To many small businesses, the federal stimulus program that provided money to pay employees during the pandemic was a critical lifeline. But if those business owners aren’t precise with their paperwork, that grant could turn into a loan or, worse, a criminal fraud charge.
“It’s a new subject and it is related to fraud,” said Arkady Bukh, a New York federal defense lawyer who works with businesses to keep them out of trouble or get them out of trouble. In some cases, he has urged clients to return the federal Paycheck Protection Program funds to avoid fraud charges. In other cases, he said, he guides them on how to keep proper records to avoid federal scrutiny.
The PPP was established in the wake of the COVID-19 pandemic to help keep small businesses afloat and allow them to keep paying employees. Each grant requires that employers spend 60% of the money on payroll; otherwise, it turns into a loan that must be paid back. If the money is spent frivolously or is intentionally misused, it could create serious legal problems.
Since the focus of the PPP is to ensure employees continue to get paid, loan forgiveness will be reduced for borrowers if, for example, their employee head count goes down without proper explanation, according to the Small Business Administration. In that case, less of the loan would be forgiven by the bank or the SBA and the borrower will be required to pay back loan money at 1% interest.
That is a problem for some right now, Bukh said, because some employees are choosing to stay home and collect an extra $600 in weekly unemployment payments the federal government is providing for many.
“Those PPP funds are a lifeline, assuming those people come back to work, but they are not because they are collecting $600 a week without having to work,” he said. “The business is trying to keep it as a gift, and not as a loan.”
However, under PPP rules, if a business can show in writing that it attempted to rehire someone but they refused to come back, it does not count against them, said Atlanta Financial Consultant Chris Tierney, with the firm of Moore Colson.
“We’ve had clients who called up and said, ‘these people are making more money sitting out and I can’t get them to come back.’ The process is there to help you get your forgiveness, but you have to show you went through the process.”
Get it in writing, Tierney said.
The other issue with the PPP is that businesses are concerned if they spend the money incorrectly, they will be accused of embezzlement.
“We get a few inquiries about that every week,” Bukh said. That makes keeping careful records even more important, he said.
“Right now, people are pulling all this information together and there are some key things they need to take into consideration to get through this as unscathed as they can,” he said. “The government has set this up so that everybody gets forgiven. They don’t want people to have unforgiven loans. We’ve talked to people to get them pre-ready. The biggest thing people need to realize is the bank and the SBA are not going to do your work for you. They are merely there to process information and make sure your math works and that’s it. It’s not like giving your accountant your box of receipts. You’ve got to have a neat clean package that makes sure 1 plus 1 equals 2. Bad accounting can get you in trouble.”
The SBA and banks will look at who is trying to game the system, Tierney said.
“Did you really use the money for the purpose it was intended?,’’ he said. “If they think your numbers don’t match up you are going to get reviewed, or have your forgiveness delayed. We told people at the beginning, now is not the time to do something naughty. You’ve seen them on the news, the guy who takes the money and buys jewelry and a car. Those people are going to go to jail.”
There have also been cases of employee whistleblowers who have accused an employer of intentionally stealing PPP by “creating something which does not exist, like employees,” Bukh said. So far, there have been no prosecutions, but there are inquiries.
“I already had a few cases where PPP money was fraudulently obtained and I have to explain to my client that the money is stolen and it is a matter of time before the feds will knock at your door. They then just send it back.”
“The best way to show them you didn’t use money fraudulently is to have accurate information,” Tierney said. “Feed it to them with a spoon. Make sure the accounting is right. If somebody feels they can’t do the accounting correctly, find someone who can help. What I tell people is this is in essence; this is free money. If you must spend a little to get a lot, that’s a lot of free money.
“Get forgiveness quickly and move on,” he said. “The people who are sloppy and don’t have their ducks in a row, that’s going to take a long period of time.”