The Department of Justice has begun a crackdown on fraud in the Paycheck Protection Program ("PPP"), one of the main components of the federal government's COVID-relief efforts. Earlier this month, that crackdown reached Buffalo, as two local businessmen who own 5 Sterns, Inc. a cell tower installation and maintenance company, were charged with defrauding the PPP of more than $600,000.
The PPP is administered by the U.S. Small Business Administration Office. In order to obtain a PPP loan, borrowers were required to attest that the money would be used to retain employees or bring back employees who had been furloughed due to the pandemic, and the loans are forgivable if the terms are met.
Fraud in the procurement of PPP loans, or in seeking forgiveness of those loans, subjects the perpetrators to wire fraud and bank fraud, as well as potential liability under the False Claims Act. The False Claims Act also has a whistleblower component, which provides financial rewards to individuals who report fraud in programs like PPP. In fact of the $3 billion in settlements and judgments reported by the government in fiscal year 2019, over $2.1 billion arose from lawsuits filed under the whistleblower, also known as qui tam, provisions of the False Claims Act.
According to the allegations contained in the complaint, the Buffalo case appears to be outright fraud. According to an article appearing in the Long Island newspaper Newsday earlier this month, "[t]he brothers inflated 5 Sterns’ payroll of fewer than a dozen employees to about 200 to secure larger loans, offering false tax returns and other documents as proof, FBI agent Kathleen A. Garver said in the criminal complaint."
While I hope that no one reading this engaged in brazen abuse of the PPP such as alleged here, the story carries with it lessons for well-intentioned small businesses as well. It is important to remember that accurate record-keeping is critical. You should always be prepared to substantiate all claims made by your company with respect to PPP and any other federally run program.
Officials say the two brothers allegedly participated in a scheme to file fraudulent loan applications seeking nearly $7 million in PPP loans from the Small Business Association under the CARES Act. “These brothers allegedly stole more than $600,000 which was intended to assist businesses and employees that have been crippled by the pandemic,” said U.S. Attorney James P. Kennedy. “Their greed in the face of a national crisis has rightly landed them in federal court under indictment. We will investigate and charge anyone who seeks to use emergency federal aid as a way to try to get rich quick.”
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