All information in this COVID-19 Response Resource issue is effective as of May 12, 2020.
In the midst of a national and global economic crisis, the likes of which have not been seen since the Great Depression, the United States government enacted an emergency lending program to stabilize the economy. In order to qualify for this loan on extremely favorable terms, borrowers certified that their financial condition made them eligible. Sound familiar?
Last November, the Second Circuit Court of Appeals ruled that the False Claims Act—which it described as “capacious”—was certainly broad enough to encompass any fraud based on “financial condition” certifications.[1] Given the timing, the Second Circuit obviously wasn’t talking about the Paycheck Protection Program (PPP)—it was a program from the 2008 financial crisis. But everything the court said about that program could apply to the PPP just the same.
In light of the looming safe-harbor deadline of May 14, under which businesses can return the PPP loans without recourse, many recipients now grapple with the shifting guidance from the SBA and Treasury Department concerning the initial loan certification that “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations.” The Treasury Department’s failure to issue clear, definitive guidance has put PPP recipients between the proverbial rock and a hard place.
The dilemma is clear: does a business who believes its initial certifications were in good faith and based on solid financial and economic projections—despite unprecedented uncertainty—return the PPP loan and risk financial viability. Or, does the business keep the PPP loan and risk later learning from the Treasury Department that the company’s analysis and certification are subject to claims the business defrauded the government? The prospect of facing fraud-type penalties because some government lawyer, using 20/20 hindsight, disagrees with the business’s prior certification is keeping business owners up at night.
PPP Fraud is a Top Enforcement Priority and Whistleblowers Will Be Critical to Those Efforts
Borrowers’ worries are legitimate. Congress specifically provided tens of millions of dollars to fund new and existing inspector general programs to go after fraud in the PPP and other CARES Act programs. The Department of Justice has made PPP fraud a top enforcement priority and already criminal charges based on egregious cases have been filed.
Initially, there was little to no guidance on what the certification of economic necessity required. After many borrowers accepted the loan funds, the United States government has issued certain sub-regulatory guidance that appears to interpret the certification more rigidly than many borrowers originally understood. The rules for the program have been likened to building an airplane mid-flight.
In the face of all of this uncertainty is the risk that if a business makes the wrong decision, an employee—or perhaps a disgruntled former employee laid off during the downturn—may have an incentive to report the business to enforcement authorities. The federal False Claims Act—among other laws—provides a financial incentive to employees and others to report fraud, real or perceived, against government programs, including the PPP.[2]
The ambiguity and shifting interpretative guidance, coupled with the incentives for whistleblowers, create a significant risk of liability under the False Claims Act, among others.
How Do Businesses Protect Themselves from Potential Fraud Liability?
This article plots two possible paths for a business to use to avoid fraud liability: “Disclose Everything” or “Document the Diligence.”
The “Disclose Everything” Approach
One of the best approaches to avoiding fraud liability in the face of genuinely ambiguous regulations and shifting sub-regulatory guidance is to put the relevant government authorities on notice of the issues. Depending on what additional guidance is issued, there are many businesses who took PPP loans who still won’t have complete clarity by May 14, or for perhaps even weeks or months later.
At some point in the future—perhaps on May 14, during the forgiveness process or beyond—these businesses may consider reaching out to the SBA and their lending institutions to disclose the basis upon which they made the certifications of necessity.
Although providing an explanation before it has been asked for may draw additional scrutiny and attention—and may result in the business having to pay the money back because it wasn’t eligible—the disclose-it-all approach is probably best way to avoid fraud-type penalties, which can far exceed the original cost of the loan.
The “Document the Diligence” Approach
For a variety of reasons, the open-book approach isn’t practical or possible for all businesses. Nor should a borrower that seeks to comply with a government program necessarily have to disclose everything to avoid fraud liability. However, in the current circumstances, the alternative approach requires a fair amount of work.
The False Claims Act imposes liability only for knowingly submitting false claims. However, the Act is broad—parties who seek benefits from the government cannot recklessly disregard or deliberately ignore information that may show that certifications they made to the government are untrue. Generally speaking, so long as a business can demonstrate that it made an “honest mistake”—that it wasn’t reckless (or worse) in its certifications of eligibility—it shouldn’t face fraud-type penalties if the business turns out to be wrong.
Courts recognize that some legal and contractual obligations are ambiguous and merely because the government and a recipient of government funds have different interpretations of those obligations does not automatically mean the recipient committed fraud. When a recipient claims it did not act in bad faith in construing a particular regulation—which later turns out to be wrong—courts will look at “(1) whether the relevant statute was ambiguous; (2) whether [the party’s] interpretation of that ambiguity was objectively unreasonable; and (3) whether [the party] was ‘warned away’ from that interpretation by available administrative and judicial guidance.”[3]
For all three factors, a party must be diligent—and if it wants to later rely on that diligence to defend itself against possible fraud claims, it would be wise to carefully document that diligence. Since the Treasury Department has already announced that many PPP recipients will be audited, documenting the diligence has the added benefit of contemporaneously building the audit support file.
Obviously, for most PPP recipients, documenting the diligence should include, at a minimum, all information, analyses, and data considered by the business, along with supporting minutes and resolutions of decision-making bodies (Board of Directors/Managers), in making the certifications for the PPP loans. It should also include, in most cases, documentation establishing that legal counsel was consulted—and its advice heeded--regarding all significant eligibility issues.[4] Legal counsel can also help tailor the specific contents of the audit support file to the particular needs of the business, including eligibility issues apart from the certification of economic necessity.
When a party takes a position on an ambiguous statute or regulation that benefits it under a government loan program, not only must it document its diligence at the outset, it must continue to monitor administrative and judicial guidance relating to the ambiguous provision that might “warn away” from the recipient’s preferred interpretation at a later time. As a result, parties who rely on the document-the-diligence approach must make sure are staying abreast of new administrative guidance, further regulations, and future judicial decisions bearing on the meaning of the ambiguous requirement.
This is going to be particularly tricky for the PPP because the rules and guidance are still evolving. Indeed, additional guidance is still expected before May 14. If a new development in the future reveals that the party’s preferred interpretation can no longer be maintained in good faith, it should promptly determine the best way of returning the funds and documenting its diligence in so doing. If, however, new developments fail to resolve the ambiguity or show the party’s interpretation is likely correct, further documentation of that conclusion by legal counsel may also be appropriate.
While the threat of whistleblowers alleging that businesses fraudulently accepted PPP loans is very real, businesses who took the loans—and now worry that they will be on the hook for fraud-type penalties due to the current uncertainty—can take steps to minimize those risks. While no solution is perfect, businesses faced with PPP uncertainty should develop their plan for insulating themselves from possible scrutiny under the False Claims Act now—how long businesses wait to act may also affect whether they are viewed as diligent by a future prosecutor.[5]
Diligence Documents to Build the Audit Support File
Businesses should consider adding documentation to their audit support files that include, among others, current and expected future liquidity; cash flow projections; the cost vs. benefit of workforce reduction; collection and receipts; business closure impacts; available credit as well as other pertinent issues. Parsons Behle & Latimer attorneys are extremely experienced in this area and can assist your business to anticipate critical documentation you need and actions you should take to protect your business, now and in the future. To discuss this or related issues contact Matthew Cook at (801) 536-6819 or send an email to mcook@parsonsbehle.com; Brandon Mark at (801) 536-6958 or send an email to bmark@parsonsbehle.com; Liz Mellem at (406) 333.0530 or send an email to amellem@parsonsbehle.com;
[1] United States v. Wells Fargo & Co., 943 F.3d 588, 595 (2d Cir. 2019).
[2] 31 U.S.C. § 3729 et seq.
[3] United States v. Allergan, Inc., 746 F. App'x 101, 106 (3d Cir. 2018).
[4] While the advice of legal counsel may be initially privileged, a business that later seeks to rely on that advice to avoid liability will have to waive the attorney-client privilege over that advice and all related communications. Care should be taken in all communications with legal counsel.
[5] As should be clear from the Wells Fargo case, cited above, which involved a decision in late 2019 relating to fraud committed under a 2008 program, False Claims Act liability under the CARES Act and PPP will likely stick around for many years.
