As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) provided loans to businesses to keep their workforce employed during the Covid-19 pandemic. Backed and run by the Small Business Administration (SBA), the PPP was designed to provide fast and direct economic assistance for small businesses and to preserve jobs for Americans.
Unfortunately, the rush to distribute funds quickly and the sheer amount of funds available led to fraud and abuse, and serve as a reminder to all businesses how seriously they need to take any government form. Initially, fraud enforcement efforts focused on PPP borrowers. Common schemes included inflating payroll numbers to qualify for larger loans and applying for multiple loans with different lenders. However, in recent months, PPP lenders have found themselves under greater scrutiny by authorities as well.
At a high level, PPP funds were available to businesses that met certain criteria. The loan amount was based on a formula tied to the business’ payroll costs in the preceding 12 months. The SBA turned to private lenders to aid in such a massive distribution of funds. Certain lenders were automatically approved while others, including even non-bank lenders such as commercial real estate lenders and microloan companies, could seek approval to be a PPP lender.
As part of the CARES Act, the SBA made clear that in order to provide relief as quickly as possible, lenders would have limited due diligence requirements, including no obligation to verify eligibility information provided by borrowers. Banks were, however, required to continue to follow Bank Secrecy Act (BSA) obligations and non-bank lenders were required to develop appropriate Anti-Money Laundering (AML) protocols. All told, borrowers were able to choose between thousands of lenders and third-party platforms accepting PPP applications nationwide – each of which with its own approval process.
There were two rounds of funding. The “First Draw” accepted over 5.2 million applications between March and August of 2020 and distributed more than $525 billion. The “Second Draw” lasted from January to March of 2021 and distributed $285 billion. Ultimately, PPP borrowers received over $800 billion.
Even before the First Draw closed, the Department of Justice (DOJ) began investigating and prosecuting PPP-related fraud. As early as March 16, 2020, Attorney General William Barr sent a memorandum to the 94 U.S. Attorneys’ offices directing them to swiftly investigate and prosecute PPP loan fraud cases, and the DOJ announced on May 5, 2020 that it had charged two Rhode Island men with filing bank loan applications fraudulently seeking more than $500,000 in PPP funds.
Until recently, PPP fraud-related actions focused on the end recipients of funds. Per the DOJ, as of April of 2022, approximately 178 people had been convicted in PPP fraud cases – almost all of whom were borrowers who: (1) made false representations to acquire the loan; (2) impermissibly spent the loan proceeds; or (3) provided false information to obtain loan forgiveness. Defendants included engineers, reality TV stars, tech executives and more who spent the money on jewelry, Lamborghinis homes, and travel.
In March of this year, however, enforcement appears to have entered a new era — investigations into and prosecutions of PPP lenders. On March 1, 2022, federal prosecutors announced that charges, including bank and wire fraud, had been filed against Rafael Martinez, CEO of PPP Lender MBE Capital (MBE), in connection with fraudulent loan and lender applications. Prosecutors allege that Martinez furnished false information to the government to: (1) obtain a PPP loan for MBE Capital; (2) qualify as a non-bank PPP lender with the SBA; and (3) obtain collateral for use in borrowing through the Payment Protection Program Liquidity Facility.
Prosecutors allege that in its application to the SBA to be a non-bank lender for the PPP, MBA fraudulently claimed to have serviced more than $3.8 billion in business loans as part of its goal to support minority- and women-owned businesses. Based on that application, SBA approved MBE as a PPP lender, and MBE went on to handle more than 36,000 PPP applications and distribute almost $1 billion in funds – earning itself over $70 million in lender fees.
Despite the somewhat egregious conduct alleged by the government in this instance, this case is significant insofar as it signals a shift towards increased government scrutiny of PPP lenders — in instances, as here, where the lender perpetrated the fraud or, more likely, where the lender failed to comply with its BSA/AML obligations or intentionally turned a blind eye to suspicious loan applications.
This article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.
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