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Governmental Oversight and CARES Act Funds: Recent Treasury Department Guidance 

by Lira A. Johnson, D. Michael Crites, Rachel E. Shonebarger

Published: April, 2020

Submission: May, 2020

 



After the nearly $350 billion in funds allocated to the Paycheck Protection Program (PPP) under the CARES Act were depleted in mid-April, Congress has approved an additional $310 billion in funds for the program. These additional funds arrive after a wave of backlash over certain businesses, such as national chains, received PPP loans.


With a new wave of funds comes a new wave of guidance from the Treasury Department, highlighting the intense government oversight companies receiving funds will face. Increased investigations, fraud allegations, and whistleblower claims are on the horizon.


Under the CARES Act, the Small Business Administration (SBA) provides economic relief to small businesses through PPP loans. Some larger businesses meet the eligibility requirements under the act, due to certain exceptions. When funds ran out, some larger entities received backlash for having sought loans under the program. While additional funds are being made available to businesses in need, the Treasury Department has issued additional guidance, narrowing which entities should apply for PPP loans and demonstrating the governmental scrutiny to follow.


The new guidance is targeted toward larger companies’ eligibility for PPP loans. When applying for a PPP loan, the application must certify that the current economic uncertainty renders the loan necessary to support the ongoing operations of the business. The guidance warns of repercussions for businesses that have sources of liquidity sufficient to support their ongoing operations in a manner not significantly detrimental to the business. As such, a publicly traded company is unlikely to be able to make such a certification in good faith and should be prepared to justify the certification, according to the Treasury Department.


Given this narrowing guidance, companies that received PPP loans before the issuance of the guidance may return the loan in full by May 7, and any such certification will be deemed to have been in good faith. Companies that retain PPP loan funds, as well as those that are yet to apply for relief, must prepare for rigorous governmental oversight in the coming months and years. Under the CARES Act, there is a tri-part oversight structure to ensure proper disbursement and use of funds. However, the government will turn to additional channels to ensure enforcement, including whistleblower claims.


The U.S. Department of Justice, for example, has urged individuals to report fraud schemes related to the COVID-19 pandemic and contact the National Center for Disaster Fraud, which then reports to federal enforcement agencies and U.S. Attorneys’ offices. The U.S. Department of Labor, Office of Inspector General, which provides oversight over certain activities under the CARES Act, has also encouraged the filing of complaints regarding potential wrongdoing.


Although many businesses are facing unprecedented hurdles as a result of the COVID-19 pandemic, it is essential to take time now to carefully review loan applications. Due to further guidance being issued, businesses should designate a specific management-level employee who will monitor any additional requirements to ensure compliance. This is especially true for industries that do not participate in federal lending or are not accustomed to enforcement scrutiny and thus may not have certain systems in place.


Although eligibility is not expressly conditioned on being unable to seek funds elsewhere, companies that can obtain funds from other sources should document the present conditions that justify the need for the loan to defend the attestation. An attestation could later be used against the business to commence a False Claims Act action or even substantiate criminal fraud charges, and contemporaneous documentation can be critical to defending these charges.


Finally, businesses need to ensure they have internal reporting systems in place to accept and investigate whistleblower complaints. A failure to do so will likely lead to serious repercussions in the months and years to come.


Taking these steps now can reduce future exposure to civil or even criminal charges upon receipt of economic relief under the CARES Act.


If you have any questions, please contact your Dinsmore attorney or the authors for assistance in employing best practices in mitigating potential fraud exposure.


 



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