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The False Claims Act and PPP: Practical Considerations

June 16, 2023

PPP, Covid Continuity vs Blatant Fraud 

We just lived through some very trying times with the COVID pandemic and the politicians who implemented work from home orders and shut down businesses hastily, but importantly, came up with the Paycheck Protection Program (PPP) to keep businesses afloat when their workforces were impacted by COVID and had little to do.  The PPP prevented mass layoffs and tried to keep businesses intact during times of economic uncertainty.  The money was supposed to flow to the employees and in most cases it did, but in some cases unscrupulous businesses just ripped off the program by engaging in a variety of schemes to defraud the SBA, Small Business Administration and essentially the taxpayers by engorging itself in underserved PPP loan money.  Since taxpayers money is at stake, fraud against the PPP is fraud against the government and individuals who blow the whistle utilizing the False Claims Act may be eligible to receive a whistleblower reward of up to 30% of what the government recovers.  The Department of Justice is very interested in making examples of these schemers and have a task force set up to prioritize using the FCA and other tools to hold PPP loan fraud companies accountable

History of the False Claims Act

The False Claims Act is one of the most potent tools at the federal government’s disposal for combating fraud against government contracts and programs. The False Claims Act’s qui tam provision allows individuals – whistleblowers – with inside knowledge of fraud to sue on behalf of the government, with the citizen-whistleblowers or qui tam “relators” entitled to 15-30% of the amount recovered by the government as a potential reward for their efforts.  The federal government has recovered well over  $21 billion through the efforts of qui tam whistleblowers, and hundreds of millions of dollars have been awarded as whistleblower rewards for individuals who blew the whistle the right way.

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Whistleblower Rewards Under the False Claims Act

Whistleblowers under the False Claims Act are eligible for substantial monetary rewards ranging from 15% to 30% of the total amount recovered. You must have firsthand knowledge of the fraud and be the first to report it to a whistleblower law firm, preferably one that can work seamlessly with the Department of Justice, like firms that have a former Department of Justice and/or FBI Agent who know the intimacies of the agency, to be eligible for a whistleblower reward.  Filing a False Claims Act case requires the use of a false claims act attorney, and one of the benchmarks for the percentage of the whistleblower award at the end of the day is how responsive counsel has been during the qui tam process.

Paycheck Protection Program (PPP)

Congress established the Paycheck Protection Program (PPP) as an emergency loan program to assist businesses affected by the COVID-19 pandemic. The program was a rare example of widespread bipartisan support and rapid distribution of billions of dollars. Under the PPP, small businesses with fewer than 500 employees (or up to 500 employees per physical location for certain industries) could receive loans to cover payroll, rent, mortgage interest, and utilities. Unfortunately, where there’s money, there’s all kinds of fraudsters, and it’s estimated that billions of dollars went to outright scammers, ineligible businesses, and companies that double counted or inflated their payrolls.

What Constitutes PPP Loan Fraud?

PPP loan fraud refers to any illegal or fraudulent activity involving the Paycheck Protection Program (PPP), a government-funded loan program designed to assist small businesses during the COVID-19 pandemic. Some examples of PPP Loan Fraud, include, but are not limited to:

  • Inflating Payroll Expenses to Obtain a Greater Loan
  • Taking the Money and Running – Laying off the workers after receiving the funds
  • Double Counting Employees or sometimes Triple Counting Employees of interrelated companies
  • Falsely claiming eligibility. This oftentimes happens by concealing interrelated companies in which the employee count exceeds 500 workers, or the aggregate revenue exceeds $10 million.
  • Falsifying the nature of the business to obtain a loan.  Certain businesses are ineligible under the guidelines and for years they would trade under a NAICS code that is consistent with their business mission, however, when obtaining the loans they claimed a different NAICS code that does not accurately describe what they do.
  • Fake Businesses – just outright scammers that will be criminally prosecuted if caught.

As a footnote oftentimes potential whistleblowers think the business didn’t need the loan, but due to the economic uncertainties if the money flowed to the employees as it was supposed to, the case will not be considered viable in our legal opinion.   The cases that are likely to be successfully prosecuted under the False Claims Act will involve businesses that are highly solvent that were ineligible at inception due to exceeding the headcount or aggregate revenue or those that changed their NAICS code for the exclusive purpose of obtaining a loan even through they didn’t change their business substantively.

How Does the False Claims Act Affect PPP Loan Fraud?

In recent years, the FCA has been used to combat fraud in government programs, including PPP loan fraud. The FCA can be used to hold individuals and businesses accountable for submitting false or fraudulent loan applications, misusing funds, and engaging in other PPP-related fraud. The FCA is especially useful because it allows for treble damages (triple the amount of actual damages), civil penalties, and attorneys’ fees, all of which can serve as a deterrent to future fraudulent activities.  The stronger PPP Loan Fraud cases under the False Claims Act will come from insiders who know that the company or interrelated companies concealed the common nucleus of ownership to bust through the eligibility caps or falsify the nature of their business.  Another wave of cases is predicted to come through data miners who are outsiders who industriously cobble data together to find businesses who are ineligible and report it.  Both types of PPP Loan Fraud Whistleblowers may be eligible for whistleblower awards at the end of the day but the insiders if successful will stand to obtain a greater relator share than an outsider and at some point the government may fatigue on outsiders, so as with any whistleblower case its important to report fraud early and often through the use of one of the best whistleblower law firms that has experience with your type of case.