who take advantage of this generous program by filing materially false documents or making false representations to either the SBA or their lender in order to qualify for the program. Second, there is a lot of gray area in the interpretation of the program. For that reason, a statement that was not intended to be false, but which put the facts in the best possible, but perhaps not most accurate, light could be problematic in the future. In order to protect yourself and your business, consistent and transparent communication and documentation are paramount. When in doubt, consult with your attorney and accountant, and, if questions are raised in the future about your application or use of PPP funds, consult with an attorney with experience in these types of investigations.


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