CARES Act Fraud – the Paycheck Protection Program

On March 27, 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act of 2020, also known as the CARES Act.  In total, the CARES Act will provide approximately $2 trillion in economic aid in the wake of the Coronavirus (COVID19). This is the largest economic aid package in the history of the United States.  If history is any judge, when the government starts handing out money, fraudsters will be there to steal large portions of it.

One of the most significant aspects of the CARES Act is the Paycheck Protection Program, also known as PPP.  Under the PPP program, the government authorizes banks to make loans to certain qualified small businesses, equal to approximately 2 1/2 times the business’s monthly payroll.  So long as the business maintains its payroll and staff, the majority of the loan will be forgiven, courtesy of the United States government.   The goal of the program is to prevent lay-offs by subsidizing paychecks.

Under the PPP, eligible small businesses can receive loans of up to $10 million for each small business.

This is an important piece of legislation during a time of great economic uncertainty.  But past experience teaches us that crooked companies will quickly take advantage of the CARES Act and the PPP program. The government, in its rush to distribute much needed economic aid, will not be able to protect itself from the avalanche of fraud that is about to fall.  Instead, the government will follow the classic “pay and chase” model.  Pay the money first and chase the fraud later.

How will crooks steal money under the CARES Act PPP Program?  In many ways.

First, in order to apply for one of these loans, a business must qualify as a “small business” under applicable Small Business Administration, or SBA, standards. Generally, this means the business must have less than 500 employees (with certain exceptions detailed in the CARES Act).  Dishonest businesses will lie about the number of their employees or other qualifications necessary to secure one of these PPP loans.

Next, dishonest businesses will submit false documents or lie in order to increase the size of their eligible PPP loan.  In particular, companies will exaggerate the size of their payroll, or submit false documents to make their payroll, rent, or utilities seem bigger, in order to qualify for a bigger (and ultimately forgivable) loan.

Also, when calculating payroll, the PPP requires companies to cap employees at $100,000 on an annualized basis.  If an employee makes more than $100,000, any amounts above $100,000 must be deducted from the annualized payroll expenses.  In other words, the goal of the CARES Act is to subsidize ordinary workers, not to subsidize executives who make more than $100,000 per year.  Crooked companies will ignore this provision, so they can fatten their government loan as much as possible.

Next, companies will lie about what they did with the loan proceeds. Under the PPP, loan proceeds can only be used to pay payroll, interest on mortgage obligations, rent, and utilities.   As stated, however, the money cannot be used to pay employees more than $100,000 on an annualized basis, nor can it be used to pay employees who live outside the United States.  Dishonest companies will lie about these facts.  Instead of paying normal payroll, we will find out that crooked companies used PPP money to pay enormous bonuses to executives and company owners.

Next, companies will lie about maintaining their staff and payroll. In order to obtain loan forgiveness under the PPP program, companies must certify and promise that they maintained their current staff and payroll within specified limits.  If companies lay off too many people or cut the salaries of too many employees, the government will no longer pick up the tab.  In other words, the whole purpose of the program is to get money to the employees, not to the owners of the companies or other fat cats.  One day, unfortunately, we will likely find that many crooked company owners lied about these matters, and that they laid off their employees while at the same time pocketing the money that Congress intended the employees to have.

We wish none of this were true, but we know better, as we have been litigating cases under the False Claims Act for a long time.  If you work for a company that is committing fraud under the CARES Act or the Paycheck Protection Program, call us for a free consultation.