Welcome to the First Issue:

• In response to anticipated SBA Audits and DOJ investigations of Paycheck Protection Program (PPP) loans and other CARES Act loans and grants, we have created a CARES Act SBA Audit & Government Enforcement Defense Team which has spent the last several months researching every DOJ prosecution of recipients of CARES Acts funds, including PPP loans, and has created an Excel spreadsheet to track them, with links to Indictments and other key pleadings. 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).
• Our Team will work with corporate attorneys and their clients to provide advice on preparing for SBA Audits and DOJ fraud investigations, and representation of clients in those audits and 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 first 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.

Executive Summary

• The SBA has announced that it intends to audit every borrower of PPP loans of US$2 million or more, and it may audit “any” borrower at “any time” regardless of the amount of the loan. Audits may occur even after loans are forgiven.
• SBA audits will focus on whether documentation supports borrower certifications that loans were “necessary” to support the ongoing operation of the business, whether businesses were qualified for loans, whether borrowers were entitled to the amount of loans for which they applied, whether loan proceeds were used for only “authorized” purposes, and numerous other factors. The SBA has made clear it believes there was widespread fraud in the PPP loan program and that it intends to refer to law enforcement suspected fraud discovered during audits.
• The Department of Justice has already filed 155 criminal prosecutions of borrowers of PPP loans and has pledged to aggressively investigate and prosecute fraud in PPP loans and other CARES Act programs.
• The Special Inspector General for Pandemic Recovery (SIGPR), created by the CARES Act, has set up both an Office of Audits and an Office of Investigations, staffed with experienced analysts, investigators and attorneys. SIGPR analysts are mining massive financial databases searching for evidence of fraud by recipients of CARES Act funds and have already referred 69 cases to other law enforcement agencies for fraud investigations.
• Our CARES Act SBA Audits & Government Enforcement Defense Team was created, in large part, to assist clients prepare for and respond to SBA Audits and other government investigations. This Update and future issues of it are intended to alert clients and corporate lawyers advising them to the risks clients face in SBA Audits and other government investigations and steps they may take to help mitigate those risks.

The CARES Act & PPP Loans

• The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), PL 116-136, March 27, 2020, 134 Stat 281, 15 U.S.C. § 9001, created the Paycheck Protection Program (PPP) and appropriated US$349 billion to fund it. Subsequent legislation increased the appropriation to US$806 billion.
  • Congress has amended the CARES Act multiple times since its enactment, including the following statutes:
  • Paycheck Protection Program & Health Care Enhancement Act, Pub. L. 116-139, April 24, 2020;
  • Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act), Pub. L. 116-142, June 5, 2020;
  • Pub. L. 116-147, July 4, 2020 (extending the authority for the SBA to guarantee PPP loans to August 8, 2020);
  • Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (Economic Aid Act), Pub. L. 116-260, Dec. 27, 2020; and
  • American Rescue Plan Act of 2021 (American Rescue Plan Act), Pub. L. 117-2, March 11, 2021.

Small Business Administration (SBA)

• The SBA published its first Interim Final Rule relating to implementation of the CARES Act and PPP loans on April 2, 2020. It has since published an additional 29 Interim Final Rules, the last of which was published on March 22, 2021.
• The SBA has also published 67 Frequently Asked Questions (“FAQs”), the last of which was published on April 6, 2021.
• As of April 18, 2021, the SBA has approved 9,876,741 PPP loans totaling US$762,405,455,019 which were processed by 5,475 lenders.
• The SBA has forgiven 2.7 million PPP loans representing a total of US$227.6 billion.
• The SBA has announced that it will audit all borrowers of PPP loans in the amount of US$2 million or more. With some exceptions, borrowers are required to maintain all documentation of eligibility, calculation of loan amount, uses of PPP loan proceeds and related documents for 6 years. However, the SBA has made clear that it may audit borrowers “at any time.” Loan forgiveness does not protect borrowers from SBA audits (or DOJ investigations).
• The SBA has yet to publish guidance on how it will audit borrowers to determine if borrowers were eligible for PPP loans. Several factors create uncertainty and borrower concern:
• The CARES Act required borrowers to certify “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.”
• In its FAQ #31, the SBA added its own interpretation of this statutory requirement:
• “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” (Emphasis added)
• On December 31, 2020, the SBA issued its Loan Necessity Questionnaire for borrowers who received PPP loans of US$2 million or more and stated that the purpose of the questionnaire was “to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application (SBA Form 2483 or Lender’s equivalent form) that economic uncertainty made the loan request necessary.” Significantly, the Questionnaire required borrowers to disclose information that previously appeared to be irrelevant to whether a PPP loan was “necessary.” Among the new factors included in the Questionnaire are:
• The borrower’s gross revenue in the second quarter of 2020 and 2019;
• Whether the borrower began any new capital improvement projects after March 13, 2020 that were not due to COVID-19;
• Whether the borrower paid any dividends or other capital distributions to its owners between March 13, 2020 and the end of the loan forgiveness covered period of the PPP loan;
• Whether the borrower paid any outstanding debt between March 13, 2020, and the end of the loan forgiveness covered period; and
• Whether any of the borrower’s employees were compensated in an amount that exceeded US$250,000.
• The Loan Necessity Questionnaire required a certification that the borrower understands that knowingly making a false statement to obtain a guaranteed loan or forgiveness of an SBA-guaranteed loan is punishable by several identified criminal statutes.
• The SBA has announced that it may take into account a borrower’s circumstances and actions both before and after the borrower’s certification of loan necessity in determining whether the certification was made in good faith.
• 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 US$2 million or more. As noted above, even if a PPP loan has been forgiven, the SBA may still conduct an audit of the loan, and has announced that it will do so for all loans of US$2 million or more. 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.

Department of Justice Prosecutions

• The Department of Justice has made CARES Act and PPP loan fraud a top priority and has directed that each U.S. Attorney’s Office throughout the country create a CARES Act Prosecutor.
• “On March 16, 2020, the Attorney General issued a memorandum directing every U.S. Attorney’s Office ‘to prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.’ Within days, each of the 94 U.S. Attorneys’ Offices identified and appointed one prosecutor to serve as the office’s Coronavirus Coordinator to ensure that those cases were given the highest priority.” (Source: DOJ Press Release)
• In a Joint Statement by Associate Deputy Attorney General William Hughes and the U.S. Attorney for the District of New Jersey, the DOJ’s position was outlined: “To be clear, the Department will not tolerate any bad actors who seek to treat the pandemic as an opportunity to defraud their fellow citizens or the government.”
• In a speech on Feb. 17, 2021 to the Federal Bar Association Qui Tam Conference, Acting Assistant Attorney General Brian M. Boynton said: “It is clear to me and my colleagues in the Civil Division – and I am sure to all of you – that the False Claims Act will play a significant role in the coming years as the government grapples with the consequences of this pandemic.”
• The DOJ has already filed 155 individual prosecutions of PPP loan fraud in 46 federal judicial districts. Our Team has created an Excel spreadsheet that tracks each case, with links to Indictments and other key pleadings, and we update the spreadsheet every week. Here is a summary of the prosecutions that have been filed thus far:
• 164 individual defendants have been charged in the 155 cases.
• The average PPP loan amount – or alleged “loss” for Sentencing Guidelines purposes – is US$3.3 million.
• 23 of the cases filed involve a PPP loan amount of US$2 million or more.
• The smallest alleged financial loss is only US$9,400.
• The largest alleged loss is US$24,800,000.
• 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 (69 cases); the bank fraud statute, 18 U.S.C. 1344 (61 cases); the loan application fraud statute, 18 U.S.C. 1014 (49 cases; the money laundering statute, 18 U.S.C. 1957 (40 cases); and the attempts and conspiracy statute, 18 U.S.C. 1349 (37 cases).
• The most recent prosecution was filed on April 13, 2021 in the Central District of California, alleging that a California company applied for and received a PPP loan of US$7.25 million and then misappropriated hundreds of thousands of dollars of PPP loan proceeds on luxury cars and a US$6,000 computer. The defendant is also charged with attempting to transfer US$150,000 of the loan proceeds to Mauritania.
• The Select Subcommittee on the Coronavirus Crisis, U.S. Congress, issued a Report on March 25, 2021, in which it estimated that there has been “nearly US$84 billion in potential fraud” of CARES Act loans and grants.
• There are new DOJ criminal investigations and prosecutions every month, and often every week. Prosecutions of fraud following the Troubled Asset Relief Program (TARP) – which was established in response to the 2008 Great Recession -- lasted over 10 years and resulted in hundreds of corporate executives being convicted and sentenced to prison. The economic bailout initiated by the CARES Act is several times larger than the TARP program. Given the number of prosecutions thus far and the estimates of the total amount of fraud, companies should expect a significant increase in the number of criminal investigations and prosecutions over the next several months as grand juries are reconvened, and FBI and other law enforcement agents and federal prosecutors return to work after receiving COVID-19 vaccinations. Many investigations had been put on hold because agents could not conduct field investigations, execute search warrants, and make arrests. As those agents return to work, expect a significant increase in fraud investigations and prosecutions. Likewise, with grand jury activities resuming, prosecutors are likely to begin issuing subpoenas aimed at obtaining evidence of suspected fraud.
• Congress expedited the PPP loan program to get federal monies to small businesses as quickly as possible to avert economic hardship and keep workers employed. As part of the emergency relief effort, the CARES Act suspended the requirement that lenders investigate borrower applications. Rather, banks were authorized to rely on borrower certifications and were granted immunity if errors occurred. Similarly, businesses rushed to apply for PPP loan funds as they faced eminent layoffs and possible closure of their businesses if they did not immediately obtain emergency relief.
• Although the government’s expeditious rollout of the CARES Act programs is laudable, and the rush to apply for those funds by businesses is understandable, when everyone acts with haste, mistakes invariably occur. And, to make matters worse, there was widespread confusion as to eligibility for PPP loans, how to calculate a company’s number of employees, application of the Affiliation Rules, determination of the loan amount, and myriad other issues. Now, with the benefit of 20:20 hindsight, federal prosecutors must determine whether those were honest mistakes, or fraud. How a company handles an SBA Audit or DOJ investigation could have a tremendous impact on whether the company and its corporate executives are prosecuted.

Special Inspector General for Pandemic Recovery

• The Special Inspector General for Pandemic Recovery (“SIGPR”) was established by the CARES Act, 15 U.S.C. § 9053. The SIGPR has the duty to conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments by the Secretary of the Treasury under any program established by the Secretary under Division A of the CARES Act – which includes PPP loans – as well as the management by the Secretary of any program established under Division A of the CARES Act. Congress appropriated US$25 million to the SIGPR to fund its activities.
• The SIGPR, Brian D. Miller, was appointed by the President and confirmed by the Senate on June 2, 2020. Mr. Miller is an experienced career federal prosecutor and attorney, having served as Senior Associate White House Counsel, Inspector General of the U.S. General Services Administration (GSA), Senior Counsel to the Deputy Attorney General, Assistant U.S. Attorney for the Eastern District of Virginia, Counsel to the United States Attorney, and Special Counsel on Health Care Fraud for the Deputy Attorney General.
• The Office of Audits, a division of the SIGPR, has authority to audit loans, loan guarantees and other investments made by the Treasury under Division A of the CARES Act.
• The Office of Investigations, another division of the SIGPR, has authority to conduct both civil False Claims Act and criminal fraud investigations relating to loans, grants and loan guarantees under Division A of the CARES Act. Agents of the SIGPR have law enforcement powers, including the authority to carry firearms, execute search warrants, and make arrests.
• The SIGPR has established a team of analysts, auditors and investigators who conduct electronic analysis of a large number of government and financial databases for evidence of fraud. The office has entered into agreements with other agencies, including FinCEN, the Federal Trade Commission (FTC), and numerous U.S. Attorney’s offices that provide SIGPR staff with access to a large volume of confidential files and databases.
• The SIGPR has already referred 69 cases of suspected fraud under the CARES Act to other law enforcement agencies for further investigation and potential prosecution.
• The U.S. Attorney’s Office for the District of South Dakota obtained an indictment on April 6, 2021, against James Bunker for allegedly defrauding or attempting to defraud banks in connection with his efforts to obtain loans under the Paycheck Protection Program and the Main Street Lending Program, both of which were funded by the CARES Act. The U.S. Attorney’s press release of the indictment credits the SIGPR, FBI and IRS for their assistance in investigating this case.

Our SBA Audits & Government Enforcement Team