Civil Settlement of PPP Loan Fraud Case Opens New Front Lines | Fox Rothschild LLP
The US Department of Justice ad his first civil settlement with a Paycheck Protection Program borrower who allegedly committed fraud as part of this very popular COVID-19 relief program. A bankrupt online retailer and its managing director agreed to pay $ 100,000 in damages to resolve claims that they had committed fraud in connection with multiple PPP loan applications. The company, SlideBelts Inc., has also agreed to repay its PPP loan in full.
The paycheck protection program is one of the flagship provisions of the CARES law, enacted in March 2020, to provide emergency financial assistance to individuals and businesses suffering economic hardship as a result of the pandemic. The CARES Act initially authorized up to $ 349 billion in PPP-grant loans to small businesses. In April 2020, Congress increased PPP funding by $ 300 billion, and last month Congress approved an additional $ 285 billion for PPP loans. To date, over 5.2 million PPP loans have been approved for a total amount of over $ 525 billion.
At the start of the COVID-19 pandemic, the Justice Department moved quickly to fight COVID-19 fraud across the country. In May 2020, just weeks after the enactment of the CARES Act, the Justice Department announced its first criminal fraud charges against two PPP borrowers. Federal prosecutors and investigators have since moved at an unprecedented pace to file criminal charges against nearly 200 P3 borrowers.
Powerful tools for civil fraud
By announcing the first civil settlement, the Department of Justice has demonstrated that it will use additional tools in its anti-fraud arsenal: the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) . These two laws authorize the government to impose massive civil penalties for fraudulent conduct and to recover damages suffered by the government as a result of such conduct.
The FCA, enacted during the Civil War, allows the government to recover damages and penalties for making false claims for payment in the United States. The law provides for a civil monetary penalty of $ 23,331 (adjusted for inflation) per false claim, as well as three times the damages suffered by the government as a result of the false claim.
FIRREA, which Congress passed in 1989 in response to the savings and loan crisis, authorizes the Department of Justice to impose civil monetary penalties for violations of certain federal criminal laws, including those affecting institutions federal financial institutions. The law provides that the amount of the civil penalty for each offense will be $ 2,048,915 (adjusted for inflation).
Enormity of exposure to civil sanctions
The SlideBelts case vividly illustrates the enormity of the civil penalties a business can face under these laws. While SlideBelts requested and received only $ 350,000 in PPP funding, the government claimed the company was liable for $ 4.2 million in damages and penalties under the FCA and FIRREA. The damage portion of this amount is only $ 17,500, which includes loan processing fees. The remaining part consists of civil penalties under the two statutes.
In the SlideBelts settlement agreement, the company did not admit liability, but admitted that it had submitted three PPP loan applications to different financial institutions and that on each application it had not indicated that it was a bankrupt debtor. The first financial institution – a creditor in the company’s bankruptcy proceedings – denied the claim on the grounds of bankruptcy. In accordance with SBA regulations, bankrupt companies have been deemed ineligible to apply for PPP funding. The second financial institution was not aware of the bankruptcy and approved the loan in the amount of $ 350,000.
In the settlement, the company agreed to repay its PPP loan in full and pay the government $ 100,000 in damages and penalties under the FCA and FIRREA. The deal makes it clear that the government was prepared to accept $ 100,000 in compromise of its $ 4.2 million civil lawsuit solely because of the poor financial situation of SlideBelts and its CEO.
The SlideBelts settlement demonstrates that the FCA and FIRREA are powerful tools that the federal government can use against companies that are suspected of having committed PPP loan fraud. With the ability to impose multi-million dollar penalties and recover damages, the government can use these statutes to obtain civil collections from borrowers that are exponentially higher than the principal amount of their PPP loans. And because both statutes provide for civil recoveries, the government’s burden of proof is the preponderance of proof, a burden much easier to meet than the much higher standard of reasonable doubt demanded in criminal cases.
Both FCA and FIRREA have long statutes of limitations, which means the government has years to investigate PPP borrowers. Finally, in most FCA settlement agreements, government release will not cover criminal conduct, so settlement parties like SlideBelts and its CEO remain exposed to potential criminal charges.