PPP borrowers: 5 ways to mitigate the risk of an adverse SBA audit or enforcement action

Timely legislation often comes at the expense of clarity, and the Paycheck Protection Program (PPP) is no exception. Congress created the PPP amid the COVID-19 pandemic and associated economic shutdown. The goal of the program is simple: “To provide a direct incentive for small businesses to keep their employees on the payroll,” primarily in the form of loans to qualified candidates. But while the PPP’s two-page “loan application form” is short, it requires applicants to complete numerous “certifications,” some of which contain broad language that is susceptible to various interpretations. The application underscores the importance of these certifications by warning that if the contents of the application and supporting documents are not “true and correct in all material respects”, the applicant may be charged with one or more federal crimes.

This warning should not be dismissed casually. While loan applications submitted to financial institutions are typically signed “under penalty of perjury” and carry at least an implicit possibility of criminal prosecution for misrepresentation, the PPP is a new creation, born out of necessity and controversy over its existence. scale and speed of its coming out. The government has already charged several individuals suspected of fraud and launched investigations into others. Government regulators, including federal law enforcement officials, will continue to want to demonstrate their ability to identify and punish those they believe have abused the program.

How can a PPP borrower, or a potential borrower, mitigate this risk?

First, and most obvious, be thoroughly familiar with PPP certifications and requirements and how they may apply to your business. Although the program is still in its infancy, it is likely that most of the enforcement action taken against borrowers will be based on a material inaccuracy in the application (or supporting documentation) that cannot be excused by vagaries in the future. the language of the law, that is, garden variety fraud. Carefully reviewing the clear and obvious program requirements and simultaneously documenting your compliance with those requirements will significantly reduce the risk of government enforcement actions. Borrowers must collect and memorize all documents justifying their certification of necessity, as well as all other representations contained in the application. In the event of an audit, the SBA may require more documentation than required by the lender to issue the loan, so the more complete the documentation initially, the better. This is especially important for applicants looking for a PPP loan of $ 2 million or more, as discussed below.

Second, borrowers must document any legal advice they have received as part of their application. A legal opinion sought in good faith may constitute a defense to a subsequent claim by a regulator that the applicant intended to defraud the government.

Third, stay current with the guidelines issued by the SBA interpreting the certifications required of applicants. As of April 3, 2020, the SBA, in consultation with the Treasury Department, has provided guidance regarding the PPP in the form of answers to frequently asked questions (FAQs). At last count, the SBA and the Treasury Department updated the FAQs 16 times and released 15 interim final rules.

One of the most important concerns identified by borrowers is the lack of clarity surrounding the so-called “necessity” requirement. All applicants are required to certify that “[c]the current economic uncertainty makes th[e] loan application required to support the applicant’s ongoing operations. But “one man’s luxury is another man’s necessity”, and the meaning of “necessary” in this context is unclear. Should a PPP loan be the only option available to “support the applicant’s ongoing operations”? What if a PPP loan was simply the best option, or the most economical? is this qualified as “necessary”?

On April 23, 2020, the SBA’s response to FAQ # 31 explained that in order to do good faith financial necessity certification, borrowers must consider their “current business activity” and “the ability to access other sources of sufficient liquidity to support their ongoing operations in a manner that is not significantly detrimental to the business. While the SBA’s response provides guidance on what an applicant should consider when assessing the need for a PPP loan i.e. other sources of cash that may be available, the FAQ does little to help an applicant determine whether these “other sources” are sufficiently viable or economical to extinguish the “need” for the PPP loan. What can an applicant do to mitigate the risk inherent in a good faith, but necessarily subjective, certification of necessity? Again, document everything. In this case, this documentation should include a memorization of the internal analysis and rationale used by the borrower to conclude that the PPP loan was necessary, as well as any documentation that supported this analysis and conclusion.

Fourth, familiarize yourself with the advantages and limitations of the Safe Harbor provisions of the PPP. On May 13, 2020, the SBA released FAQ # 46, which created a new safe harbor provision for borrowers with P3 loans under $ 2 million. (Other safe harbor provisions excused failure to meet the necessity requirement if the loan was repaid by May 18, 2020.) For loans under $ 2 million, the SBA will consider the borrower ” has made in good faith the required certification regarding the necessity of the loan application “. The SBA justified this seemingly arbitrary $ 2 million safety threshold by noting that “borrowers with loans below this threshold are generally less likely to have access to adequate sources of liquidity in the current economic environment.” .

Conversely, borrowers with P3 loans in excess of $ 2 million are not only excluded from the Safe Harbor, but the SBA has said they “will be subject to a review for compliance with program requirements.” If it turns out that the borrower did not have an adequate basis for certification of necessity, the SBA will request repayment of the loan balance. Failure to repay the loan balance after notification by the SBA may result in SBA enforcement action and potential referral to other government agencies for further civil and / or criminal enforcement actions.

It is important to note that this safe harbor provision does not guarantee that borrowers with loan amounts less than $ 2 million will be exempt from government verification. This safe harbor is simply a presumption that the certification of necessity was made in good faith – a presumption that can be overcome if, for example, a government regulator or whistleblower discovers evidence of inaccuracies anywhere in the request. . In an interim final rule released on May 22, 2020, the SBA made it clear that any loan, regardless of amount, is subject to audit. Areas of review include the borrower’s eligibility to participate in the PPP (including the assessment of certifications made by the borrower), the calculation of the loan amount, the appropriate use of the loan proceeds, and the calculation the amount of the loan forgiveness.

Finally, in the event of an audit, government subpoena, congressional investigation, or whistleblower complaint, consult a qualified attorney to assess and mitigate any civil, criminal, or reputational risk to you and your business. Assessing whether a business meets the requirements for various certifications, whether a business has acted in good faith, and whether the prior advice of a lawyer can be relied on are nuanced matters on which a borrower needs the advice of a qualified lawyer. .

Former federal prosecutor Stephen R. Cook is a partner and practice group leader of Brown Rudnick’s White Collar Defense & Government Investigations practice group. Ashley L. Baynham is a partner in Brown Rudnick’s White Collar Defense & Government Investigations group.

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