As the United States acts to contain the economic damage caused by the ongoing coronavirus outbreak, a substantial portion of relief efforts have focused on small businesses. On March 27, 2020, Congress approved $349 billion in the Coronavirus Aid, Relief and Economic Security (CARES) Act for the Small Business Administration (SBA) to help small businesses. The SBA loans and guarantees could be lifelines for businesses in dire need of financial relief during this global pandemic. But assistance from the federal government rarely comes without conditions and restrictions. Failure to comply with the many regulations that will attach to such assistance could result in fines, penalties, or worse for borrowers that fail to exercise proper diligence in applying for and using the funds from these loans.

Businesses interested in availing themselves of these programs should recognize the risks of criminal and civil prosecution for inaccurate or incomplete information in SBA loan applications or for failing to follow the requirements for the use of the funds obtained. Experience shows that once an immediate crisis is over, the SBA, the Department of Justice and other federal enforcement agencies scrutinize those that have accessed the federal assistance program. Years later, mistakes made at the time of the loan may look like fraud to enforcement agencies with the luxury of time not available to the borrower or the SBA during the crisis. Prospective borrowers should therefore proceed with caution and diligence in requesting loans under this program.    

CARES Act and 7(a) Loans

As passed by the Senate, the CARES Act amends section 7(a) of the Small Business Act to add an entirely new section entitled the “Paycheck Protection Program.” Although a part of section 7(a), this lending program differs from small business loans previously provided under the SBA’s familiar “7(a)” loan program. Requirements have been changed to make loans more broadly and more rapidly available. Yet the loan program still includes significant qualification criteria and utilization requirements for borrowers. Additionally, some benefits to borrowers are contingent upon using the funds for specific purposes. In short, access to these loans, and the many potential favorable terms afforded by them, is dependent on compliance with the many rules established in the CARES Act and any subsequent regulations and guidance from the SBA. 

First the Crisis, then Enforcement

The unprecedented circumstances under which these loans will be made available will create extreme time pressure for all involved. First, borrowers, desperately in need of funds, may submit rushed applications without typical careful review. Second, the SBA, and its affiliated lenders, will be under enormous pressure to move quickly to get funds in the hands of borrowers to stave off financial ruin. The enormity of this job is clear from the sheer amount of money SBA will be expected to distribute. The current funding level for this program is $349 billion for the period from February 15, 2020, through June 30, 2020.  For some perspective, the SBA has made less than $30 billion in loans per year in recent fiscal years. The SBA will now be called on to pump out nearly 12 times that amount in the next three months.

Federal authorities are keenly aware that such circumstances raise the specter of fraud as SBA lenders seek to approve as many loans as possible in a highly compressed time period. In a 2019 report to Congress, the Office of Inspector General for the SBA stated, “OIG and GAO audits have identified that SBA’s disaster loans have been vulnerable to fraud and losses in the past because loan transactions are often expedited in order to provide quick relief to disaster survivors, and disaster lending personnel, who are brought into the workforce quickly, may lack enough training or experience.”

While the government’s priority during a time of crisis is decidedly and justifiably in favor of getting loans issued and money into the hands of strapped businesses, the time will come when prosecutors set their sites on recovery of those funds it believes were fraudulently obtained.  Several provisions in the CARES Act demonstrate the government is aware, and preparing for, potential fraud against the various programs created by the act.  First, a congressionally confirmed inspector general and oversight board will be appointed to oversee certain pandemic relief funds.  Second, specific funding of the Offices of the Inspector General for government agencies has been included in parts of the act. Like other major government spending efforts, such as TARP and the Iraq Relief and Reconstruction Fund, we can expect years of enforcement activity following the initial phase of lending under this program.

Consequences for Borrowers 

The consequences of enforcement action against borrowers can be ruinous. Criminal liability may attach under several statutes, and civil liability attaches under the False Claims Act and the Financial Institution Reform, Recovery and Enforcement Act (FIRREA). Even in cases where the government determines that the borrower did not commit fraud, a government investigation brings financial and reputational costs that are best avoided.   

On the criminal side, a knowing false statement for the purpose of influencing an action by the SBA is punishable by up to $1 million in fines and up to 30 years in prison (18 U.S.C. 1014). Additionally, such actions would also be subject to the mail and wire fraud statutes, violations of which can result in criminal fines and significant time in prison. A false statement on a loan application is the first step to potential investigation for violation of these laws. 

The risk of civil liability is equally great. The government can hold a borrower responsible for up to three times the amount of the SBA loan if the borrower made a false statement in the loan application or other representations to the government with “reckless disregard” for the truth or falsity of that statement. The relevant statute, the federal False Claims Act, is the government’s primary enforcement tool for clawing back federal money that was obtained through false representations to the government. False statements can include a statement in the loan application that led the lender to approve the loan, or subsequent representations regarding utilization of funds provided by the loan. Finally, the government can also institute million-dollar penalties under FIRREA for false statements to the SBA. Under FIRREA, however, the government doesn’t even need to show any loss on the loan.

What to Do?

The worldwide outbreak of the coronavirus presents an unprecedented combination of both a health and economic crisis. Many businesses will find that they must avail themselves of federal government money available through the SBA. Mitigating the risk of back-end scrutiny by enforcement agencies begins when a borrower decides to take an SBA loan. History teaches us that fraudsters will attempt to take advantage of these programs and be pursued by enforcement authorities after the crisis. Legitimate borrowers should therefore take reasonable measures to make sure they are not unfairly swept up in such enforcement activities. Here are some things to consider:

• First, no matter what the time pressure, take the application and every statement in it seriously. Although the government might forgive its own lack of diligence during a time of crisis, it will not forgive yours.
• Second, be aware of the loan programs eligibility requirements.
• Third, be diligent in ensuring every piece of information provided to the SBA is accurate. Finally, government funding rarely comes without strings attached. Be aware of the requirements attached to the government funds.

Although these are unprecedented times, history shows that fraud – and enforcement actions – follow the money. With an enormous new government program, legitimate businesses should still proceed carefully. If you have questions about the process, experienced counsel can help.