DOJ Appears to Shift Focus to Lenders in Paycheck Protection Program Investigations: What You Need to Know

The Department of Justice appears to be shifting its focus from investigating fraudulent behavior by Paycheck Protection Program (PPP) borrowers to investigating lenders and related institutions.

What Has Happened So Far?

• Since the inception of the PPP, DOJ has mainly focused on people who borrowed PPP funds using fraudulent documentation, inflated figures and/or spent the funds on prohibited uses, including egregious examples like luxury vehicles and expensive jewelry. The Department also has investigated reported fraudulent activity in Economic Injury Disaster Loans.
• So far, only one publicly reported matter involves an action against a PPP lender: In September 2022, a regional Texas- and Oklahoma-based bank settled with DOJ for approximately $18,000 to resolve allegations that it improperly made a PPP loan to an ineligible borrower. DOJ alleged that someone who owned more than 20% of the borrower’s company faced criminal charges, which made the company ineligible to receive a PPP loan, and that the lender knew this but made the loan anyway.

What is Changing?

• Evidence suggests that DOJ is turning its attention to PPP lenders and other non-borrower companies involved in lending. DOJ’s acting COVID enforcement chief, Michael Galdo, has noted that cases against PPP lenders take more time than others to build, but warned that he anticipates more activity in this space.
• As in the 2008 financial crisis, when the government investigated mortgage lenders, we expect the government to turn its sights on PPP lenders to determine if government-backed loans were improperly made, particularly in light of the broad participation in and cost of the PPP program.
• One study suggests that up to 15% of the $800 billion in PPP loans are suspicious.

Who is at Risk?

• Any lender who made PPP loans is at risk of a government investigation or whistleblower allegations.
  • The government or a whistleblower could bring claims under the False Claims Act, alleging that lenders submitted a false claim when they approved and processed PPP loans but did not properly vet the borrower.
  • Lenders also could face liability under the Bank Secrecy Act (BSA) if they did not follow minimum anti-money-laundering requirements or flag suspicious activity.

What about Fintechs?

• Given their size and how quickly they moved into this space, the government could focus enforcement activity on fintechs that supported PPP lending. Investigators may explore whether proper anti-fraud controls were in place.
• Last year, a fintech lender disclosed in a bankruptcy filing that it is under investigation by DOJ related to PPP lending practices, and in March 2023, a former fintech CEO pleaded guilty to criminal charges related to fraud and making false statements to the Small Business Administration in relation to PPP lending.
• Fintechs were the lenders in 75% of a sample of DOJ prosecutions of PPP borrower fraud despite processing just 15% of all PPP loans.

What Should PPP Lenders Do?

• PPP lenders should work with counsel to assess their internal lending procedures for compliance with SBA’s PPP guidance and BSA/AML requirements.
• Additionally, lenders should ensure they have effective document-retention policies. Liability under the False Claims Act can extend up to 10 years in the past, and the SBA typically requires lenders to maintain records for six years.
• Any lender who receives a subpoena or inquiry from DOJ, Inspector General or another government entity should immediately implement appropriate legal records holds and engage counsel to assist with the response.