PPP loan necessity certifications and fraud investigations

A recent article in the Wall Street Journal highlights renewed discussions in some circles about the alleged “growing evidence” of fraud among P3 participants. We think the observation of the former federal prosecutor who is quoted in the story is salient. While we wouldn’t express it the way the ex-prosecutor does (“scandal is what’s legal, not what’s illegal”) and we don’t agree with his contempt for the program, the most important point is important: Congress has spoken – twice – and can speak a third time. By passing the CARES Act, Congress established a program in which self-assessment by small businesses of their needs is the critical element for eligibility. Congressional revisions to the P3 at the end of May liberalized several program rules and broadened the amount of loan forgiveness borrowers could expect. While the existence of fraud, as with any federal program, was predictable, particularly in the deployment of an emergency measure, the history of the WSJ and the Federal Prosecutor points out that prosecutions are difficult given that the Potential defendants would be tried on the basis of the regulations. and the law in force at the time the request was made.

We also think it’s important to put the numbers discussed in the Wall Street Journal article into context. If each of the suspicious activity reports were for PPP loans, then less than 0.05% of the loans were suspicious. If the 500 suspects are guilty of fraud, this represents less than 0.01% of PPP borrowers. If we round the dollar amount involved to ten hundred million dollars (which any journalist attempting to make a big story (or an evil brain transported in time) would round up to one billion dollars), then less than 0.2% money loaned under the paycheck program was fraudulent.

The story of the WSJ comes at a time when we have seen many accounting firms and a number of lawyers circulating the project. SBA loan necessity questionnaire for For profit and Non-profit borrowers. ” survey “. The questionnaires indicate that they will be used in cases of PPP loans greater than $ 2 million “to facilitate the collection of additional information that will be used by SBA loan examiners to assess the good faith certification you have made on your PPP borrower application… that economic uncertainty has made the loan application necessary.

The questionnaires have not been published by the SBA in an official and definitive form. We have no reason to doubt the authenticity of the questionnaires, but we would not be surprised if revisions were made before they were finalized. We have not heard from clients who have received them directly from the SBA.

The questionnaires go beyond the questions applicants had to answer to get the loan and beyond the basic requirement that applicants maintain their employees and spend the proceeds on payroll. They ask for details on quarterly income, capital expenses and whether an employee’s salary is over $ 250,000. The alarm raised by the questionnaires is understandable, given that the SBA and the Treasury did not and did not set thresholds, nor did they ever formulate a clear rule to help candidates who were deciding if they could. certify that the loan was “necessary” due. to economic uncertainty.

We think it is important to stress that there has not yet been any formal promulgation of new standards or guidance regarding certification of “necessity”. It is conceivable that more regulations could be promulgated, but we have not heard that more are in the works. Questionnaires may end up being used as a screening tool, but this does not mean that questionnaires fundamentally change a certification’s analysis of “necessity”.

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