Business Owners: Did your SBA loan create Criminal Exposure for you and your company?

The SBA is a government entity and as such any false information submitted to SBA can expose a business and individual to Federal criminal liability.  If your SBA PPP Loan had discrepancies that you are now aware of, there are steps you can take to reduce liability and shield yourself and your business from criminal exposure.

What Is the Small Business Administration?

What is the difference in liability between Criminal vs. Negligence?

The difference between criminal activity and negligence lies simply in intent.  The penalties for criminal actions are significantly higher than those which stem from neglect.

Why is this important?

If you applied for the SBA Loan and submitted incorrect information, you may have exposed yourself and your company to criminal liability.  If you recognize your error, seek legal counsel and self-report, you will ensure that SBA and its supporting agencies, IRS, CAFTB and the attorney general cannot say that your intent was criminal.

Download the Whitepaper: Is This A Civil Audit Or Criminal Investigation

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When the government announced the Paycheck Protection Loan Program (PPP), it chose to rely on Borrower certifications, rather than normal underwriting, to issue the loans. Recent announcements and guidance from the U.S. Treasury Department and the U.S. Small Business Administration have announced their intention to audit Borrowers with loans in excess of $2,000,000.00 and to pursue criminal or civil penalties against Borrowers who they find have falsely certified the need of these loans due to COVID-19. Question 31, of the SBA’s frequently asked questions about PPP loans states: “31. Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?”

The Answer to this Question reminds all Borrowers that in order to receive a PPP loan, each Borrower is required to certify that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This certification must be made in good faith, taking into account the Borrower’s current business activity and its ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The Answer goes on to give an example of a public company with substantial market value and access to capital markets likely not being able to make the required certification in good faith and suggesting that such a company be prepared to demonstrate to the SBA, upon request, the basis for its certification. (Note that this language is inconsistent with the CARES Act waiver or the normal SBA requirement that a Borrower will not be able to obtain financing elsewhere.) For Borrowers whose certification is later found to have failed to satisfy the required standard, the government may (i) deny loan forgiveness, (ii) assert criminal liability based on false statements by the Borrower under 18 U.S.C. §1001 or (iii) asset civil liability under the federal False Claims Act (31 U.S.C. §3729) for false or misleading statements in connection with the request to receive the loan from the government.

Should I repay the SBA Loan if I think I may not have been due those funds?

Over the past several days, the SBA made a series of announcements instituting an amnesty program of sorts to allow Borrowers to avoid problems with their certifications. Originally, the Answer to Question 31 provided that any Borrower that applied for a PPP loan prior to the issuance of the SBA’s April 28, 2020, guidance and that did not feel that it made or could make the certification in good faith, could repay the PPP loan proceeds in full by May 7, 2020, and be deemed to have made the certification in good faith. That deadline was then extended to May 14, 2020. This morning (May 13, 2020), the SBA withdrew all repayment deadlines and added Q&A 46 to its guidance indicating that Borrowers for all loans under $2,000,000.00 will be deemed to have made the certification of need in good faith. Those with loans in excess of that amount may still qualify for the loans and related forgiveness, but may have to demonstrate their qualification. Further, the new guidance provides that, rather than giving Borrowers a repayment deadline, the SBA will determine eligibility for PPP loans on audit and, if it determines that a Borrower is ineligible, will seek repayment of the loan. A Borrower that repays the loan after receiving notice from the SBA will not face administrative enforcement or referrals to other agencies based on its initial certification. Any Borrower that is subject to audit must be prepared to defend its certification both on audit and in connection with its application for loan forgiveness. Smaller Borrowers who are not subject to audit still must be prepared to support their upcoming loan forgiveness application.

What are the criteria for Criminal Intent?

Because of potential penalties, many Borrowers are asking whether they should just return the money and avoid the possibility of adverse consequences. Each Borrower must make that decision based on its individual circumstances. There is not one answer that is applicable to all Borrowers. With respect to making false statements, 18 U.S.C. §1001 provides potential criminal liability for a Borrower who “knowingly and willfully” makes any materially false, fictitious, or fraudulent statement or representation; or makes or uses any false writing or document knowing the same to contain materially false, fictitious, or fraudulent statements. In order to prove that a false statement was made knowingly and willfully, a statement must have been made with an intent to deceive, to induce belief in a falsity or to mislead. The government may prove a violation by referring to evidence that a defendant acted deliberately and with the knowledge that the representation was false. The federal False Claims Act, 31, U.S.C. §3729, penalizes any person who, among other things, “knowingly (i) presents…a false or fraudulent claim for payment or approval, [or]…(ii) makes, uses … a false record or statement material to a false or fraudulent claim.” “Knowing” for this purpose means that one has actual knowledge of a false statement, deliberate ignorance or reckless disregard of the truth. Intent to defraud is not required. Of particular note is that the False Claims Act claims may be brought by either the government or a whistleblower. So, Borrowers face the possibility of a claim from an employee who assumes that he or she knows that a certification is false.

How can I prove financial hardship or impact from COVID-19?

In order to support the PPP loan certifications to the government, Borrowers should examine and consider certain key issues when making its determination as to whether or not to return the loan proceeds. First, a Borrower should review its business projections and financial circumstances at the time it applied for the PPP loan in order to identify evidence that indicates that its certification was made in good faith. Clearly, during March and April of 2020, the country’s economic future was in serious question. States were issuing “Stay-at-Home” or “Shelter-in-Place” orders and identifying which businesses were “essential” that could continue their operations. If deemed non-essential, businesses were required to cease operations except for limited on-line or delivery options. Even businesses that were designated as “essential” had no idea what impact closures would have on their customers. So, the economic uncertainty clearly has been and continues to be present. For most businesses, this economic uncertainty will support their certifications.

However, economic uncertainty alone does not address individual business circumstances. In light of the potential penalties and governmental agencies that will be focused on enforcement sooner or later, every Borrower should take the opportunity now to document and organize its basis for requesting the SBA’s assistance. Below are a few steps that every Borrower should consider to support certifications and be prepared for audit activity and loan forgiveness applications:

Steps to ensure SBA PPP loan forgiveness:

• Evaluate the financial situation at the time it made certifications. The following questions suggest the kind of evidence that may be helpful in supporting a PPP loan/forgiveness application.
  • Did the Borrower have adequate capital reserves or access to capital on reasonable terms?
  • How long could available resources be expected to last?
  • Did the Borrower believe that employee furloughs or layoffs would be necessary?
  • What specific financial uncertainties faced the Borrower during the loan application process?
  • What uncertainties faced the Borrower’s industry as a whole?
  • How does actual business performance compare to pre-application projections?

• Ensure that each individual who signed an SBA loan or grant application has sufficient documentation to support the good-faith nature of his or her representations and certifications.
• Prepare financial statements and summaries that support the Borrower’s certification that the PPP loan was necessary due to COVID-19, and that show that funds were disbursed to pay expenses.
• Review the SBA’s Affiliation rules to ensure qualification with size restrictions applicable to financial assistance the Borrower has requested or received. This is especially important for companies with multiple related entities or locations.
• Place loan proceeds in a segregated account, separate from other operating funds, and document the application of all loan funds. This will enable a Borrower to easily trace the application of the loan proceeds in the event of an audit and will help to support its loan forgiveness application.
• Commence collecting documentation that will support loan forgiveness and that would be useful in the event of an audit, including canceled checks, payment receipts, transcripts of accounts, and other documents demonstrating that funds have been used for eligible payroll mortgages, lease obligations, and utility payments.
• Consult with the Borrower’s SBA lender to determine what documents it will require and how those documents should be organized to support the Borrower’s loan forgiveness application.

What should business owners do now that SBA PPP audits are commencing?

Many questions remain about whether the government can legally regulate government financial assistance extended by Congress without engaging in the formal process for promulgating regulations. It remains to be seen whether the U.S. Treasury and the SBA can enforce rules that they keep changing with retroactive effect after businesses have already relied on the statute. Even in the face of this uncertainty, Borrowers must be prepared to support loan forgiveness applications and, if required, respond to audits. Each Borrower should evaluate its individual circumstances and determine how best to demonstrate compliance with SBA loan rules while supporting its loan forgiveness application. Borrowers should consult with counsel, their lenders, and other advisors concerning these issues.

Navigating an SBA PPP Audit

At Milikowsky Tax Law we are experts at communicating with government entities during an audit or investigation.  The SBA and IRS will be launching these SBA audits for the first time.  The team at Milikowsky tax Law is here to be your relentless advocate and seasoned guide through the process of audit.  We have helped over 400 business owners reduce their liability and we have defended hundred fo cases agains criminal prosecution.

Do not go it alone.  Government agency audits can result in prison terms, massive fines of over $75K and loss of assets through leins and levys of personal property.  We are experienced and confident in our ability to help your business stay in business.

Reach out to one of our San Diego tax attorneys today: