Noted with Interest: PPP Hangover: Government Escalates Crackdown on Alleged PPP Loan Fraud

Years after the Covid pandemic subsided, U.S. regulators and prosecutors are escalating their crackdown on businesses and individuals they believe improperly obtained Paycheck Protection Program (“PPP”) loans during the height of the crisis.  In just the past few months, the Department of Justice has announced multi-million dollar False Claims Act settlements in several high-profile cases, including against Herb Chambers, a billionaire car dealer in New England; Azumi Restaurants, Ltd., a chain of high-end Japanese restaurants that operate under the “Zuma” name, among others; and  Delta Air Lines (under the comparable Payroll Support Program for airlines).  This trend is likely to continue, and even potentially expand into enforcement against lenders and financial technology companies that processed and approved fraudulent PPP loans, given that this effort aligns with the Trump Administration’s priority of eliminating waste, fraud, and abuse from government programs, as well as the Department of Justice’s recently published principles guiding the prosecution of white collar crime. See Matthew R. Galeotti, Head of the Criminal Division, Focus, Fairness, and Efficiency in the Fight Against White-Collar Crime (May 12, 2025) (“[T]he Criminal Division will prioritize investigating and prosecuting white-collar crimes in the following high-impact areas: 1. Waste, fraud, and abuse, including health care fraud and federal program and procurement fraud that harm the public fisc.”)

Hundreds of billions of dollars of PPP loans were distributed and forgiven by the federal government in a rapidly scaled program, when demand for PPP loans was high and the nation was plagued by uncertainty and fear at the outset of the unprecedented COVID-19 pandemic.  Now that the dust has settled, the government is revisiting those loans and looking for opportunities for civil and criminal enforcement.  Scrutiny of PPP loans will almost certainly land on both conscientious business owners who made mistakes in their applications, as well as on fraudsters who intentionally sought to profit from knowing falsehoods.  Separating one from the other may be difficult in certain circumstances, and the consequences of being targeted could be severe, including costly investigatory processes, as well as civil and criminal penalties, fines, and even prison sentences.

The CARES Act and the Establishment of the Paycheck Protection Program

Congress enacted the CARES Act in March 2020 in response to the Coronavirus pandemic. Section 1102 of the Act established the PPP in order to “provid[e] small businesses with the funds necessary to meet their payroll and operating expenses and therefore keep workers employed.” Springfield Hosp., Inc. v. Guzman, 28 F.4th 403, 409 (2d Cir. 2022). “[A]ny business concern” could be “eligible to receive a [PPP] loan if” it had not more than 500 employees or otherwise did not exceed the SBA’s applicable industry employee size standard for small businesses, whichever was larger. 15 U.S.C. § 636(a)(36)(D)(i)(I)–(II). The applicable industry size standard, in turn, depended on the business’s North American Industry Classification System (“NAICS”) code.  Applicants with business activities spanning multiple NAICS codes needed to determine which code represented the primary focus of their work.  For most businesses, when determining whether the business employed fewer than the applicable maximum number of employees, the SBA required that the applicant count all employees directly employed by the business as well as those employed by any of the business’s “affiliates.”  Whether a company qualified as an “affiliate,” however, turned on yet another regulatory provision containing additional factors and tests.  Adding still another wrinkle, businesses in the accommodation or food services industries were exempted from counting the employees of their affiliates. 15 U.S.C. § 636(a)(36)(D)(iv)(I).   Small businesses, lenders, and application processers at fintech companies tried to make these decisions quickly, before the allocated PPP funds were depleted.

Civil and Criminal Liability

Perhaps unsurprisingly, given these requirements, the rush, and the availability of PPP loans for individuals and small businesses without prior SBA experience, many individuals and companies ended up requesting and receiving PPP loans to which they were not entitled. Once the government is alerted to what it believes to be a wrongfully obtained PPP loan, it has a decision to make: whether to resolve the matter administratively (i.e., the recipient of the loan simply pays it back) or to investigate and potentially pursue the loan recipient civilly or criminally. 

Those facing civil investigations for PPP loan fraud are typically accused of knowingly certifying compliance with regulatory eligibility requirements for which they were not, in fact, eligible.  Such knowingly false certifications can serve as the basis for civil FCA claims.  For example, the government may claim that a company knew that it was not eligible for a PPP loan because it exceeded SBA size limitations, but nonetheless signed a PPP loan application stating that it was eligible. The knowing element here could presumably be proven through the testimony of a whistleblower or inculpatory statements. 

FCA liability can also attach to entities that helped process and submit fraudulent PPP loan applications that they knew or should have known were false.  There is, of course, a significant difference between, on the one hand, business owners who may have been confused by PPP regulations during COVID and applied for loans they were not entitled to and, on the other hand, sophisticated banks and fintech companies that knew they were processing fraudulent loans but turned a blind eye in order to reap profits.  The latter has already been the focus of Congressional scrutiny, see "We Are Not The Fraud Police: How FinTechs Facilitated Fraud in the Paycheck Protection Program," Staff Report, Select Subcommittee on the Coronavirus Crisis, Dec. 2022, (accessible at https://coronavirus-democratsoversight.house.gov/sites/democrats.coronavirus.house.gov/files/2022.12.01%20How%20Fintechs%20Facilitated%20Fraud%20in%20the%20Paycheck%20Protection%20Program.pdf), and is likely to be the subject of  government enforcement efforts coming down the pike. Criminal PPP cases typically involve allegations that records have been deliberately falsified or even fabricated.  For example, the target of a criminal PPP case not only may have certified compliance with regulatory eligibility requirements, but also allegedly have submitted doctored documents such as payroll and bank statements, in support of its loan applications. Individuals who have been convicted for fraudulently obtaining millions of dollars in PPP loans have received years-long prison sentences. See U.S. Att'y's Off. for the N. Dist. Tex., Mansfield Woman Sentenced to 7 Years in Prison for $8.5 Million PPP Fraud (Jan. 16, 2025), available at https://www.justice.gov/usao-ndtx/pr/mansfield-woman-sentenced-7-years-prison-85-million-ppp-fraud; IRS, Texas Couple Sentenced to Federal Prison for COVID Era PPPP Loan Fraud (Oct 4, 2024), available at https://www.irs.gov/compliance/criminal-investigation/texas-couple-sentenced-to-federal-prison-for-covid-era-ppp-loan-fraud; U.S. Att'y's Off. – N. Dist. Ohio, Ohio Man Sentenced to Prison for Paycheck Protection Program Loan Fraud Totaling More than $2M (May 21, 2025), available at https://www.justice.gov/usao-ndoh/pr/ohio-man-sentenced-prison-paycheck-protection-program-loan-fraud-totaling-more-2m.

Of course, some cases warrant neither civil or criminal enforcement. Where the government lacks evidence of knowing or intentional wrongdoing, and the issue instead appears to be the result of innocent mistake by a business during a global pandemic, PPP loan disputes can (and should) be resolved via administrative repayment of the wrongfully obtained funds.

Whenever anyone becomes aware of any government investigation into a PPP loan that was potentially wrongfully obtained, the first question is simple: whether the loan was, in fact, wrongfully obtained?  Given the complicated regulatory regime and the government’s imperfect information regarding private businesses, it is possible that the government regulator or prosecutor, or the qui tam relator, simply has the facts wrong.  The best way to short-circuit an investigation into potential PPP fraud is to review the regulations and facts carefully to demonstrate that the loan was proper.

However, in cases where an investigation has developed to the point that the government is making contact with companies or potential witnesses, there is likely a viable argument that a loan was wrongfully obtained.  At that point, the critical question is whether there is evidence of  knowing or intentional misconduct to obtain a loan to which the recipient was not entitled.  Even if the government can show that a person or company made a statement that proved to be false (concerning eligibility, workforce size, revenues, business classification, or something else), in the course of obtaining a loan, there is no liability or criminal exposure if the government cannot also prove that the false statement was knowingly or intentionally made.   In certain circumstances, reliance on the advice of counsel may be a viable defense.

Any company that has been contacted by lenders, federal regulators, or prosecutors regarding PPP loans that were allegedly wrongfully obtained or approved should tread carefully.  Cooperation may be beneficial, and yet initial communications with the government can have a big impact on your ability to defend and resolve allegations of wrongdoing successfully.