The amount of PPP loan fraud that has apparently occurred is astonishing. Government investigations have determined that the amount of fraudulent PPP loans is in the tens of billions of dollars, if not more.
The government wants to get back the money that should never have been loaned in the first place. The government has various tools at its disposal to obtain repayment from the fraudsters of their ill-gotten gain. In criminal prosecutions for bank fraud, a conviction invariably includes complete restitution and an “order that the person forfeit to the United States any property constituting, or derived from, proceeds the person obtained directly or indirectly” as the result of the fraud. 18 U.S.C. § 982.
In addition to criminal prosecutions, the government has been using the federal False Claims Act (“FCA”) 31 U.S.C. §3729, et seq., against borrowers who improperly obtained PPP loan funds. Despite its name, the FCA is not a criminal statute. It is a civil statute whose remedies include significant penalties. The FCA provides a cause of action against anyone who “knowingly” submits or causes to be submitted a false claim to the government. Id. at §3729(a)(1). Persons who violate the FCA are liable for three times the actual damages “which the Government sustains because of the act” giving rise to liability. Defendants found liable are also required to pay a mandatory penalty for each false claim. Id. at (a)(1)(G). In most instances, by the time charges are brought or a claim has been made, the totality of the ill-gotten gain has long been spent and is not recoverable.
In addition to using the FCA against borrowers who improperly obtained PPP loans, the U.S. Department of Justice (“DOJ”) has begun to look into the application of the FCA against lenders who made loans to ineligible borrowers. On September 13, 2022, the DOJ announced its “first-ever” FCA settlement received from a PPP lender. DOJ was assisted by the SBA’s Office of Litigation in this matter. Prosperity Bank settled DOJ’s claim that the Bank improperly processed a PPP loan on behalf of an ineligible borrower who falsely certified on the loan application that it, or its principal, was not then the subject of an indictment. In the press release, the DOJ states that “bank employees” then knew that the borrower was facing criminal charges and was not eligible for a PPP loan. Interestingly, the press release does not say whether those bank employees involved in the processing and approval of the loan knew of the borrower’s principal’s pending criminal charges. Prosperity Bank has over $32 Billion in assets, over 3900 employees, and processed more than 10,000 PPP loans. Under the circumstances it seems highly unlikely that the employees who knew of the criminal charges against the borrower’s principal had anything to do with the processing of the PPP loan. Moreover, the borrower repaid the loan. DOJ claimed that “but for” the fraud, Prosperity Bank would not have received $10,670 in processing fees. Prosperity Bank settled the case for $18,674, an amount far less than what it would have cost for Prosperity Bank to defend the case. If the borrower had not repaid the loan, DOJ would apparently have claimed that it was damaged in the amount of the loan and would have looked to Prosperity Bank to repay three times the amount of the unpaid loan plus other penalties available under the FCA.
It is concerning that DOJ would prosecute an FCA claim against a PPP lender under these facts. An FCA violation requires intent. Under the FCA, a person who knowingly commits an action is liable for that action, even if the person did not know that they were violating the FCA. In the Prosperity Bank matter, the DOJ does not claim that the person who approved the PPP loan knew that the borrower had lied on the application.
It appears that the government has conveniently forgotten the chaos around the inception of the PPP loan program, and the pressure the government put on the lending industry to make PPP loans available as quickly as possible. DOJ and SBA are now looking to recoup improper loans from lenders made as the result of mistakes made in the haste of getting PPP loans to eligible small businesses as quickly as possible. It looks like even the most innocent of mistakes may now come under the scrutiny of the DOJ and the SBA.