It is no secret that the government is giving out very attractive loans to qualifying businesses. And it is no secret that there are businesses who are taking advantage of this.
We will discuss why it is a bad idea for business owners to fudge applications for these loans and how businesses are getting duped by companies pretending to be authorized by the government offering to lend money.
Here's a scenario:
There is a club in South Jersey and they have a bunch of waiters and bartenders working there. COVID-19 hits and the owners shut down immediately and tell staff to go collect unemployment. This is before New Jersey ordered businesses closed. The owners then hear about these loans and they immediately get to filling out the applications. They list on their application that all of their employees are still working. But they are not.
The club is approved for the loan and their business account is funded. The owners have a small fortune in their account now but it is not being used for payroll. They start calling their employees telling them that they are to return to work but they are not full-time. They will get paid for 20 hours. And if they don’t return to work immediately, they will probably not be re-hired when the COVID- situation is over.
Did the Jersey Shore club owners break the law?
Yes. Lying on the loan application is a crime and you will be prosecuted.
On March 19, 2020, the Department of Justice ordered every U.S. Attorney’s Office to appoint a Coronavirus Fraud Coordinator. They have assigned special teams of prosecutors to address this specific kind of wrongdoing and I am sure that new York State, along with other states are gearing up to recover money that was obtained by lying.
Let's get technical for a moment:
We have all heard at least the mention of the CARES Act -- It was enacted to provide immediate assistance to businesses affected by the the COVID-19 Outbreak. Under the CARES Act, eligible small businesses can obtain loans under a temporary loan program called the Paycheck Protection Program – the PPP.
The PPP is a forgivable loan program is to help eligible borrowers affected by the coronavirus pandemic keep their employees on the payroll. The loan can be forgiven if at least 75% of proceeds are used for payroll expenses, which banks and borrowers are expected to verify.
The applications clearly state:
“I understand that if the funds are knowingly used for unauthorized purposes the federal government may hold me legally liable, such as for charges of fraud.”
What are the penalties of falsifying information on these applications?
The application states that knowingly making a false statement is punishable by a maximum of:
- (1) five years’ imprisonment and/or a $250,000 fine under 18 U.S.C. §1001 (making false statements) and 18 U.S.C. §3571 (sentence of fine);
- (2) two years’ imprisonment and/or a $5,000 fine under 15 U.S.C. §645 (false statements to SBA); and,
- (3) 30 years’ imprisonment and/or a $1,000,000 fine, if submitted to a federally insured institution, i.e., virtually any bank, under 18 U.S.C. §1014 (false statements to banks with respect to loans).
False statements in a PPP application may also subject violators to up to 20 years’ imprisonment and a $250,000 fine for wire fraud (18 U.S.C. §1343) and mail fraud (18 U.S.C. §1341), and up to 30 years’ imprisonment and a $250,000 fine for bank fraud (18 U.S.C. §1344), among other things. It is thus crucial for small businesses and self-employed taxpayers alike to be aware of and understand the numerous potential legal pitfalls during the application process.
As of yesterday, at least 1.6 million PPP loans already have been approved. How many of those loans were approved because of false information provided by the business?
There is a specific fraud statute (18 U.S.C. Section 1340) that details fraud associated with major disasters or emergency benefits. Section 1340, makes it a crime to knowingly make a material false statement in any matter involving benefits paid in connection with a major disaster declaration. Like COVID-19. This statute includes people who falsify numbers on the applications to benefit them or someone else. So, anyone filling out these applications on behalf of a company are on the hook, too.
What if the business owner had good intentions?
A business owner gets questioned by law enforcement on the false number of employees they put down on the application. The owner explains that they were just trying to stay afloat so that they could re-hire everyone. It just didn’t pan out. Well, it may have been well-intentioned by the owner by falsifying information on a loan application, you can bet that it will lead to an arrest and charge of violating federal fraud statutes.
A small restaurant has had been operating in Queens for many years, but because of the Quarantine, the diner has to shut down and the owner has no way to pay the bills. The heartbroken owner does not want the business to go under and they don’t want to file for bankruptcy. The owner believes that their only option is to obtain a PPP loan to get them by until New York City re-opens. But, the owner doesn’t meet the eligibility requirements for the application. So, the owner falsifies the details of the loan application to make sure they are approved, using fake employee names, an inflated loss and expense reports, and a doctored payroll log.
There is really no way out for the owner of that business. The government is going to prosecute hard on these crimes and I’m not sure that a jury made up of people who had to endure what is happening now is going to be pleased with someone taking what should have gone to a company that was eligible, that could have kept their employees on payroll, but they applied too late and the money just ran out. I don’t know.. Maybe the owner will get a sympathetic jury. But I don’t think so. And federal court judge’s are very keen on setting examples. I mean, they gave Situation from Jersey Shore 8 months in jail for filing false tax documents.
A store has five 20% owners. One of the questions asks for information about the owners’ past and current involvement with the criminal justice system. The application fails to mention that one of the owners was convicted of a felony many year ago. Is the application fraudulent?
Well, if certain criminal history is present, the entire business is not eligible for a PPP loan. Now all of the owners are exposed to being prosecuted.
The lesson: DUE DILIGENCE. Owners and managers have to work together. Otherwise, at a minimum, you are looking at hefty criminal defense attorney’s fees and the possibility of jail.
Calculating the Size of the Company:
PPP applicants must qualify as eligible under section 3 of the Small Business Act, 15 U.S.C. §632. Businesses have to be cautious when calculating their number of employees and certifying that they are an independent contractor, eligible self-employed individual, or sole proprietor, or that they employ no more than 500 employees.
Also keep in mind that the total employee calculation is the average number of people employed for each pay period over the last year; an employee must be included regardless of the number of hours worked or temporary status.
Certifying Economic Uncertainty
One of the easiest sections of the PPP application to get into serious trouble is where the applicants must certify that the “current economic uncertainty makes this loan request necessary to support the ongoing operations.”
Businesses have to conduct a thorough analysis of their present financial condition before submitting an application. We know of companies that stated in their applications that they have lost a fortune since the quarantine order went into effect. Yet, their tax reports for the same months from the last two years show income for a fraction of the amount claimed. Some owners even included cash income lost when cash was not reported for past tax years.
I was walking down the street and noticed two suits inspecting a restaurant that had a “CASH ONLY” sign. They were taking notes and pictures. Maybe they were having problems with their systems or maybe they were preparing to show business interruption. In any event, “CASH ONLY” is a badge of fraud. Think of it as, Where there’s smoke, there’s fire.
Victims of Fraud: SBA Loan Scams
Because of the overload of applications filed, processing has come to a grinding halt opening up a cottage industry of phony lenders.
One small business received a call from an SBA Loan Program representative who claimed to be calling from the SBA. The representative informed the business owner that SBA Loan Program was working with that business’s bank and urged the owner to apply immediately because the PPP program had limited funds that would run out. A second representative followed up with the owner by e-mail, claiming: “We are the SBALoanProgram.com and as mandated by the SBA, getting approved is easier than ever!”
Sounds perfect, right?
That SBA Loan Program also lures consumers through the website, sbaloanprogram.com. The sbaloanprogram.com website immediately triggers a pop-up screen that states in large, bold font, “CARES Act Paycheck Protection Program.” Right below that, this pop-up also at times has represented in all caps “WE ARE A DIRECT LENDER FOR THE PPP LOAN PROGRAM!”
Sounds even better. Hey! They have a website!
SBA Loan Program further represents, “The Paycheck Protection Program is being processed through lenders across the country participating in this program. No fee, No collateral, and No personal guaranty required. Lending is at a fixed 1.00% interest rate for two years and the SBA guaranty fee is waived. Apply now!”
What struggling business could resist?
But the loan company is a complete fake. After the owner signs all the documents and gets their funds, they will finally figure out that they have a high-interest, un-forgiveable loan. The lesson here is to beware of scam lenders during this time.
If you have any questions at all, feel free to give us a call at 212.213.8511.