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Questionable PPP Certifications Are Poor Prosecution Targets

Posted on May 19, 2020

Applicants who clearly lied in their applications for the Paycheck Protection Program’s (PPP) tax-free forgivable loans will make better targets for criminal investigation than those who don’t fit lawmakers’ ideas of the program’s intended beneficiaries.

“It’s really hard to see how, based on a subjective certification of need that was included in the application, any criminal charges are going to occur unless there was an outright lie in the information submitted,” Larry A. Campagna of Chamberlain, Hrdlicka, White, Williams & Aughtry told Tax Notes.

“I’m sure there are some blatantly false [statements on PPP loan applications], and I think that is where it’s going to go. I don’t think they’re going to get in the business of going in and second-guessing the uncertainty,” Steven Toscher of Hochman Salkin Toscher Perez PC said.

In the wake of reports that large businesses like Shake Shack and the Los Angeles Lakers received millions of dollars in PPP loans, Sen. Marco Rubio, R-Fla., led an outcry questioning how such large enterprises were able to certify in good faith that “uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient.” The PPP was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). Many of the large businesses publicly identified as PPP loan recipients have pledged to return the funds.

In response to the outcry, the Small Business Administration first issued an FAQ warning that public companies with substantial market value and access to capital markets likely can’t certify in good faith that they need the loans. A few weeks later, it complicated matters further by adding another FAQ deeming loans under $2 million to have met the good-faith certification requirement.

This isn’t the first taxpayer certification quandary to raise the specter of criminal prosecution when a taxpayer affirms a set of facts leading to the most beneficial outcome and the government disagrees. In August 2019 the government charged the first taxpayer with falsely certifying that his failure to report foreign bank accounts had been non-willful.

Under the offshore voluntary disclosure program, a taxpayer could disclose previously hidden bank accounts but faced penalties as high as half of the largest balance in those accounts, while a taxpayer whose failure to disclose wasn’t willful could use the streamlined alternative and pay only 5 percent. For years before the announcement of the first charge, the government had been threatening potential criminal charges for false claims of non-willfulness.

Looking Forward to Looking Back

John M. Colvin of Colvin + Hallett said there are both substantial similarities and critical differences between the streamlined program’s non-willfulness certification and the PPP uncertainty statement. Perhaps the most important difference is which prosecutors may be involved in the cases, he said. The foreign bank account prosecutions, including the false non-willfulness certification, involved the Justice Department Tax Division, and PPP prosecutions will likely involve the Criminal Division and the local U.S. attorney offices, he said.

Toscher agreed that the comparison between the two certifications is imperfect. He noted that the streamlined certifications involve what a taxpayer has done in the past and the PPP certification refers to what the applicant fears about the future. It’s much easier to look for false statements about past facts than subjective worry about the future, he said.

Drawing an analogy to the Supreme Court’s recent unanimous reversal of the so-called Bridgegate convictions, Toscher pointed out that “not everything you don’t like is a violation of criminal law.”

Because of the uncertainty that has come with the coronavirus pandemic, especially shortly after the passage of the CARES Act, “almost every company could honestly make that certification that the loan was necessary,” Campagna said. “Hindsight may show that the company actually did very well or very poorly, but that has nothing to do with the uncertainty that was listed at the time of the loan application.”

“The certifications that were made as part of the SBA loan program are so limited and subjective that it’s hard to see where some of the new guidance could be used to make a criminal case,” Campagna said.

Early Indicators

The Justice Department has announced charges arising out of the PPP three times already.

First, two Rhode Island business owners were charged with bank fraud, conspiracy, and identity theft for lying on their PPP applications about the state of their businesses, whether they had any employees they were paying wages to, and in one instance, whether the applicant even owned the relevant business.

“In all investigations of potential crimes, the government tends to start with the cases that are the clearest demonstration that someone lied, cheated, or stole,” Campagna said. That already seems to be the case with the government’s PPP criminal enforcement efforts, given the charges that have been filed so far, he said.

The second announcement involved “a reality TV personality” charged with bank fraud for lying about his intended use of the PPP loan funds. According to the government, after he received a loan of just over $2 million on the promise of using the funds for payroll, the defendant bought $85,000 worth of jewelry (including a Rolex watch) and paid $40,000 in child support. When the federal agents searched his home in early May, they found a 2019 Rolls Royce Wraith that still had a temporary dealer tag.

Colvin said the likely most attractive PPP certification prosecutions — as opposed to other sorts of lies on the application — will probably involve objective facts like a taxpayer making a large bonus payment to an executive or a large dividend payment shortly after the passage of the CARES Act in a way that reduced available capital and thus artificially caused the seeming qualification.

The third Justice Department announcement involved a Texas engineer charged with bank fraud, wire fraud, and false statements for seeking $10 million in PPP loans to support 250 employees when he didn’t employ anyone.

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