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Watch your P(PP)s and (FA)Qs! Preparing for Compliance Challenges with the PPP

May 01, 2020
  1. PPP Loan Compliance Realities

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020. A key component of the relief package included the Paycheck Protection Program (PPP) – a $659 billion federally-guaranteed loan relief program for qualifying small businesses. At the highest of levels, the PPP is intended to provide small businesses with adequate liquidity to maintain its workforce through June 30, 2020, as the economy sits idle from the COVID-19 healthcare crisis. The PPP loan proceeds are designed to be forgiven if employers utilize the funds for certain enumerated expenses. To achieve loan forgiveness, you have to satisfy several tests that require specific and supported certifications and calculations – each carrying civil, and even criminal, penalties if falsified. If you do not obtain loan forgiveness, of course, you are required to repay the remainder of the loan at a rate of 1% over the two-year term.

Earlier this week, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza announced that the SBA has “processed more than 14 years’ worth of loans in less than 14 days.” In the first 13 days of the PPP, over 1.6 million PPP loans were approved. Along with the break-neck velocity of this program has come confusion, concern and, at times, chaos. To date, we have seen seven interim final rules and 39 frequently asked questions – all intended to help guide borrowers and lenders through the program. Nevertheless, the formal guidance has yielded more questions than it was able to solve or even conflicted with or changed prior guidance. With that said, considering that no program in the history of the United States has attempted to deploy this level of liquidity to small businesses in such a short period of time, the frustration is quickly balanced by the urgent and palpable need to protect some 60 million U.S. workers. In many cases, small businesses are forced to make critical decisions about whether to participate in the PPP based on the interpretation of the intent of the Act – well before guidance is ever issued.

To add to the complexities of the PPP itself, recent fallout, whereby a number of public companies were identified as loan recipients, has brought a rash of media reports scrutinizing the program. To protect the American taxpayers from fraud, abuse and waste, and to ensure compliance with the intent of the PPP, Secretary Mnuchin and Administrator Carranza announced an audit requirement of all loans over $2 million. Considering the organic nature of the guidance, the prospects of all loans being reviewed for loan forgiveness, and heightened audit requirements for larger loans, it is imperative for companies to implement sound practices to ensure compliance and be prepared for future review and scrutiny.

  1. Enforcement under CARES

A component of the CARES Act includes the establishment of a Special Inspector General to enforce the Act and pursue financial crimes associated with the disbursement of what is nearing $3 trillion. This is not unusual, particularly given the size of the relief program. In fact, this is very similar to the framework established during government bailouts following the 2008 financial crisis. From the submission of the application to the request for forgiveness, small business owners face potential exposure under federal law, including criminal statutes such as 18 U.S.C. § 1001 (making false statements), 18 U.S.C. § 1014 (making false statements to the SBA), 15 U.S.C. § 645 (SBA fraud), 18 U.S.C. 371 (conspiring to defraud the United States) and 31 U.S.C. §§ 3729-3733 (submitting false claims). Particularly, the Department of Justice (DOJ) has already announced its intention of enforcement. On March 16, 2020, Deputy Attorney General Jeffrey Rosen issued a memorandum to each U.S. Attorney in every federal district directing the appointment of a Coronavirus Fraud Coordinator to serve as legal counsel on coronavirus-related matters, direct the prosecution of coronavirus-related crimes and to conduct outreach and awareness.

As the federal government enhances its oversight, compliance efforts should be a top priority to avoid civil and criminal penalties. Many of the criminal statutes are listed in the application for the PPP loan. However, the False Claims Act (FCA), which is not mentioned, is one of DOJ’s most powerful tools used to combat fraud. The FCA creates liability for any party who, among other things, knowingly presents or causes to be presented a false claim for payment from the government. The FCA also proscribes knowingly making, using or causing to be made a false record or statement material to a false or fraudulent claim. For purposes of the FCA, “knowingly” can mean not only having actual knowledge but also acting in deliberate ignorance or reckless disregard of the truth or falsity of the information.

As stated above, recent comments by Treasury Secretary Mnuchin have arguably raised the stakes regarding certification and forgiveness issues.  He has made it clear that the government intends to pursue those borrowers who have taken advantage of the system in the eyes of the government. 

  1. Compliance

In analyzing compliance issues, it is important to understand some key provisions of the guidance related to the CARES Act and to sufficiently organize your records.

The PPP, in particular, welcomes audit and compliance scrutiny in several critical areas. Those include, for example, 1) eligibility, 2) justification of loan amount, 3) satisfaction for loan forgiveness, 4) proof that loan proceeds were spent for eligible purposes and 5) good faith certifications. For each, you should document and maintain records that are contemporenously to each decision and calculation you relied upon in relation to your PPP application and the manner in which you expended the funds. This is important because the SBA has confirmed that it will review every loan to determine loan forgiveness. See Question 39, PPP FAQs. Equally as important, it previously stated that “borrowers and lenders may rely on the laws, rules and guidance available at the time of the relevant application.” See Question 17, PPP FAQs. Having records dating back to specific decisions or calculations along with supporting documentation will assist you in evidencing well-reasoned and good faith compliance with the rules of the PPP.

Consider also the new guidance on the “necessity of the loan” certification required in the application. While the CARES Act dispensed with the “credit elsewhere” requirement for loans, Questions 31 and 37 of the FAQ guidance states that “borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” The guidance invites each borrower, in essence, to reassess whether it passes the “necessity” test required to certify for the loan application. If you do not satisfy the “necessity” test, the SBA provides you a safe harbor to return the funds without penalty by May 14, 2020. As borrowers re-evaluate the certification, they should analyze the nature of their business and market conditions, the availability of capital elsewhere, the impact of utilizing other available liquidity for the business, and projected revenues and expenses through 2020. This information should be maintained contemporaneous to the certification to evidence the decision-making process and good faith attestation required to secure the PPP loan.

In further preparation for audits or inquires, you should practice extreme financial hygiene. For example, it is advisable to maintain separate bank accounts for the PPP loan funds and forensic accounting of expenditures.  Be conservative in your calculations and ask yourself whether or not your calculation is objectively reasonable.  You should also consider future proposed projects or transactions and anticipate whether those actions will create a perception issue (i.e., you are about to expand, contract or make other substantial changes that may appear contrary to the stated purpose of the program). Throughout this process, it is also important that you develop checklists appropriate for your specific business and your industry in preparing for and conducting a self-audit, government audit or the SBA review for loan forgiveness.

Finally, in preparing for future communications with the SBA or a government auditor regarding your certifications, calculations or documentation, it is important that you protect attorney client privilege and work product associated with your analysis  in order to avoid  unintentionally undermining the rationale for securing the PPP Loan.   This will help prevent disclosure of any inadvertent statements or analyses that might be used against you in a government investigation. 

This alert is currently based on the information readily available. Our COVID-19 Task Force will continue to monitor the PPP program and provide updates related to the PPP and other issues related to the pandemic.