Assessing What's To Come In PPP Loan Enforcement

By Lloyd Liu and Hilary LoCicero
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Law360 (January 26, 2021, 5:04 PM EST) --
Lloyd Liu
Lloyd Liu
Hilary LoCicero
Hilary LoCicero
Over the last year, many in the legal community have been forecasting a wave of Coronavirus Aid, Relief and Economic Security, or CARES, Act investigations, particularly regarding fraud in its hallmark component, the Paycheck Protection Program. Rightfully so.

The PPP — and the CARES Act as a whole — is a massive and ongoing pandemic relief package, unprecedented in size and scope. Given the velocity with which PPP loans were disbursed, the program was ripe for abuse.

In some respects, Congress saw this coming, a necessary trade-off to ensure speed. With the health of the U.S. economy on the line, legislators had no choice but to focus on the immediate needs of Americans working across hundreds of industries.

The first period of the Paycheck Protection Program ended in August when its congressional authorization expired. It has since been revived based on the new COVID-19 relief package signed into law on Dec. 27, 2020.

Given the revival of the program, and the December 2020 release of U.S. Small Business Administration data that tracked loans made during the first wave of PPP funding prior to August 2020, practitioners have a window into how PPP enforcement actions may look going forward. This article aims to help assess the landscape for such investigations, and enforcement now and going forward.[1]

For context, the SBA guaranteed, and banks issued, around 5.2 million PPP loans, totaling $522.9 billion in funds, during the program's first phase. While all loan recipients initially were subject to audit by the SBA to ensure their compliance with PPP requirements, the agency announced in May 2020 that borrowers who received less than $2 million would be exempt from that requirement.

Borrowers that received loans of $2 million or more thus are the focal point for the SBA and others at this juncture.

Nationwide, 29,000 businesses accepted loans in excess of the $2 million threshold, representing a total of $100 billion in funds. Within that group, roughly 5,000 businesses received loans ranging from $5 to $10 million, totaling $33.2 billion.

The chart below shows how much each industry received in PPP loans:



Much of this list is not surprising, with the largest amounts concentrated in health care and social assistance, professional, scientific and technical services, construction, manufacturing, accommodation and food services, and retail trade.

It provides only a high-level snapshot of the SBA's lending activities. It bears noting that some of the industries described in the chart are quite broad, representing a composite of fairly distinct subindustries.[2] To make better use of the underlying data, this information will have to be met with a degree of industry expertise.

The Evolving Oversight Scheme

The oversight of pandemic funds is coordinated by the Pandemic Response Accountability Committee, or PRAC, which is part of the independent executive branch agency known as the Council of the Inspectors General on Integrity and Efficiency. The committee functions pursuant to the Inspector General Act of 1978 and has both informal and formal subpoena power.

In addition, a special inspector general for pandemic recovery, or SIGPR, was created by the CARES Act on March 27, 2020. SIGPR's first inspector general was confirmed in June, and the last member of the SIGPR senior leadership team was appointed at the end of July 2020.[3]

Together, PRAC and SIGPR reflect a tremendous pooling of resources to oversee an equally tremendous task.

Individual agencies also will bear a heavy load with respect to oversight of PPP loans. The SBA will be particularly immersed in this effort, given its early role in guaranteeing and overseeing loan disbursement.

It also seems likely that the federal government will seek to leverage preexisting substantive knowledge held by individuals and departments that spearhead enforcement matters in particular regulated industries.

For example, agents employed by the U.S. Department of Health and Human Services, who regularly work on matters involving health care providers, may be the most logical choice to examine the appropriateness of loans paid to such providers.

The U.S. Department of the Treasury Office of Inspector General and the U.S. Government Accountability Office also seem to have natural affinity for such work, though PPP loans do not fall within their jurisdictional mandate.[4]

The U.S. Department of Justice and the U.S. Securities and Exchange Commission, of course, will each occupy their own swaths of this enforcement landscape.

We also expect to see the creation of intra-agency task forces that will centralize their knowledge, much like the Medicare Fraud Strike Force within the U.S. Department of Health and Human Services and the Intellectual Property Task Force housed at the DOJ.[5]

Stratifying Audit Risk

The House Select Subcommittee on the Coronavirus Crisis stated in September 2020 that it had identified more than $4 billion in potentially improper PPP loans.[6] Publicly available sources indicate that investigating agencies are already evaluating anomalies in the SBA data.

With thousands of businesses preparing to seek forgiveness under the PPP program, now is a good time for borrowers to get a sense of how the SBA and other agencies may be doing so.

The government has been parsing similar data in other areas of the law for years. For example, Medicare Utilization Reports compiled by the Centers for Medicare and Medicaid Services are often a fundamental part of health care fraud investigations.[7] The manner in which it has done so provides insight into probable strategies in the PPP context.

There are some low-hanging metrics that provide potential starting points for audit risk assessment.

Government agencies almost certainly will evaluate the number of reported jobs for any given loan recipient seeking forgiveness. No reported jobs or no data would raise immediate questions about the loan.

Relatedly, the government may look at loan-to-reported-job ratios. Dividing a loan amount among the number of reported jobs will provide a baseline of the average cost to retain a job.

Investigators may compare such ratios with averages in the borrower's particular industry, geographic region, or both to provide a rough sense of how much it ought to cost to retain a job in a particular industry or for a firm of a certain size. That sets a benchmark against which to identify outliers.

The SBA and other investigating agencies also have a good amount of borrower-specific data at their disposal. In their PPP applications, applicants were required to disclose payroll expenses and proof of payroll costs, among other things.

All loan recipients were instructed to retain documentation supporting how they calculated the amount for their loan. This is important because the more data the government is armed with, the more robust its baseline estimates will be, and the easier it may be for them to identify outliers.

At the same time, there is no doubt that the investigating agencies also will have more sophisticated instruments at their disposal, certainly with inspectors general's teams equipped with data analytics personnel to help understand these massive data sets.

Artificial intelligence or machine learning will amplify the capabilities of these agencies, mitigating the tradeoff between speed and rigor in monitoring stimulus spending.

How the government ultimately uses its data analytics tools remains to be seen, but PPP loan recipients should not assume that the government's analyses are unassailable. It is entirely possible that the government could deem a company to be an outlier based on a superficial comparison such as a finding that Company X received a loan orders of magnitude larger than Company Y.

While the agencies should find common denominators — such as industry, headcount, region and so on — to make a better estimate as to whether something is amiss, it would be dangerous for borrowers to assume that this level of advanced analysis will occur in every case.

Borrowers should be prepared to explain and document why such benchmarks may or may not be an appropriate means of evaluating their particular need for PPP funds. It would be patently unfair, for example, if a mold remediation company's employee salary were compared against those of more standard janitorial businesses.

Every business is unique, and borrowers should be prepared to explain their unique features in a manner that supports their legitimate need for the funds at issue. And, as many other commentators have previously noted, consistent internal record-keeping is of paramount importance.

These audits undoubtedly will include a comparison between applicant information, and other documents and data available, such as tax returns and SEC filings.

Bandwidth for CARES Act Oversight

Aside from how the agencies will begin diving into this data, it also is important to consider their bandwidth to conduct audits and investigations. The SBA, SIGPR and others have limited resources and there is no question this will limit the scope of the oversight apparatus, as shown by the fact that borrowers receiving less than $2 million likely will receive little scrutiny, at least for now.

To provide a sense of scope, legal commentators have compared the CARES Act oversight regime with that of the Troubled Asset Relief Program. TARP was a response to the 2008 Great Recession that resulted in a $440 billion plan to rescue businesses and individuals.[8]

Under TARP, $240 billion was disbursed to roughly 800 different financial institutions, and $30 billion or so was disbursed to individual homeowners. TARP created the special inspector general for TARP. Like any inspector general, SIGTARP was empowered to monitor, audit, and investigate fraud, waste, and abuse relating to TARP.

While the CARES Act is quite different from TARP and dwarfs that program in size — 29,000 PPP loan borrowers from a variety of industries accepted $100 billion in funds under CARES versus a mere 800 financial institutions that borrowed $240 billion under TARP — it remains a natural reference point for understanding the potential scope of oversight.

SIGTARP has an annual budget of approximately $25 million.[9] From its inception to present day, SIGTARP investigations have led to the recovery of over $11 billion.[10]

SIGTARP also led to 24 separate enforcement actions brought by the Department of Justice, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the U.S. Consumer Financial Protection Bureau and other similar entities.

SIGTARP notes that it has a "cumulative 31 times return on investment," which it further observes is "one of the highest returns on investment of any office of inspector general."[11] If PPP loan investigations are similarly funded, this suggests that at least $5 billion could be recovered by the involved agencies.

This is at least one data point for estimating the bandwidth and speed of PPP oversight and investigations. However as discussed below, SIGPR ultimately may be even more effective than this comparator.

While SIGPR is funded by a $25 million a year appropriation and therefore has a similar budget to SIGTARP, SIGPR will receive significant support from other agencies, including a $50 million boost appropriated to the SBA to audit and otherwise combat PPP fraud.[12]

Moreover, PRAC represents a pooling of resources of other inspectors general that further amplify their capabilities to tackle this historic challenge.

In addition, the PPP segment alone of the CARES Act presents, as noted above, a much more varied area of oversight than TARP, which principally was focused on a finite number of regulated financial institutions and other entities.

PPP loans cut across a multitude of industries and subindustries. The PPP loans furthermore cover a sea of smaller companies, which present unique and different challenges than overseeing primarily financial institutions. Overseeing and substantiating how PPP loans are spent will require both finesse and a willingness to deep-dive into a myriad of industries.

The SBA and SIGPR will have to familiarize themselves to a degree with these different industries to understand, for example, what are normal salaries (to identify inflation), headcounts (to identify overreporting of jobs), retention patterns (for businesses that have a more cyclical work force), business cycles themselves, and so forth. In these areas, cross-agency collaboration will help to streamline their work.

It is possible that, as the difficulties inherent in the auditing process further emerge, the SBA and other agencies will seek to offload the expense and effort involved in a comprehensive audit onto the companies being investigated.

Just as the Department of Justice has long done when investigating potential violations of the Foreign Corrupt Practices Act or the Sherman Act, the auditing agencies could significantly reduce their workload by encouraging self-auditing and self-reporting of violations.

If the analogy to these other areas of the law holds, this may present a significant proactive and protective advantage to companies that are able to send counsel in early and offer to present the government with a thorough report establishing their right to PPP loan money. Such an approach also could be beneficial to those borrowers that wish to self-report and repay any funds accepted improperly.

If you are at higher probability of being audited, be prepared and ensure that the materials substantiating the need for your loan are in proper order. SIGTARP enforcement continues to this day. Given that, there is, at least at this moment, no reason to believe why investigations of PPP loans under the CARES Act will end any time soon.



Lloyd Liu is a partner and Hilary Holt LoCicero is a founding partner at Bennett Doyle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] The SBA's recently-released data was analyzed in PPP Enforcement Issues to Watch in 2021, Derek Adams, Ellen London and Steven Deolus, Law360, January 11, 2021.

[2] Source: https://www.pandemicoversight.gov/track-the-money/funding-charts-graphs/paycheck-protection-program

[3] See SIGPR, Initial Report to Congress, Aug. 3, 2020, https://www.oversight.gov/sites/default/files/oig-reports/SIGPR-Initial-Report-to-Congress-August-3-2020.pdf.

[4] See SIGPR Initial Rep. (Aug. 3, 2020) at 59-80.

[5] Medicare Fraud Strike Force, U.S. Dep't of Health and Human Services Office of Inspector General, https://oig.hhs.gov/fraud/strike-force/.
Intellectual Property Task Force, United States Department of Justice, https://www.justice.gov/iptf.

[6] "Select Subcommittee Releases Preliminary Analysis of Paycheck Protection Program Data," Select Subcommittee on the Coronavirus Crisis Press Release, Sept. 1, 2020, https://coronavirus.house.gov/news/press-releases/select-subcommittee-releases-preliminary-analysis-paycheck-protection-program ("The Subcommittee's analysis shows that PPP helped millions of small businesses and non-profit organizations stay afloat during the coronavirus crisis, but a lack of oversight and accountability from SBA and Treasury may have led to billions of dollars being diverted to fraud, waste, and abuse, rather than reaching small businesses truly in need.").

[7] For an example of such data compilations, see, e.g., https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareFeeforSvcPartsAB/MedicareUtilizationforPartB.

[8] Report on the Troubled Asset Relief Program, Congressional Budget Office, April 2019, https://www.cbo.gov/system/files/2019-04/55124-TARP_April2019.pdf.

[9] Quarterly Report to Congress, SIGTARP, July 30, 2019, https://www.sigtarp.gov/Quarterly%20Reports/July_30_2019_Report_to_Congress.pdf.

[10] Christy Goldsmith Romero, "5 Ways a Special IG Can Combat Crisis Relief Fraud," Law360, June 2, 2020, https://www.law360.com/articles/1278453/5-ways-a-special-ig-can-combat-crisis-relief-fraud.

[11] "About Us," SIGTARP, https://www.sigtarp.gov/Pages/aboutus.aspx.

[12] Stacy Cowley, Relief Deal Would Give Small Businesses a Shot at a Second Loan, N.Y. Times, Dec. 21, 2020, https://www.nytimes.com/2020/12/21/business/stimulus-paycheck-protection-program.html

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