Strategies for Improving CARES Act Oversight

white and blue come on in we ere open signage Photo by Tim Mossholder on

In the wake of the economic downturn caused by the outbreak of COVID-19, Congress passed the CARES Act to financially protect those most affected. Among several programs signed into law by President Trump, the Paycheck Protection Program (“PPP”) offered low-interest, oftentimes forgivable loans to struggling small businesses. Additionally, the CARES Act increased the funding and eligibility for the Small Business Administration’s (“SBA”) Economic Injury Disaster Loans. Thus far, more than 14.5 million loans and grants were provided under the programs, totaling $729 billion.

Constrained by time, SBA moved quickly to approve loans and grants to prevent any further economic damage. In the two months following the implementation of PPP, Eighty-five percent of the programs’ loans were provided. Indeed, within the first few weeks of the program, Seventy-five percent of the loans over $2 million were provided. This deliberately hasty process quickly became rife with fraud.

In a recent testimony, the Director of the Financial Markets and Community Investment division of the Government Accountability Office, William Shear, highlighted SBA’s self-certification program as one of the main fraud risks associated with PPP. The CARES Act required borrowers “certify in good faith that (1) current economic uncertainty made the loan request necessary… and (2) the funds would be used to retain workers and maintain payroll….” Once self-certified, SBA simply confirmed the borrower’s certifications, reviewed supporting documents, and provided the loan.

Because of this streamlined approach, detecting fraud in the inducement of the loans was highly improbable. Instead, SBA and the Department of Treasury announced in April 2020 that loans in excess of $2 million (20% of approved loans) would be reviewed after the borrower requested loan forgiveness to ensure good faith. In May 2020, SBA further expanded the scope of its audits to include any facet of a PPP loan. Despite this broad authority, Shear reports that SBA has developed few rules and guidelines for these investigations.

Recently, the Department of Justice (“DOJ”) began working with the banks who facilitated the loans to investigate particularly egregious cases of fraud in the inducement of PPP funds. In September 2020, 57 individuals were charged by the DOJ, totaling $175 million in fraudulent transfers. To avoid prosecution and penalties, SBA will allow recipients to correct their documents and requests. In addition to ensuring good faith, the corrected information will better help SBA identify fraud via data analytics.

Following the August 8 deadline for PPP applications, there have been widespread calls to redouble PPP. If enacted, SBA would have significantly more time and institutional knowledge to properly implement PPP without fear of the same fraud risks present in April. However, SBA oversight should not unnecessarily stall the PPP process as small business have been disproportionately impacted by the economic downturn. Further, many service-based small businesses may suffer further as cold weather could prevent outdoor accommodations.

Going forward, SBA should more closely examine loan applications requesting $2 million or more. Although these loans would automatically be reviewed upon a request for forgiveness, a temporary misallocation of these funds could prevent another small business from obtaining relief, potentially leading to insolvency. To further deter fraud, the SBA should issue clear rules and guidelines regarding the audit process. Inconsistent penalization of fraud will ultimately deter borrowers from requesting PPP loans.

Since the September announcement of criminal charges against 57 individuals connected to PPP fraud, the DOJ has not publicly announced any further action. Publicization of these charges should discourage would-be fraudsters from improperly attaining public funds. In sum, the watchful oversight of SBA alongside the swift and public prosecution of fraud in the Paycheck Protection Program can help protect the integrity of future small business protection programs.