The fear and restrictions of the pandemic may be fading, but the financial impact is sure to follow us for decades. Beyond the individual checks and extra unemployment compensation, the Payroll Protection Program (PPP) was a major portion of the CARES and Economic Aid Acts. While the PPP funding did an important job, keeping small businesses afloat through the pandemic, its implementation was flawed making it ripe for fraud.
So far, more than 100 defendants have been prosecuted in more than 70 criminal cases for over $60 million in fraudulently obtained funds.
Earlier this month, the New York Times reported on one of the more egregious instances of fraud. David Hines of Miami, Florida was sentenced to 6 years in prison and required to forfeit $3.4 million dollars of loans and a $318,000 Lamborghini Huracan Euro he purchased with fraudulently obtained PPP funds. The NYT reported that Hines sought $13.8 million in PPP loans to pay employees at his four moving companies. The bank approved three of these applications for a total of $3.9 million. On applications, Hines reported that he had 70 employees and a monthly payroll of $4 million. That works out to about $57,000 per employee per month. His actual monthly payroll is $200,000 (about $2,800/person).
Besides the Lambo, Hines gave his mom two payments of $15,000, spent money on dating sites, Miami resorts, and other luxury purchases.
Payroll Protection Program funds were made available to small businesses through both the Coronavirus Aid, Relief, and Economic Security Act (CARES 2020) and the Economic Aid Act of January this year.
The CARES Act provided $349 billion in funds that were depleted in the first 13 days. Congress realized they needed to take an aggressive approach to prevent fraud forgiveness requests and recovering as many fraudulent loans. By September of 2020, they had already identified billions in suspect loans.
Both the Department of Justice and the Department of Treasury are working to charge fraudsters and recover funds. The DOJ is focusing on large companies that have received multimillion-dollar loans and individuals who received 6-figure PPP loans. The Department of Treasury is auditing all loans over $2 million and spot-checking smaller loans. Both intentional and unintentional fraud will be prosecuted.
The Small Business Administration, the agency that oversaw the loan program, explains that the loans are specifically for companies with less than 500 employees and designed to cover only payroll, utilities, and rent. 60% of the loan must go to payroll, the remaining 40% to utilities, rent, and mortgage interest. Loans used for these purposes will be forgiven. Several businesses were left in a strange position when downsizing left their anticipated payroll at less than the loan amount they applied for giving them a surplus. In these situations, the companies could choose to pay employees more to use up the surplus or return the remaining amount of the loan to their lender to keep the loan forgivable.
LJ Suzuki of CFOshares.org explains that any leftover funds could become a loan to the business with a low-interest rate of 1%. The loan would need to be spent on the business that received it for repairs or capital investments. First payments on unforgiven portions of the loans would be due in six months with the total due in 18 months.
PPP loan forgiveness requires certification of compliance. Fraud could occur in several scenarios, most obviously by spending funds on unauthorized purchases. Businesses could also get in trouble for securing funds from multiple lenders. Businesses receiving PPP loans from more than one bank will be target by the DOJ for fraud. Businesses that overstate their number of employees, or understate them to fall under the 500 employee threshold, or those making other inaccurate statements on their loan applications will also be charged with fraud.
The Small Business Administration states that any person knowingly using funds for an unauthorized purpose is subject to “additional liability such as being charged with fraud”.
Obvious unauthorized spending will be met with more strict punishment, as in the Hines case.
In recent weeks, an anonymous tip received through our website shared information on a Duluth business owner with several properties and combined PPP loans totaling more than $2 million with a surplus of over $1 million, has been planning to spend surplus money outside of the businesses that secured the loans.
Not only would this be fraud, but PPP loans were secured on the backs of the next generation, making unauthorized use a disgusting misuse of current and future taxpayer funds. This particular business owner would be investing in a new business that would likely provide him a generous residual income for decades without a second thought toward the massive debt the country has incurred for his benefit.
Looking at the businesses receiving large PPP loans, it’s likely his story is just one of many. While the appropriate use of PPP funds to help businesses and the economy survive the pandemic was necessary and forgivable, misusing those funds for personal and professional gain is not – morally and financially.
If you suspect a business of misusing PPP loans, the SBA asks that you report potential fraud to the SBA Office of Inspector General Hotline 800-767-0385.