Needs and eligibility keys to avoid the liability risk of PPP loans
How you determine your need and eligibility for a Paycheck Protection Program (P3) loan can impact your liability risk if you are asking for funds to help you get through the crisis, Annie said. Railton, a partner at the law firm Goodwin, in a Airbase webcast.
Although Congress has added several layers of oversight under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which created PPP loans for companies with less than 500 employees, the liability will eventually fall. existing criminal and civil fraud laws, including the False Claims Act, Railton said.
“The CARES Act sets up a complicated oversight structure that involves congressional entities, a special Inspector General, and the takeaway from all of this is that there’s a lot of oversight, a greater risk. high audit, which can then be transferred to the Department of Justice, ”Railton said.
Under the program, you can get up to 2.5 times your average monthly salary costs. If you get financing, you don’t have to repay the loan if you use at least 75% of the money to keep employees on board and the remaining funds for other eligible uses, including rent and utilities public. If you do not use the funds in the prescribed manner, you must repay the money, with interest.
At the beginning of May, approximately $ 125 billion of the $ 660 billion authorized was still available.
Necessity, eligibility and forgiveness
In practice, companies with larger loans will be considered first. “The $ 2 million threshold provides a benchmark on audit risk,” Railton said.
There are three areas the government will likely be looking at the most:
- Money justification
- Eligibility based on your number of employees
- Decision to apologize rather than repay the loan if you get the funds
“The DOJ has talked about prosecuting candidates who have overestimated their salary costs, distorted their employee numbers or distorted the nature of their business,” she said.
Federal prosecutors have already brought the first charges under the program. In early May, the Justice Department alleged that two people had tried to apply for more than $ 500,000 in loans for several businesses they were operating, even though some of them did not exist and none of them did. they had no employees. The charges include conspiracy to commit fraud and conspiracy to commit bank fraud.
“It is unacceptable that anyone attempting to steal a program intended to help hard-working Americans continue to be paid so that they can feed their families and pay part of their bills,” said the US Attorney General in Rhode Island. Aaron Weisman, whose office has laid the charges, said in a statement.
Focal point of execution
The False Claims Act will likely be the biggest source of civil claims under the program, Railton said. It is widely used whenever federal funds are involved and has been a primary source of litigation following the 2008 financial crisis and Hurricane Katrina.
“It’s a central point where we think there will be a lot of activity,” she said.
Whistleblowers, who can get up to 30% of the money involved, file most claims under this law. “Whistleblowers are encouraged to bring these lawsuits,” she said, adding that the Treasury should also recover a substantial sum of money. “We have seen these lawsuits aggressively brought over the past few years.”
One of the reasons whistleblowers play such an important role: The government is obligated to investigate any claim they make, even if it lasts for up to 10 years after the event, which means long after that you requested, received and refunded or obtained the funds. forgiven, you can remain liable for the fraud.
To reduce the risk of problems if you are audited or the victim of a whistleblower complaint, document the thought process that led to the decision to apply for the loan – why your business thought it was economically necessary – and include them. differing opinions.
As part of your needs determination, explain why you are not using other sources of funds available to you.
“There are real considerations there,” Railton said. “If you use a credit zone, will that hinder your ability to get more credit in the future?” If you use another source now, are you going to be in a tough spot six months from now? What are the conditions ? by which I can get money? Are they reasonable or are they in themselves harmful? What if I could use it and use it, what is the impact on the business? This assessment can be quite precise. If you still believe the PPP loan is necessary, document this assessment, how it was made. It pays to record this solid assessment. “
Both business and individuals can be held accountable. If, as the CFO, you were the one who completed the loan application or led the calculation process to determine the need, you want the assessment to be in-depth, and if you or someone else thought that the loan was not needed, but the board or other leaders did, included these concerns in the documentation.
“Pay attention to people who have expressed divergent views, whether they are board members or internal to the company,” Railton said. “If you hear questions about whether to apply for a P3 loan, take them seriously.”
While companies can provide indemnification agreements to help protect individual executives or others involved in the decision to apply for a loan, these agreements ultimately cannot prevent the government from suing you.
“You cannot negotiate a government enforcement right with a private party,” she said. “You cannot prevent the risk of the government taking action by trying to negotiate with your employer the issue of compensation or advancement of legal costs.”
What is critical to avoiding liability, she said, is whether the need was calculated in good faith and whether you have the documentation to support the decision.
This applies not only to the question of need, but also to whether you qualify based on the number of employees and whether you are eligible for a loan forgiveness.
“There is a risk at both ends,” she said, “a risk in the application process and a risk in the pardon process, which to some extent is still uncertain.”
The Small Business Administration (SBA), which administers the PPP, said it will release more guidance on the forgiveness process and whether there are any additional certifications you need to do.
Safe Harbor period
The loan program included a period of refuge – until mid-May – for companies which decide after receiving a loan not to need it and to return it.
From a technical standpoint, the government can still sue you, Railton said, because the fraud applies to the request for funds, not just their use. But in practice, if you pay the money back, you risk falling very low on the priority list for an audit, especially if your loan is below that $ 2 million threshold.
While the Safe Harbor is on the issue of necessity, the government will likely apply a similar standard if you decide you weren’t eligible after the fact due to an error in calculating your employee count.
“If the loan application skewed the number of employees – described it as less than 500 when it was in fact well completed – there could still be a liability risk, as the Safe Harbor does not say that all is forgiven, ”Railton said. “Having said that, we’ll assume that you acted in good faith as to economic necessity, which is only part of it, but in practice if you return the funds it greatly reduces the risk of oversight and of responsibility. “
Bottom Line: Unless you are intentionally trying to mislead, as long as you document your needs assessment and make a good faith effort to meet the eligibility and pardon criteria, you are in a good position to protect yourself if your business is subject to an audit or a trial.