Welcome to the Second Issue:

• In response to anticipated SBA Audits and DOJ investigations of Paycheck Protection Program (“PPP”) loans and other CARES Act loans and grants, we created a CARES Act SBA Audit & Government Enforcement Defense Team which spent several months researching every DOJ prosecution of recipients of CARES Acts funds, including PPP loans. We track those prosecutions along with new ones in an Excel spreadsheet, with links to Indictments and other key pleadings, and update it daily. The Team has also read and analyzed over 1,000 pages of law, including the 380-page CARES Act and the statutes that have amended it, all SBA Interim Final Rules, all SBA “Frequently Asked Questions” and other guidance, and has researched the three entities created by the CARES Act: the Special Inspector General for Pandemic Recovery (SIGPR), the Pandemic Response Advisory Committee (PRAC), and the Congressional Oversight Commission (COC). We monitor each of those on a daily basis as well.
  
  
• Our Team is working with corporate attorneys throughout Dentons to represent clients in SBA audits, and to provide advice on preparing for those audits and DOJ fraud investigations. The Team will also work with other white collar and government investigation attorneys at Dentons who are best suited geographically to assist clients with CARES Act-related audits and investigations.
  
  
• This is the second issue of our “Update,” which is intended to provide periodic summaries of recent CARES Act-related SBA Audits, DOJ prosecutions, and other developments concerning government enforcement agencies. If you missed the First Issue, please contact us and we will email it to you.

SBA Audits Have Begun

• The Small Business Administration (“SBA”) has begun audits. In the past two weeks, we have represented clients in New York and Texas in responding to SBA “reviews” of their PPP loans. The SBA has told us that their “reviews” are, in fact, “audits.” The SBA has recently repeated its previous announcement that it will audit every borrower of PPP loans of $2 million or more, and it may audit “any” borrower at “any time” regardless of the amount of the loan. The SBA told our Team that PPP loans of less than $2 million will be “spot checked” and if the SBA needs information they will contact the lender, and the lender will contact the borrower to let them know the loan is under review.
  
  
• SBA “reviews” a/k/a “audits” are requiring that Borrowers upload a massive amount of documents within a 15-day deadline, with no extensions available. The SBA is requiring Borrowers to upload documents to their banks, which will then upload them to an SBA portal. Required documents include the Borrower’s PPP Loan Application, PPP Loan Forgiveness Application, and the SBA Loan Necessity Questionnaire, along with “all supporting documents.” In addition, when Borrowers applied for loan forgiveness, the SBA required that Borrowers preserve for six years all documents relating to their PPP loan, although they were not required at the time they sought loan forgiveness to produce them to the SBA. Now the SBA “reviews” require that all of those documents be uploaded as well.
  
  
• We recommend that, when Borrowers respond to the SBA audits, they provide the SBA with a memorandum explaining their good faith basis for their certifications of loan necessity, their determinations of eligibility, the number of their employees under the Affiliation Rules, their calculation of loan amount, any other eligibility issues, and how they spent the proceeds of the PPP loans. The memorandum should reference exhibits to support each and every issue that the SBA may audit and review.
  
  
• Borrowers must “make the record” in their submissions to the SBA in response to a review/audit. Under the Administrative Procedures Act which governs appeals of SBA decisions, the “record” for appeal is whatever was in the SBA file at the time of its determination. Thus, in the event of an adverse SBA decision, the Borrower must rely on the SBA file in an appeal. There is no guarantee that the SBA will contact the Borrower again if the SBA has questions or concludes that the documents submitted are not sufficient to support eligibility, loan necessity, the amount of the loan, or that the proceeds were only spent for “authorized” purposes under Section 1102 of the CARES Act. Borrowers should therefore submit every document, and provide every explanation, needed both to convince the SBA to conclude the Borrower was eligible for the loan and is entitled to loan forgiveness, and to support an appeal if one becomes necessary.
  
  
• A central issue in most, if not all, SBA reviews/audits is whether the PPP loan was “necessary to support the ongoing operation of the business.” The CARES Act requires borrowers to certify, inter alia, “that the uncertainty of current economic conditions makes necessary the loan request to support theongoing operations of the eligible recipient.” The SBA announced in April 2020 an additional requirement Previously, there was no requirement that borrowers consider other sources of liquidity. The SBA will review whether a Borrower had other sources of liquidity, including private equity firms, venture capital firms, or hedge funds (See “Liquidity Assessment,” Question #10, SBA Form 3509 “Loan Necessity Questionnaire”). The SBA will also examine a Borrower’s cash or cash equivalents at the time of its PPP loan application, its ability to borrow from banks or other financial institutions, and its capital.
  
  
• The SBA has also announced that if it believes a borrower may have committed fraud in obtaining a PPP loan or loan forgiveness, or has made a false certification, it will refer the borrower to the Department of Justice for a criminal fraud investigation.

Preparing for an SBA Audit

• Borrowers of PPP loans should act now to prepare for an SBA Audit, particularly if the borrower received a PPP loan of $2 million or more. It is proving difficult for our clients to gather all required documents, and for us to prepare a comprehensive memorandum explaining the Borrower’s decisions on loan necessity and forgiveness, within the 15-day deadline the SBA is imposing in its audits. Borrowers should act now, before a “review” or audit occurs and when they have no such deadline, to get prepared for them. To prepare for such audits, borrowers should:
  
  
  • Gather all documents that will be needed in the event of an audit, including:
    • Materials which support the borrower’s certification “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient;”
      
      
    • Documents that support the borrower’s calculation of the number of employees it had at the time its PPP loan application was submitted, taking into account the “Affiliation Rules;”
      
      
    • Documents that support the borrower’s calculation of payroll costs;
      
      
    • Documents that support the borrower’s determination of the maximum loan amount for which it was eligible; and
      
      
    • Accounting and other records verifying that the PPP loan proceeds were only utilized for “allowable uses,” and that at least 60% of the proceeds were used for payroll costs.
      
      
• If borrowers have not previously documented the basis upon which they made their loan necessity determination or other decisions relating to their PPP loans and loan forgiveness, they should re-create those determinations now. Borrowers should be cautious, however, not to back-date any memoranda created now to memorialize prior decisions. Any back-dating or creation of documentation that appears to have been made prior to submission of the loan application or application for loan forgiveness could be considered obstruction of justice, which is a federal criminal offense.

SBA Data Update

• As of May 24, 2021, the SBA has approved 11,618,144 PPP loans totaling $795,909,415,6979 which were processed by 5,469 lenders. The total funds appropriated by Congress for PPP loans is $806 billion, so the SBA is nearing the limit.
  
  
• The SBA has forgiven 3.3 million PPP loans representing a total of $279.4 billion

Department of Justice Prosecutions

• In a meeting with a high-ranking DOJ Fraud Section attorney on April 28, 2021, our Team was told that the DOJ Fraud Section has a “huge backlog” of PPP loan fraud cases and that as law enforcement agents and federal prosecutors return to the office from working remotely, we will see a significant increase in criminal investigations and prosecutions throughout the United States.
  
  
• We continue to monitor the DOJ for new criminal filings. Predictably, that number continues to grow. As of May 24, 2021 we have identified a total of 482 defendants charged for CARES Act or PPP fraud related cases. Of that total, there are currently 164 individuals indicted for allegations centered on PPP fraud. That number includes four new separate indictments that have been publicly unsealed this month.
  
  
• Since our last Update, the Department of Justice has continued to demonstrate that CARES Act and PPP fraud remain a focal point. That focus extends to both public pronouncements and court pleadings. One recent news release from the U.S. Secret Service touted the fact that, one year into investigating COVID-19 related fraud, the DOJ and Secret Service have seized over $640 million in allegedly fraudulently procured funds, and have recovered over $2 billion for state unemployment insurance programs.
  
  
• In addition to tracking new criminal prosecutions, our Team continues to monitor existing ones. To date, none of these cases has proceeded to trial. In addition, since our last Update, DOJ has secured 4 new plea agreements, bringing the current total to 33 pleas filed.
  
  
• Of those 33 guilty pleas, only one PPP loan fraud defendant has been sentenced. In United States v. Hines, (U.S. District Court, Southern District of Florida), the Defendant admitted to seeking $13.5 million in loans for business expenses that were not legitimate, including payroll for employees who didn’t exist. He also used the money for personal expenses, including the purchase of a Lamborghini. He was sentenced last week to prison for 78 months, followed by 3 years of supervised release.
  
  
• Prosecutions have charged defendants with violating 15 different federal criminal statutes. The most frequently cited statutes are the wire fraud statute, 18 U.S.C. 1343 (83 cases); the bank fraud statute, 18 U.S.C. 1344 (66 cases); the loan application fraud statute, 18 U.S.C. 1014 (34 cases; the money laundering statute, 18 U.S.C. 1957 (40 cases); and the attempts and conspiracy statute, 18 U.S.C. 1349 (30 cases).

Special Inspector General for Pandemic Recovery (SIGPR)

• Since publication of our first Update, a dispute has arisen over the jurisdiction of the SIGPR. Unless Congress clarifies its authority, it appears the SIGPR will not exercise any jurisdiction over the Paycheck Protection Program (“PPP”), including the SIGPR will not conduct PPP audits or investigations.
  
  
• The CARES Act created the Office of Special Inspector General for Pandemic Recovery (SIGPR) and vested it with authority to “conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury under any program established by the Secretary under this Act . . .” CARES Act, Section 4018(c)(1). Section 1 of the CARES Act reads: “This Act may be cited as the “Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act.” It would thus appear that “this Act” in Section 4018 defining the SIGPR’s authority would include any program under the entire CARES Act.
  
  
• In his April 30, 2021 Quarterly Report, the SIGPR revealed that he would need to “discontinue many ongoing oversight efforts and transfer others, including criminal investigations and leads,” due to a jurisdictional dispute with the Department of the Treasury and the Treasury Inspector General regarding oversight of the Coronavirus Relief Fund, Payroll Support Program, and the Paycheck Protection Program. The SIGPR has taken the position that those programs fall within the scope of the SIGPR’s oversight authority, but that position has been hotly contested by the Department of the Treasury. The parties referred the matter to the Department of Justice’s Office of Legal Counsel, which issued an opinion on April 28, 2021 that the “SIGPR’s jurisdiction is narrowly limited to programs established under title IV, subtitle A of the CARES Act,” which includes “Treasury’s direct loans and the Federal Reserve’s lending programs,” but excludes “the Coronavirus Relief Fund, Payroll Support Program, and Paycheck Protection Program.” The dispute between the SIGPR and Treasury reportedly escalated in late January of 2021, when the Treasury Department began refusing the SIGPR’s requests for information, such as access to the “Treasury’s Payroll Support database.” The SIGPR has urged Congress to pass legislation clarifying the SIGPR’s mandate “to provide oversight of the Coronavirus Relief Fund, Payroll Support Program, and other pandemic-related programs managed by the Secretary of the Treasury.”

Our SBA Audits & Government Enforcement Team