November 10, 2020
Authored by: Tim O'Connell and Robert Klingler
A recent article in the Wall Street Journal highlights renewed talk in some circles about allegedly “growing evidence” of fraud among PPP participants. We think the observation of the former federal prosecutor who is quoted in the story is salient. While we wouldn’t phrase it the way the ex-prosecutor does (the “scandal is what’s legal, not what’s illegal”) and we disagree with his disdain for the program, the larger point is important: Congress has spoken—twice—and may speak a third time. In adopting the CARES Act, Congress established a program with small businesses’ self-assessment of their needs as the critical component for eligibility. Congress’s revisions to the PPP at the end of May liberalized several program rules and broadened the amount of loan forgiveness that borrowers could expect. While the existence of fraud, as with any federal program, was predictable, particularly in the rollout of an emergency measure, the WSJ story, and the federal prosecutor, points out that prosecutions are difficult considering that potential defendants would be judged based on the regulations and law existing at the time application were made.
We also think it’s important to put the numbers discussed in the Wall Street Journal article in context. If every one of the suspicious activity reports related to PPP loans, then less than 0.05% of loans were suspicious. If all 500 suspects are guilty of fraud, that represents less than 0.01% of PPP borrowers. If we round up the dollar amount involved to ten hundred million dollars (which any reporter attempting to make a story sound important (or evil mastermind transported forward in time) would round to one billion dollars), then less than 0.2% of money lent under the Paycheck Program was fraudulent.
The WSJ story comes at a time when we have seen many accounting firms and a number of lawyers circulate the draft SBA Loan Necessity Questionnaire for For-Profit and Non-Profit Borrowers. “questionnaires.” The questionnaires state that they will be used in cases of PPP loans greater than $2 million “to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application … that economic uncertainty made the loan request necessary.”