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SS+D COVID-19 Response Team: Feds Announce Robust Enforcement and Audit Plans for Certain PPP Recipients

May 1, 2020 | Sebaly Shillito + Dyer

Practice Areas

Corporate Law

The Department of Treasury recently announced businesses that have borrowed Paycheck Protection Program (PPP) funds may be subject to audit before loans are forgiven. The audits are intended to prevent fraud and self-dealing and to ensure that businesses use PPP funds only for authorized purposes. Treasury Secretary Steven Mnuchin stated on April 28 that recipients of PPP loans of $2,000,000 or greater will be audited. While we anticipate audits will be focused on businesses that received larger loan amounts, there is no assurance that small loan recipients will not be subject to audit.

We are recommending to our clients that they consult with us and other advisors to begin compiling supporting documentation to validate their basis for applying for PPP loans. Upon applying PPP loans, each business must certify in good faith that current economic uncertainty makes the PPP loan necessary to support the ongoing operations of the business. Audits will seek to verify that these certifications were accurate and made in good faith, among other things.

Each PPP loan recipient should consider having a memorandum prepared that documents its activities and status prior to applying for a PPP loan as well as during the life of the loan. Some loan recipients are subject to risk if an audit reveals the PPP loan was not “necessary.” According to recent guidance issued by the SBA, businesses should take into account “their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business” before certifying the PPP loan is necessary. This new guidance creates some question around the SBA’s previously clear position that businesses were not required to seek credit elsewhere before applying for PPP loans. This might be especially worrisome for businesses that fare particularly well through the COVID-19 crisis or who have significant, untapped access to liquidity.

Concerned borrowers may repay their PPP loans before May 7, but they should seek counsel before finalizing their decision to do so. A certification not made in good faith or otherwise knowingly false could result in civil and/or criminal liability. Any borrower that applied for a PPP loan on or before April 23 will be granted safe harbor from audit and further scrutiny if it repays its PPP loan in full on or before May 7. It would be prudent to seek experience counsel before doing so.

If you have any questions or concerns about how to handle your PPP funds, please call us at 937-222-2500 and ask for a member of SS+D’s COVID- 19 Response Team.

The SS+D COVID-19 Response Team was formed to provide clients, colleagues, and friends of the Firm updates for the foreseeable future on COVID-19 issues facing businesses, executives, and employees. Please let us know if there are any items/issues you would like for us to track or summarize.

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Sebaly Shillito + Dyer