Small Business Money Grab Under the CARES Act Brings Enforcement Risks | #employeefraud | #recruitment | #corporatesecurity | #businesssecurity | #

The devastating economic impact of the COVID-19 pandemic already has set in, with the future of thousands of businesses hanging in the balance. Big and small businesses alike are finding it difficult to cope with the downturn. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provisions related to small business loans provide a glimmer of hope. Among other forms of economic relief, the CARES Act created the $349 billion Paycheck Protection Program (“PPP”) to provide funding to assist small businesses impacted by the pandemic. The Senate recently approved at least $310 billion in additional funding on April 21, 2020,[1] which likely will be passed by the House and signed by the President this week. It may turn out for some businesses, however, that these provisions will be nothing more than fool’s gold. The U.S. Small Business Administration (“SBA”) loan programs, including the PPP under the CARES Act, only are available to qualifying businesses that strictly comply with complex rules related to the size of the business, including its employee count, financial condition, affiliations, control and ownership, and industry classifications. Businesses that reflexively jumped at the SBA money grab without discipline or compliance are at risk of aggressive government enforcement that surely will follow.

Long before the pandemic hit, many “bad actor” companies took advantage of SBA rules and qualification thresholds to game the system. In response, the SBA Office of Inspector General (“OIG”) and federal prosecutors established a well-organized investigation and enforcement network to prevent and detect SBA fraud, waste, and abuse. They have aggressively and successfully prosecuted fraud against the SBA for years, and undoubtedly will target those seeking to exploit relief funds under the CARES Act. As part of the initial wave of enforcement, the Department of Justice already has prioritized the investigation and prosecution of organized criminals such as drug cartels who use small businesses as fronts to launder illegal funds and continue to defraud the government under the CARES Act. It will not be long before government enforcement authorities investigate the next wave of businesses that acted carelessly or recklessly by not doing their homework before misleading the government through their SBA loan applications under the CARES Act.

Criminal and Civil Enforcement

While the Administration, Congress, and local governments currently are prioritizing the availability of crisis funds to support small businesses affected by COVID-19, federal enforcement authorities concurrently are mobilizing to identify businesses they believe fraudulently applied for and obtained CARES Act relief. Such businesses may become targets of severe criminal and/or civil liability.

First, whoever knowingly misrepresents information on CARES Act loan applications may be criminally liable under 18 U.S.C. § 1014 for “mak[ing] any false statement or report . . . for the purpose of influencing in any way the action of the . . . Small Business Administration. . . .” Misrepresentations on loan applications may further subject potential wrongdoers to prosecution under 18 U.S.C. § 1341 (mail fraud), 18 U.S.C. § 1343 (wire fraud), and 18 U.S.C. § 1344 (bank fraud). Each of these crimes is punishable by up to $1,000,000 in fines and/or up to 30 years imprisonment.

Second, businesses or persons may be civilly liable for loan application misrepresentations under the civil False Claims Act (“FCA”) (31 U.S.C. §§ 3729–33).[2] Under the FCA, a business or person does not need to have actual knowledge of the falsity of a loan application statement; the business or person need only “act[] in deliberate ignorance of the truth or falsity of the information,” or “act[] in reckless disregard of the truth or falsity of the information, and no proof of specific intent to defraud is required.” 31 U.S.C. § 3729(b)(1). Liability under the FCA is severe, including both penalties for each false claim submitted and triple the amount of loss sustained by the government. For decades, the FCA has been the most lethal enforcement weapon used by the Department of Justice to combat fraud, waste, and abuse, hauling in multiple billions of dollars in settlements each year.

Finally, the CARES Act allocated $80 million for the creation of a “Pandemic Response Accountability Committee” (“PRAC”) to prevent and detect fraud, waste, abuse, and mismanagement related to lending under the Act. The committee is composed of inspectors general from relevant agencies, including the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, and Treasury, as well as the SBA. As noted above, the SBA OIG is no stranger to aggressive investigations to root out loan fraud. In 2018, SBA OIG investigations resulted in 62 criminal indictments/informations, 43 convictions, and more than $79 million in recoveries, fines, asset forfeitures, civil fraud settlements, and cancelled contracts. In 2019, SBA OIG investigations resulted in 49 criminal indictments/informations, 36 convictions, and more than $72.6 million in potential recoveries, fines, asset forfeitures, civil fraud settlements, and cancelled contracts. If SBA OIG enforcement prior to the COVID-19 pandemic is any indicator, the PRAC will be poised to clawback some of the government’s resources by investigating and rooting out businesses seeking to exploit the CARES Act.

Ways To Avoid Common Pitfalls When Engaging with the SBA

The relief available under the CARES Act has attracted hundreds of thousands of businesses applying for funding from the SBA. As with most financial transactions with the government, businesses and their owners may face civil and criminal liability if they make misrepresentations to the SBA when applying for and using relief funding. Businesses that have not previously registered with the SBA, or applied for SBA set-aside contracts or similar contractual arrangements, are navigating uncharted terrain and should take care to avoid common pitfalls.

Misrepresentations or even reckless conduct made in haste with respect to any of the requirements for CARES Act relief can lead to a number of unwanted outcomes. At best, the SBA may deny applications or delay approval for funding. At worst, the SBA, OIG, and/or the Department of Justice may investigate businesses for fraud against the government seeking civil or criminal liability. Under the FCA, private whistleblowers who are entitled to share in any recovered bounty also can pursue claims on behalf of the government.

The following proactive steps are some of the ways to avoid common pitfalls when applying for CARES Act relief:

  1. Ensure All Documentation is Accurate and Complete

All SBA loan applications require applicants to provide accurate and complete information about the size and circumstances of their businesses, including their total number of employees and/or their annual revenues. There are specific guidelines on how to calculate these figures. Under the CARES Act, PPP applicants also must provide documentation showing the number of employees before and after receiving PPP loans and documentation showing expenses related to payroll, rent, mortgage payments, and utility payments.

The government frequently investigates and prosecutes businesses and individuals for fraud against the SBA where they use falsified documents, such as fake bank statements, to apply for SBA funding. For example, a Texas man was sentenced to 24 months in prison and ordered to pay over $4.9 million for misrepresenting his personal assets in verification documents to banks administering SBA loans.[3]

Businesses in a rush to submit applications under the CARES Act, possibly for the first time, risk becoming too aggressive or quickly “filling in the blanks” with unsubstantiated or unverifiable information to get the application out the door so they are not left behind in the mad dash for relief funds. This sort of reckless conduct may be swept up in the government’s dragnet when eventually it pursues SBA audits and CARES Act program reviews. Applicants should get ready now for that day by preparing and maintaining impeccable records with complete and accurate information documenting the application process.

  1. Understand the Eligibility Requirements for CARES Act Relief

The CARES Act relief funds only are available to businesses that satisfy certain eligibility requirements. For example, PPP funding is only available for businesses that satisfy certain size requirements. PPP applicants must not have more than 500 employees, including employees of their affiliated businesses, unless they otherwise qualify as a “small business concern” under other SBA regulations. Further, SBA size requirements vary depending on the industry classification for that business, and may allow businesses in certain industries to qualify even though they may employ more than 500 employees or have annual revenues that vary. To complicate matters for some applicants, there are additional business affiliation rules, including assessment of control and ownership by related businesses. These requirements can be complex and often lead to government review and investigation.

To the extent there are nuanced or gray areas in the application process, applicants should seek advice from competent professional advisors. Further protection can be achieved by seeking clarifications or explanations from the SBA or other responsible government personnel. All “Q&A” or advice provided by advisors or government personnel should be preserved for potential audits and reviews down the road.

  1. Make Sure Certifications Are Truthful

The PPP requires applicants to make a number of certifications in good faith, including that the business meets the size requirements for PPP eligibility, that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19, that they do not have a pending application for PPP funds, and more. The government will be especially watchful for large businesses applying for PPP funds that falsely certify relief is necessary to support the ongoing business operations. The SBA has clarified that businesses must take their current business activity and access to liquidity into account, and that public companies with substantial market value and access to capital markets would be unlikely to certify in good faith that PPP funds are necessary.

The business’ express “certification” to the SBA and federal government is a critical event. FCA investigations and legal actions by the SBA OIG, Department of Justice, and whistleblower counsel, frequently are predicated on “false certification” allegations and legal theories of liability. Accordingly, applicants must prepare now to substantiate and defend each of the certifications as truthful, i.e., accurate and complete, when government scrutiny comes knocking.

  1. Avoid Using SBA Funding for Unauthorized Purposes

The SBA typically requires businesses to use funds for specific purposes. The government often prosecutes businesses that utilize SBA funds for unauthorized purposes. PPP funding, for example, must be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments. The SBA has warned applicants and recipients that using PPP for unauthorized purposes may subject businesses to charges of fraud.

Businesses should take steps now to implement safeguards to ensure that they are using SBA funds for authorized purposes. During the initial wave of enforcement, the government is targeting sham applications used to take money from the government for personal gain or to support illegal activities. In subsequent waves of enforcement, however, it also will look for businesses that take PPP funds and use them, in whole or in part, for purposes besides maintaining their payroll, such as investing in other ventures while laying off employees, or simply taking the funds as extra income for business-owners. In these cases, unhappy or disgruntled employees also could be persuaded to seek self-help under the FCA whistleblower provisions taking a “pay me now or pay me later” approach. To avoid these adverse consequences, businesses must make sure their owners, managers and employees are using SBA funds properly, resisting any temptation during these distressing times to use the funds for other unauthorized purposes.


The CARES Act provides much-needed relief to economically distressed small businesses, but misrepresentations or reckless inaccuracies in CARES Act relief applications could create even bigger trouble for businesses. With the growing trend of SBA enforcement actions and increased government vigilance for fraud looming over the CARES Act, businesses must take all reasonable and prudent steps now to avoid making false or misleading statements in their applications for relief.

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