Holding Banks and other Lending Institutions accountable for PPP Fraud

May 16, 2022

Any leading whistleblower law firm tackling the tens of billions of dollars stolen from the Paycheck Protection Program (PPP) should be looking at whether False Claims Act suits can be brought against not just the individual wrongdoers and businesses who fraudulently applied for PPP loans, but also the banks and lending institutions that processed and approved the loans. These banks were economically incentivized to expeditiously write and close as many PPP loans as possible.  The willful decision to sign off on loans that the bank ordinarily would not have written, all at the taxpayer’s expense, can and should be viewed as a basis for False Claims Act liability.

There are a few tracks to hold banks accountable for PPP fraud using the False Claims Act. Banks may have (i) written loans without an existing business relationship and without conducting any due diligence; (ii) written loans in which the bank had an existing business relationship but failed to cross-check submitted falsified financials with documents already in the bank’s possession; and (iii) approving PPP Loans that they suspected or outright knew were fraudulent.

The PPP program was noble in its intentions – it wanted to throw a lifeline to businesses who had cloudy economic prospects due to the pandemic and keep employees working, even if there was a lull in work activity.  The goal was to quickly fund businesses to keep them in operation and have the money flow to the employees to prevent massive layoffs and furloughs.  However, the emphasis on speedy delivery of funds caused a sacrifice of diligence by banks when processing and approving loan applications, and the taxpayers were socked with losses estimated to be in the tens of billions.

Only recently, the government is catching up to these fraudsters using tools like the False Claims Act, which enables the government to recover triple damages and further allows courageous individuals who step forward to obtain whistleblower awards up to 30% of what the government recovers by bringing a PPP loan fraud whistleblower action.

Since the loan amounts approved and forgiven depended on the payroll from prior years, and forgiveness was contingent on actually paying employees, here is a non-comprehensive list of PPP loan scams that our qui tam firm has encountered:

  • • Creating outright false businesses
  • • Double or triple-counting employee head count
  • • Failing to disclose interrelated companies to exceed the SBA’s size threshold or employee headcount cap
  • • Falsifying and inflating payroll costs
  • • Applying for funds for businesses that were already partially or fully shuttered
  • • Executives immediately disbursing funds to themselves as bonuses or shareholder distributions while laying off employees

With PPP schemes like these it is obvious in most cases that the recipient of the loan has violated the law and needs to be held accountable, but what about the banks that funded these loans?

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Let’s work through a few examples to understand the argument about how and why financial institutions can and should be held accountable for funding loans that they ordinarily wouldn’t have funded. In most cases, businesses applying for a loan had a pre-existing relationship with the lending bank.  So the bank had access to the business’s disbursements, including payroll disbursements which occurred regularly and were calendared.  All the bank needed to do was cross-check the numbers submitted on the PPP loan application with the payroll numbers it already had access to and it could have identified fraudulent applications involving falsified head counts and inflated payroll costs.  The bank would also know if and when the business activity ceased, so it could have ferreted out shuttered businesses.  Had the fraudulent loans not been guaranteed by the SBA and approved at the expense of the taxpayer, the bank never would have funded the loan without conducing these sorts of easy examinations.

If the bank received a loan application from a business entity with which the bank did not have a pre-existing relationship, red flags should have gone off about why the business’s existing bank wasn’t funding the loan. The bank should have had increased scrutiny on all such submissions.  Would the bank just randomly fund a new entity without conducting extensive due diligence if the loan was coming from its own assets?  We all know the answer would be a resounding no.

The answer is the banks have some answering to do regarding the billions of taxpayers dollars lost through the PPP program.  The banks treated the taxpayer’s money differently than their own.  Even though the government wanted the banks to process and approve the loans with some speed, the government didn’t want the banks to abandon all diligence, put their blinders on and knowingly write loans that they themselves would not have written.

The banks must be held accountable for the billions of dollars squandered.  If you know of anyone defrauding the government out of money, especially, PPP loan fraud money and want to discuss your ability to bring a PPP Loan Fraud whistleblower lawsuit in which you could potentially obtain up to 30% of what the government recovers, you should contact the PPP loan fraud law firm of Brown, LLC, by calling (877) 561-0000 for a free, confidential, consultation.

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