Just before I took a blogging detour into the world of lawyer/tennis players, I promised to post a straightforward analysis of the certifications within Economic Injury Disaster Loans (EIDL) and Paycheck Protection Program (PPP) applications. Now is the perfect time to refocus on these original application certifications as we head into a time when the new wave of forgiveness applications is beginning to take shape. Just recently, the Small Business Administration released new forgiveness forms and rules for loans under $50,000. According to the New York Times, such loans make up nearly 70 percent of the PPP. Because guidance from the government has been an unsystematic moving target from the beginning, litigation over these applications is inevitable.
As a white-collar criminal defense attorney, I want to understand where my clients may have made good faith errors when making certifications in the original application for pandemic relief funds. Further, I need to have these individuals and businesses prepared to address any impending scrutiny from the government, before they make new certifications in their applications for forgiveness of the loans.
The rollout of pandemic relief funds has been anything but a model of clarity. Although the original principle behind loan forgiveness seemed elementary, ” . . . its execution is anything but.” Understanding this backdrop, one action we can take to help settle the uncertainty is to appreciate the importance of the original certifications and how the government might view them.
How will the government analyze the certifications made by your business?
This question brings me to the heart of the government’s main tool to combat PPP fraud, the False Claims Act (FCA). This act sets penalties for anyone who knowingly submits a false claim for money to the federal government or fails to return money belonging to the federal government. In short, under the FCA, you may be liable for individual penalties (roughly between $11k and $23k for each false claim), damages to the government and possibly treble damages. Under the worst of circumstances, criminal liability may attach where an individual could face up to five years in prison in additional to criminal fines. The government will most likely analyze any problematic certifications through the lenses of the FCA.
In this analysis, I am focused on two sources (PPP and EIDL) of financial relief for distressed business during the COVID-19 pandemic. Under the PPP and EIDL programs, the opportunity for relief required making some difficult certifications. These were difficult because the guidance coming out of the government was not always consistent, timely or easy to follow.
The seven certifications for a PPP loan are:
The most important part of the analysis of each and every one of these certifications can be distilled into a one pivotal question. In answering these questions, did you make a statement that you knew was false at the time you made the statement?
You have not violated FCA unless the statement you made was knowingly false under circumstances that were in front of you. Rather, the Act applies only to knowing violations of federal law that are material to the government’s payment decisions.
NOTE: reckless disregard for the truth can count as “knowingly” false. there is a reasonableness standard when it comes to ignoring facts right in front of you.
Note the possibility for substantial debate over the certification that “current economic uncertainty makes this loan request necessary to support to ongoing operations of the Applicant.”
For example, what if you certified that “current economic uncertainty makes this loan request necessary” because you believed at the time of the application that you would have to lay off employees because a contract you expected to receive before the pandemic now seemed improbable. But, it turns out you got the contract, and therefore, did not suffer the great financial losses you expected.
The statement that you were uncertain at the time is still true and therefore not a false statement under the FCA.
Many businesses will find that circumstances did change from between the first application and the present. The looming difficulty under these circumstances is whether or not an application for forgiveness of any part of this loan is advisable.
The SBA started approving PPP forgiveness applications and sending out payments to PPP lenders to their borrowers on Oct. 2. Under federal rules, businesses have 10 months from the date they received the loan to ask to have their loans waived from banks.
Under this tight time frame, we can expect to see an uptick in businesses scrambling to evaluate whether and how to file for forgiveness.
Last and least, EIDL loans made up a much smaller amount of pandemic relief funds and were based on lost revenues up to about $10k.
There is one umbrella certification for EIDL:
Given the fact that the Secretary of the Treasury announced a $2 million safe harbor; meaning there is a presumption that that certifications for less than $2 million were made in good faith, I would not expect to see any efforts or resources spent on investigating FCA cases stemming from the EIDL line of loans.
That said, I also believe that the government would not turn a blind eye to blatant fraud if a whistleblower brought it the their attention; even if the loan amounts were modest compared to those over $2 million. There will be no safe harbor for classic fraud.
If you or your business have concerns about the circumstances surrounding your original certifications or are unclear about whether it is advisable to ask for full forgiveness of pandemic related loans, now is the time to consult with experienced legal counsel about your specific circumstances.