As the Department of Justice (DOJ) made clear when it announced its False Claims Act (FCA) enforcement priorities for 2024 earlier this year, it intends to actively investigate and seek recoveries for false claims and fraudulent activity relating to pandemic relief programs. Two recent settlements illustrate the DOJ’s sustained focus on the misuse of COVID-19 funds, and Paycheck Protection Program (PPP) loans in particular.

In the first case, bankrupt online lender Kabbage Inc. agreed to pay $120 million to settle allegations it defrauded the PPP by knowingly submitting thousands of false claims for loan forgiveness, loan guarantees, and processing fees to the U.S. Small Business Administration (SBA). The DOJ found that Kabbage approved PPP loans for ineligible borrowers and failed to comply with other program requirements.

In its May 13 press release announcing the settlement, the DOJ stated that—in addition to knowingly submitting false claims—Kabbage failed to implement the appropriate fraud controls necessary to comply with its PPP obligations. These failures included:

• Removing underwriting steps from its pre-PPP procedures to process a greater number of PPP loan applications and maximize processing fees;
• Knowingly setting substandard fraud check thresholds despite knowledge that fraudulent borrowers might seek to benefit from the PPP;
• Relying on automated tools that were inadequate in identifying fraud;
• Devoting insufficient personnel to conduct fraud reviews; and
• Discouraging its fraud reviewers from requesting information from borrowers to substantiate their loan requests.

In the second PPP case settled this month, the DOJ announced on May 9 that a solar energy company agreed to pay $425,710 to resolve allegations it violated the FCA by inaccurately reporting its average monthly payroll amount when it applied for its PPP loan.

According to the DOJ’s press release, Freedom Solar overstated its payroll costs on its April 2020 PPP loan application by failing to cap the annual salary of certain employees at $100,000 when it applied for the loan. For purposes of calculating payroll costs, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act excluded any compensation to an individual employee in excess of an annual salary of $100,000 and only permitted small businesses to receive a PPP loan that totaled 2.5 times the business’ average monthly payroll. By failing to cap the annual salary of several of its employees, Freedom Solar applied for—and received—more PPP funds than it should have.

The settlement resolved a lawsuit against Freedom Solar filed by a whistleblower under the qui tam provision of the FCA.

Both settlements evidence that the DOJ continues to investigate the misuse of PPP loan funds as a top enforcement priority in 2024. We expect COVID-19 related investigations, whistleblower actions and affirmative litigation (and resulting settlements) to continue for years to come—in particular, because Congress extended the statute of limitations for PPP fraud from 5 to 10 years by passing the PPP and Bank Fraud Enforcement Harmonization Act of 2022. The law allows for criminal charges and civil enforcement against borrowers who defraud PPP loans until 2031. The long limitations period means that entities that received PPP funds in 2020 or 2021 must exercise diligence and transparency in their accounting and record-keeping practices for the foreseeable future to guard against FCA risk and be best positioned to defend against government investigations and FCA litigation.

If you have any questions regarding False Claims Act investigations or litigation, please contact our Enforcement Insider Editors Rosie Dawn Griffin (rgriffin@feldesman.com) and Mindy B. Pava (mpava@feldesman.com) or call 202.466.8960. Be sure to also check out our Enforcement Insider blog to stay up to date on the latest enforcement actions and court decisions of interest to federal grantees.