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    Small Business Owners Risk Jail For PPP Fraud

    The Paycheck Protection Program (PPP) was hailed as a big step towards alleviating the pandemic-driven problem faced by US businesses. Yet, due to the sheer scale and size of the program, fraud prospered. According to the US Attorney General, as of May 2020, 15 to 20 of the largest loan processors reported evidence of applicants inflating their payroll costs. 

    It is difficult for banks to verify the number of employees claimed by applicants, creating a vulnerability in the system. The Department of Justice has started prosecuting the first cases.

    What PPP Did Businesses Receive?

    The CARES Act includes three funding packages:

    • Economic Injury Disaster Loan Program
    • Paycheck Protection Program
    • Tax Relief

    PPP was created to help small businesses impacted by COVID-19 retain their employees. It makes up the largest segment of the CARES Act.

    As a small business, you are eligible to apply for a maximum of $10 million, or 2.5 times your average monthly payroll. Interest on the loan is capped at 4%.

    If you use 75% of the PPP loan to cover your payroll, you are free to invest the balance to cover other priorities and still be eligible for loan forgiveness.

    With a bit of creativity and strategic planning, you can use your PPP loan to thrive in the post-COVID-19 business word. For instance, if you own a small retail business, you can use your PPP loan to:

    • Prepay the rent on your retail sites. This will put you in a position to negotiate lower rents, reducing your operating costs over the long-term.
    • Buy equipment, inventory, and improve your facilities. You forfeit the forgiveness aspect of the PPP loan, but if you use the money to invest in measures that will increase future sales, you will have no problem repaying a loan.
    • Keep the money on hand to improve your liquidity. If the pandemic continues, your financial health could deteriorate, making it difficult to apply for other types of business loans.

    Question Marks Over Eligibility

    PPP was rolled out quickly, creating confusion as eligibility and policies evolved. For example, the original guidelines required applicants to certify in good faith that they needed the PPP loan to support ongoing operations. This opened the door to larger businesses that were able to weather the disruption. After being exposed, these businesses returned the funds.

    Confusion about eligibility and forgiveness, as well as audit risk, has deterred many small businesses from applying, citing that they fear a DOJ audit more than the IRS. Innocent mistakes could easily be made. Additionally, loan forgiveness calculations are challenging for businesses with multiple employees.

    What Fraud Is Taking Place?

    The majority of small business applications are legitimate. Still, there is a growing list of companies that have made fraudulent claims or misused loan funds. Some egregious examples include:

    • A trucking company received a PPP loan claiming a monthly payroll of $1,490,200 to support 107 employees. The company received more than $2 million. The owner used $1.5 million of the loan to purchase expensive jewelry and pay child support.
    • A software engineer created a fake IT company and was approved for more than $1 million in PPP funding. He provided a false EIN, which he had recently received from the IRS, and claimed to have 20 employees.
    • One company strengthened its application by claiming that it was in the business of manufacturing protective equipment and COVID-19 test kits. After asserting hundreds of employees on the payroll, the company fraudulently received more than $1.45 million in PPP loans.

    What Can The Authorities Do?

    Presently, the government is focused on small businesses that received the largest PPP loans. Those who received less than $2 million are considered as having made a good faith effort to certify their eligibility before applying.

    The government has pooled its resources, forming a multi-agency collaboration with the SBA, FBI, IRS, and FDIC to investigate PPP fraud. Investigators are using undercover measures to obtain evidence and whistleblower testimony.

    Charges being brought include making false statements on loan applications, conspiracy to commit bank fraud, and aggravated identity theft. Fraudsters face hefty fines and jail time depending on the charges.


    The Paycheck Protection Program is a generous government program that can keep your small business afloat during this pandemic. If you keep your employees on the payroll, it will be that much easier to get back into business post-COVID-19. 

    Unfortunately, eligibility requirements and forgiveness rules have been confusing. Moreover, vulnerabilities in the system have created a welcoming climate for fraudsters. 

    Yet, if you have moved past your apprehension and applied for a PPP loan, remember that there are many ways you can use it to strengthen the operational health of your small business. Most importantly, keep accurate records and avoid raising red flags.