Qui Tam Claims and PPP – A COVID-19 Legal Side Effect

When the government passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, it created the Paycheck Protection Plan (PPP). The PPP was intended to enable small businesses to borrow money to pay workers and bills, and the loan can be forgivable if certain criteria are met. But the loose rules, massive popularity, and eventual audits could create a False Claims Act firestorm. It’s important for business owners and potential whistleblowers to understand what’s happening.

PPP: The Hastily Paved Road of Good Intentions

The CARES Act passed on March 27, 2020, pumping hundreds of billions of dollars into the Paycheck Protection Plan. The PPP is essentially a loan program intended for small businesses that allows them to apply for the funds they would need to ride out the COVID-19 crisis, specifically to help pay their bills and their employees.

In turn, if they were approved for the PPP loan and used the funds as the government directed, then that loan could be converted into a grant and the debt would be forgiven, in full or in part. As is often the case with rushed legislation, there have been unforeseen consequences – and there may be more.

Government Money, Government Rules

What many of the businesses (and the fraudsters among them) applying for loans may not have known was that PPP exposed them to the False Claims Act (FCA). Larger businesses that are regularly audited by the government, along with healthcare providers, are familiar with the FCA and have compliance measures in place to ensure they do not run afoul of it. Smaller businesses, however, may not even be aware of it.

This becomes a problem for a few reasons.

  • First, the PPP ended up being a kind of first-come, first-served cash grab, with some larger businesses jumping on the opportunity even though the fund was not created to assist businesses with easier access to lending markets.
  • Second, the rules by which the program is governed may be open to interpretation, and PPP applications rely on borrowers to certify their claims rather than any standard pre-approval review processes, such as underwriting.
  • Third, businesses that qualify to receive the funds likely do not know anything about the FCA, and may not have the record-keeping and organization tools to satisfy the audits the government will very likely conduct in the aftermath of COVID-19.

And, quietly, in the midst of all of this chaos, the idea of a whistleblower becomes incredibly important.

Part One: Large Companies Moved Quickly, Small Businesses Left Out

It did not take long for problems with the PPP to surface. Big businesses applied for, and received, loans from the fund early on. This, in turn, used up the money intended to keep America’s small businesses afloat.

Larger, publicly traded companies have easier access to capital. They can sell shares (debt) and borrow from banks against their assets. Two of the more recognizable businesses that fell into the trap were Ruth’s Chris Steakhouse, which obtained $20 million, and Shake Shack, which borrowed $10 million. Both companies returned the money.

According to an analysis by Forbes, 71 publicly traded companies received money from the PPP before the money ran out. We know at least some of them returned the funds, especially after public backlash, but what is clear is that they were never the intended recipients.

So When Is a Business “Too Big” to Borrow?

There are, however, large businesses which are not publicly traded. Just because their company is not on a stock exchange doesn’t mean they don’t need access to PPP funds, and vice versa. There’s good news and bad news here. The good news is that the Small Business Administration defines what constitutes a small business. The bad news is that those criteria are complicated, and were made even more complicated by an “alternative size standard.”

SBA’s “alternative size standard” as of March 27, 2020: (1) maximum tangible net worth of the business is not more than $15 million; and (2) the average net income after Federal income taxes (excluding any carry-over losses) of the business for the two full fiscal years before the date of the application is not more than $5 million.

We’ll discuss qualification standards more below. How many businesses qualify under this alternative standard is anyone’s guess. This is the gray area where the government may well depend on whistleblowers to expose fraud.

Part Two: Borrowing and Using Funds and the Changing Rules that Govern Them

The PPP’s reliance on borrowers to self-certify their situations and criteria opened the door for massive fraud on the front end. Arrests have already been made. The flagrant cases, however, are not the problem moving forward. Those tend to be rooted out quickly. There are two perspectives to consider.

From the whistleblower perspective, the question of whether a business qualifies is the first possible red flag for an FCA claim. That would be difficult to recognize without a great deal of insider knowledge and thorough understanding of the rules. An experienced whistleblower attorney could be of great help as well in building a case.

The most likely source of a false claim may be the self-certification process to qualify for the loan. The complete rules for application are available online, but here is a summation:

  • Any small business concern that meets SBA’s size standards (either the industry-based sized standard or the alternative size standard)
  • Any business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern (sec. 31(b)(2)(C) of the Small Business Act) with the greater of:
    • 500 employees, or
    • That meets the SBA industry size standard if more than 500
  • Any business with a NAICS Code that begins with 72 (Accommodations and Food Services) that has more than one physical location and employs less than 500 per location
  • Sole proprietors, independent contractors, and self-employed persons

Combined with the alternative size standard mentioned earlier, these constitute the lion’s share of qualifications for a PPP loan. Whistleblowers should be aware of any criteria that may disqualify a business. Intent to mislead may not matter, as we’ll discuss later.

From a business perspective, what seems on its face to be a Godsend may be a much greater headache. In the face of rapidly increasing debt and an existential threat to their livelihood, business owners may overlook vital qualification criteria – deliberately or not. There are gray areas as well, such as:

  • What if my business is spotty and has chaotic financial history?
  • What if I have two businesses of different kinds and I depend on both for income – do both qualify and can I count myself for both?
  • What if I have a seasonal employee count that’s over 500 but my average number is below 500?
  • What if my business’s net income will drop to qualifying standard but is too high on record?

These are just a tiny sampling of the kinds of questions business owners might be asking. Or, perhaps more perilously, they may not be asking. Additional risk comes from the changes to the rules after the fact. It’s hard for a business owner to keep up.

Using the Funds and Loan Forgiveness…

Part of what makes PPP loans so attractive to small businesses is that the loans are ultimately forgivable. They essentially become grants if the business owner uses them according to the government’s guidelines. Again, however, there is no up-front compliance structure on offer. The government is depending on businesses to ethically implement the loan funds, while promising to follow up later in the form of audits to enforce accountability. For loan forgiveness, businesses will need clear records of how funds were used.

Another aspect that makes PPP loans attractive is that they’re simple to apply and qualify for. After all, PPP funds were intended to keep businesses in business, even if they were forced to close their doors during the COVID-19 pandemic. They’re easier to qualify for than Small Business Administration (SBA) Disaster Loans.

This resulted in loans with generous terms.

  • Borrowers can receive loans in the amount of 2.5 times their monthly payroll costs for employees making less than $100,000 per year (with amounts over $100,000 being excluded). So, if your payroll over the last 12 months has been $20,000 a month, you could qualify for a loan of $50,000.
  • Payroll costs can include payment for vacation, parental, family, medical and sick leave (that is not covered by another emergency loan/grant); payment for dismissal or separation; payment for group health care coverage, including insurance premiums; payment for retirement benefits and payment of state and local taxes assessed on employees’ compensation.
  • The maximum amount of the loan is currently capped at $10 million.
  • No collateral or personal guarantees are required, and there are no fees.
  • The funds must be used for payroll and related expenses, and up to 25% of the funds may be used to cover mortgage interest, rent, utilities, and interest on pre-existing loans.
  • Businesses must have been in operation by February 15, 2020, and the money can cover expenses incurred from February 15 through June 30, 2020.
  • The interest rate on any part of the loan not ultimately forgiven is 1.0% and is due within two years, though payment is deferred for the first six months and there is no prepayment penalty.

The loans can be forgiven if the funds are used for the approved payroll and expenses listed above.

…And an Open Door for an FCA Claim

Again, all of this information feeds two important perspectives, that of the business owner and that of a potential whistleblower. On one hand, a business may be trying very hard to comply and fail. On the other side, a whistleblower may see a massive fraudulent use of government funds. The perceptions may differ.

From a whistleblower perspective, it could be much easier to see how the funds are spent than know how or whether a business qualified for the loan. Are wages being paid? Are benefits being paid? Are the utilities on?

There are smaller, more intricate things at play as well. For example, in a restaurant setting, wait staff may earn very little in terms of wages, but depend on tips to make a living. What is being paid? It depends on what the business claimed when it applied – if it claimed the payroll total including the tips earned by wait staff, but is not paying that aggregated amount, that’s a red flag.

The nuances that may come about are far too numerous to mention. What’s important for whistleblowers is to be vigilant and gather information and evidence if they suspect wrongdoing. If there’s any question, or someone wants to express their suspicion privately to determine if they’re witnessing fraud, an experienced whistleblower attorney would be a good resource.

From a business owner perspective, it is incredibly important to record when and how funds are spent, down to the cent. Not only does this help when asking for the loan to be forgiven, it reduces the chance of being held liable for a qui tam claim under the FCA. Larger businesses and those that deal with the government often usually have rigorous compliance rules in place to avoid FCA claims.

Smaller businesses will simply not have that luxury.

Enforcement After the Fact

Also of note to business owners and potential whistleblowers alike is the government’s obvious intention to audit and otherwise check compliance after the fact. The Justice Department is aware of the potential for fraud, and has a keen eye out.

“Every dollar stolen from the Paycheck Protection Program comes at the expense of employees and small business owners who are working hard to make it through these difficult times. The Criminal Division is committed to working with our law enforcement partners to root out abuse of the important relief programs established under the CARES Act.” -- Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division

The government has many ways to investigate and root out PPP fraud through existing and recently established avenues. These include administrative audits and investigations from the SBA, all the way through Justice Department-led civil and criminal investigations.

From the other side, whistleblowers can gather evidence, putting fraudsters between a rock (the Department of Justice) and a hard place (a whistleblower).

Finding Fraud First and Why It Matters – PPP Edition

Whistleblowers should understand that time is of the essence. Not only is the clock ticking to gather evidence before it might disappear, but there is always the chance that the government might discover it first. Bringing a qui tam claim – which is essentially a lawsuit by a private citizen on behalf of the government – has a very specific order. If the government follows up with audits and an aggressive investigation and verification program, the opportunity for a qui tam claim may dissolve very quickly.

Of course, if the Justice Department is already investigating the fraud, a whistleblower has no claim. You can’t bring the government’s attention to a case it is already working. To bring a claim, a whistleblower must be the one to bring the fraud to the government’s attention.

Similarly, the Justice Department, once it is aware of a claim, may choose to take on the investigation itself. While this does not eliminate a whistleblower’s claim, it does reduce the potential reward for bringing the fraud to its attention. If the Justice Department refuses to take the case on, adopting the role of an interested party, a whistleblower can continue to pursue the claim.

Triggering Qui Tam, and Why Intent May Not Matter

There are going to be businesses that trigger qui tam claims from PPP loans despite their good intentions. Meaning well isn’t going to save them, so it is important to know what’s expected and the criteria for a violation. This same information is useful for potential whistleblowers, as knowing the triggers for fraud may make or break a whistleblower’s claim.

The False Claims Act has a few very specific triggers. In order to violate the FCA, the individual or business must have known that it was making (or causing another to make) a false claim or a false record or statement to get a false claim paid. Under the FCA, knowledge of the falsity is defined as being:

  • actual knowledge;
  • deliberate ignorance of the truth or falsity of the information; or
  • reckless disregard of the truth or falsity of the information

Here are some examples:

  • Rather blatantly, Business X applies for a PPP loan knowing full well it did not meet all the criteria. It had actual knowledge of a false claim. If that can be proven, the claim would be valid. This is the often the simplest FCA claim one can levy.
  • Business Y applies for a loan and calculates its amount based on a certain number of employees. Most of those employees are students who will be gone when the period of the loan ends, and so could not be rehired, but Business Y decides that doesn’t matter and applies. It is deliberately ignoring the truth, in this case, that its employee population can’t really be re-hired because they’ll be gone.
  • The people at Business Z run a fast-paced sales business with several offices. Each office is run by different managers, all of whom do things a bit differently. They have a mix of salaried employees and independent contractors. Business Z asks each office manager how many employees it has and for their payroll records. Some offices report all employees – Business Z did not ask them to differentiate between salaried and independent contractors – and the business applies for the loan based on those numbers without bothering to do the simple task of verifying actual employees (for whom the loan can be obtained) and independent contractors (who are excluded). They recklessly disregarded the truth of their application.

It’s important to note that the whistleblower or the government is tasked with the burden of proof in these cases. If proof of wrongdoing is obtained, business owners could find themselves paying many times the amount they borrowed to save their businesses.

Have You Witnessed PPP Fraud and Don’t Know What to Do Next?

Maybe you’re not sure, or you’re worried about retaliation. Arm yourself with knowledge. You can find out more about whistleblower claims on our website. When businesses defraud the government, they’re taking money from everyone – it’s all taxpayer money, after all. If your claim is successful you could receive up to 30% of the total recovery. In 2018 alone, whistleblowers filed more than 600 qui tam suits and received, collectively, nearly $301 million in compensation. If you’d like to speak to someone discreetly about your suspicions or a potential claim, contact the NC Whistleblower Attorneys online or at 1-844-520-2889 for a free, private case evaluation.

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