PPP enforcement turns to lenders | Ballard Spahr LLP

As we approach the second anniversary of the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the scale and costs of fraud related to its relief programs continue to increase. To date, the Justice Department has filed criminal charges against more than 1,000 defendants with alleged losses exceeding $1.1 billion; seized over $1 billion in economic disaster loan proceeds; and launched more than 240 civil investigations of more than 1,800 individuals and entities for alleged wrongdoing in connection with pandemic relief loans totaling more than $6 billion.

While these numbers represent a huge amount of fraud, they likely represent the tip of the iceberg in terms of the total amount of fraudulent or otherwise inappropriate spending that has taken place under these pandemic relief programs. A significant amount of fraud in the Paycheck Protection Program (“PPP”) in particular has been detected since the program’s inception. Indeed, some studies indicate that more than 15% of all PPP disbursements – around $125 billion – may have been made improperly or obtained fraudulently.

To date, PPP fraud prosecutions have targeted borrowers and often involve the most brazen fraudsters. The lenders who facilitated the fraudulent borrowings have so far avoided liability. This dynamic, however, appears to be changing as the federal government increasingly signals that it intends to redirect its enforcement efforts toward complicit lenders.

Congressional investigations.

The potential liability of lenders for fraudulent PPP loans has come under intense congressional scrutiny. Throughout 2021, the House of Representatives Select Subcommittee on the Coronavirus Crisis, led by Representative James Clyburn, has made several overtures to PPP lenders.

First, on March 3, 2021, Rep. Clyburn has sought information from the nation’s largest lenders on their PPP lending policies and compliance efforts, including anti-money laundering (“AML”) and know-your-customer (“KYC”) policies. “). This request was prompted by the core subcommittee’s dual concerns that lenders were prioritizing existing customers for PPP loans over non-customers in need of PPP loans and were not adequately implementing collateral for prevent fraudulent borrowing.

At May 28, 2021, the select subcommittee broadened the scope of its investigation to look at the role FinTech firms and their banking partners have played in PPP lending. Specifically, the Select Subcommittee, seizing information that FinTech firms were behind a grossly disproportionate number of fraudulent PPP loans, requested information and documentation from some of the largest FinTech firms regarding their AML and KYC controls and their compliance policies and protocols. Further expanding its investigation, the subcommittee sent a request for additional information to two other large FinTech companies on November 23, 2021.

Enforcement efforts.

While Congress has taken the lead in reviewing lenders’ PPP practices in 2021, the executive branch has positioned itself to enter the fray in 2022. During his State of the Union address, the President Biden has underscored his intention to significantly increase Justice Department efforts to detect and prosecute PPP fraud in several key ways. First, he announced he would appoint a chief prosecutor to the DOJ’s COVID-19 Fraud Enforcement Task Force to lead specialized teams of prosecutors and agents to target major COVID-19 fraud schemes. 19 and pursue more sophisticated affairs. These “strike force teams” will be responsible for “connecting[ing] updates on identity theft and other complex fraud schemes committed across state lines or transnationally, as well as investigations[ing] major cases of criminal fraud in programs like the [PPP].” Second, he called on Congress to provide additional resources to fund “strike force teams” and also to strengthen penalties for pandemic-related fraud.

Then, on March 10, 2022, the DOJ announcement Associate Deputy Attorney General Kevin Chambers will serve as COVID-19 Enforcement Director. Underscoring its commitment to using “all available federal tools — including criminal, civil, and administrative actions,” the DOJ explained that the “strike teams” that would operate under Director Chambers “will include analysts and scientists from the data to review the data, officers to investigate the cases, and prosecutors and prosecutors to lay charges and try the cases”.

This increased enforcement effort closely followed the first criminal prosecution of a PPP lender. On March 1, 2022, the DOJ announced the indictment of the CEO of a non-bank PPP lender, accusing him of falsifying records in order to obtain SBA approval to participate as a PPP lender. According to the indictment, after obtaining approval to participate in the PPP, the defendant oversaw the approval of more than $932 million in PPP loans, which generated more than $71 million in loan fees. . On top of that, the defendant allegedly caused his own business to receive a $300,000 PPP loan through misrepresentations regarding the number of his employees.

And after?

Clearly, the federal government has moved beyond the low-hanging fruit stage of P3 enforcement and is now focusing on the most complex, sophisticated, and hard-to-detect fraud cases. It is also clear that the government is now aggressively examining the behavior of lenders in PPP. With lenders having earned billions of dollars in fees for administering the PPP, the government is stepping up efforts to determine whether these lenders have fully complied with all applicable obligations. Based on the nature of investigations into lender practices so far, we can expect further enforcement action to be taken in at least four different contexts.

First, the government will carefully review alternative lenders to ensure that they fully and accurately meet all program requirements to participate in PPP.

Second, the government can be expected to review borrower fraud cases to determine whether lender insiders aided or facilitated the fraud in any way. If this is the case, the lender itself can be held liable.

Third, the government will continue to review whether PPP lenders have properly maintained and implemented AML and KYC procedures and have otherwise fulfilled all of their fraud detection and prevention obligations. Proper compliance not only involves preventing potential fraudulent borrowing, but also requires monitoring borrower activity to detect ongoing fraud and file suspicious activity reports, if any. Any failure to comply could result in penalties under the Bank Secrecy Act or, if systemic, potential liability under the Misrepresentation Act. While no PPP lender is immune from enforcement action stemming from compliance failures, FinTech companies and other non-bank lenders that have engaged in large-scale PPP lending without robust compliance programs will continue to be most at risk.

Fourth, the government will continue to review PPP lending data to ensure that lenders meet all applicable fair lending standards.

Although we are two years away from passing the CARES Act, we are only just entering the fraud and compliance enforcement phase in earnest.

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