The Justice Department has opened an investigation into companies that applied for emergency loans under the Paycheck Protection Program, and businesses that provided misleading information could face jail sentences, experts say.
The new government program aims to help small businesses hurt by the coronavirus crisis.
“Whenever there’s a trillion dollars out on the street that quickly, the fraudsters are going to come out of the woodwork in an attempt to get access to that money,” Assistant Attorney General Brian Benczkowski told Bloomberg News Thursday.
As head of the department’s criminal division, Benczkowski could oversee prosecution of small-business owners or other executives who have certified documents submitted to the Small Business Administration. Prosecutors have contacted 15 of the 20 largest loan processors and the SBA as part of the investigation.
Small-business owners who have applied for or received PPP funds should “definitely take it as cause for concern,” Derek Adams, a former Justice Department trial attorney, told MarketWatch.
The PPP was established by Congress in its $2.2 trillion CARES Act to protect small-business owners and their employees from the economic impact of efforts to combat the spread of COVID-19. It allows businesses with fewer than 500 employees to apply for forgivable loans that cover two months of payroll and other expenses, if “the uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient,” according to the CARES Act.
But last week the government issued further guidance saying that applicants must exhaust other avenues of liquidity that would enable them to support ongoing operations. “This suggests a more robust analysis than what a lot of folks initially anticipated,” said Adams. “Businesses should do a fresh analysis to understand if they can support this certification before May 7,” a government-set deadline for paying back loans.
Companies that are found to have misled the government about the necessity of the loans could face penalties ranging from a loss of loan forgiveness to jail time. “When you’re making a certification in connection with receiving this loan, you face criminal liability” under statues that proscribe lying to government as well as mail fraud and wire fraud, Adams said.
Neil Barofsky, the former special investigator general for the 2008 financial-crisis bank bailouts told MarketWatch that the announcement was “an important first step” in the process of overseeing the nearly $3 trillion in coronavirus stimulus that Washington has delivered to date, but “it won’t be nearly enough given the opportunities for fraud in the program.” Barofsky has called on Congress and the White House to stand up further oversight mechanisms quickly, to head off fraud as these programs get off the ground.
He also said that given limited prosecutorial resources, the government should not focus on cases where businesses may have overstated the need for the funds or their lack of access to other financing, but on “outright cases of fraud around false payroll numbers,” and other financial data.
The Trump administration, however, appears eager to dissuade big businesses from taking funds, given the widespread demand for these loans that is set to exhaust the $670 billion allocated to the program.