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Beyond the Lamborghini: Paycheck Protection Program Fraud

Paycheck Protection Program Fraud

On March 20, 2020, during the COVID-19 pandemic, the Paycheck Protection Program ("PPP") was created as a part of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide pertinent financial relief for small businesses affected by the crisis. The program is directly administered by the Small Business Association ("SBA") and consists of a government-guaranteed loan specifically designed to incentivize small businesses to keep their employees on payroll. Businesses must meet eligibility requirements to qualify for a loan, and the SBA forgives loans only if the business meets all employee retention criteria and uses the funds for eligible expenses.

As of May 31, 2021, the SBA has disbursed close to 12 million PPP loans with a cumulative value of more than $800 billion under the PPP. The Department of Justice ("DOJ") has already identified numerous cases of PPP fraud – one famous example involves a Florida man using fraudulently obtained PPP funds to purchase a Lamborghini. However, lenders can also play a significant role in enabling these fraudsters.

How do PPP Loans Work?

The PPP allows qualified small businesses and organizations to acquire loans with a 1% interest rate and a maturity of two years. The SBA delegates authority to SBA Participating Lenders to both approve the PPP loan and issue a decision to the SBA on whether the loan should be forgiven. Upon receiving that decision, subject to any SBA review of the borrower’s loan applications, the SBA will remit the appropriate forgiveness amount plus interest to the lender, unless it finds that the borrower was ineligible for the PPP loan. 

When applying for a PPP loan, businesses must provide sufficient documentation to their Participating Lender, such as payroll records and payroll tax filings, to establish eligibility and determine the loan amount. The PPP lender is then expected to conduct a good faith review of the borrower’s supporting documents and may rely on borrower representations of costs.

Borrowers must use at least 60% of the loan to help fund payroll costs, including benefits. The remainder may be used for mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.

In order for the loans to be fully forgiven by the SBA, borrowers must satisfy the following criteria:

  • Employee and compensation levels are maintained;
  • The loan proceeds are spent on payroll costs and other eligible expenses; and
  • At least 60% of the proceeds are spent on payroll costs.

The SBA may reject forgiveness for any portion of the loan that does not meet the eligibility criteria. For instance, if a business uses some of the funds for expenses other than the ones listed above, then the SBA is not obligated to forgive that portion of the loan.

What does PPP Fraud look like?

If a business violates or misrepresents any terms of the PPP, it may be liable under the False Claims Act ("FCA"). Examples of PPP fraud that could lead to FCA violations include:

  • Falsifying or misrepresenting expenses and other information reported on a PPP loan application;
  • Using received PPP funds for non-eligible expenses;
  • Applying for and receiving PPP funds when the business does not actually exist or does not have any employees.

For PPP lenders, inadequate facilitation and screening of PPP loan applications for fraud can lead to FCA liability as they are essentially enabling this fraud. In addition, the SBA pays PPP lenders a processing fee for every loan with the expectation that their screening processes are compliant. When a PPP lender falsely represents to the SBA that their screening process is compliant, possible FCA liability follows.

Any time the federal government authorizes relief funds, there is potential for FCA violations, and the PPP is no exception. Whether it is through inadequate screening practices or inappropriate use of funds, both play a role in fraudulently inducing the federal government to disburse PPP funds that in honest circumstances would not be disbursed. This can result in FCA violations. 

Although the DOJ has identified several instances of PPP fraud already, whistleblowers can play a key role in identifying other instances of PPP fraud. By working with a whistleblower attorney to file an FCA lawsuit alleging PPP fraud, whistleblowers can help the government recover fraudulently obtained funds, which helps to ensure these funds serve their intended purposes. In addition, whistleblowers who are successful in the FCA suit receive 15-30% of the government’s recovered funds. The FCA also provides whistleblowers with protections from retaliation

Recent Examples of PPP Fraud

The Department of Justice has cracked down on PPP loan fraud with numerous instances of PPP fraud coming to light:

  • A man in Texas was charged with fraudulently obtaining and spending over $1.6 million in PPP loans on luxury items, including a Lamborghini, Rolex watch, trips to strip clubs and other items.
  • An owner of a Texas wedding company was charged with fraudulently seeking over $3 million in PPP loans and using the obtained $1.5 million toward personal investments, his home mortgage and a Tesla. 
  • A Georgia TV personality was charged with using more than $1.5 million of his PPP loan to purchase more than $85,000 worth of jewelry and to pay $40,000 for child support.

A disproportionate number of fraudulent PPP loans like the ones illustrated above have been linked to financial technology ("fintech") companies and their bank partners who processed 15% of total PPP loan volumes. They boasted a quick application turnaround with little human review required by both parties. Fintech companies were authorized to provide PPP loans after big banks prioritized existing customers, thus restricting options for businesses without an existing relationship with a bank.

Congress has recently launched an investigation into four companies that have been linked to high numbers of fraudulent loan applications to determine the adequacy of their fraud detection practices:

  • Kabbage Inc., a fintech company, accounted for 20% of suspicious PPP loans in one analysis, including facilitating and enabling at least 378 loans totaling $7 million to non-existent businesses and farms.
  • Cross River Bank, a bank partnered with Kabbage, was reportedly involved in close to 30% of the PPP loans issued by fintech companies and their bank partners that were subject to DOJ fraud prosecutions. This includes approving at least three out of the five loans used to fraudulently obtain more than $4 million in PPP funds as well as approving at least six of allegedly fraudulent PPP loans in a scheme involving $24 million
  • BlueVine, a fintech company, was linked to a group of fintech companies that accounted for 75% of the PPP loans connected to fraud, representing about $175 million according to a Bloomberg analysis. This means that BlueVine helped facilitate a significant number of PPP loan frauds through potential lack of adequate oversight and manual review.
  • Celtic Bank, a bank partnered with BlueVine, was reportedly involved in an estimated 30% of the PPP loans issued by fintechs and their bank partners that were subject to DOJ fraud prosecutions. This means that once the loan applications were processed by their fintech partners, they were involved in approving and issuing a significant number of fraudulent PPP loans, potentially costing the federal government millions of dollars.

What should you do if you encounter PPP fraud?

If you observe PPP fraud pertaining to PPP loan terms and the facilitation process, call Goldberg Kohn at 312-284-3258 or contact us online to discuss a potential FCA case. Our whistleblower attorneys are familiar with cases involving PPP fraud and are always willing to provide you with a free, confidential consultation to discuss a potential case.

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