Paycheck Protection Program Loans and Certifying “Necessity”: New Guidelines Highlight Potential Civil and Criminal Exposure Related to Obtaining PPP Loans

COVID-19 Update

Date: May 02, 2020

Key Notes:

  • The government’s position on PPP eligibility continues to evolve since the launch of the program.
  • Borrowers should carefully reevaluate whether their PPP loans are “necessary” in light of new federal guidance and consider whether to return the funds without liability by the safe harbor deadline of May 7, 2020.
  • Audits will be initiated for all loans ≥ $2 million, and borrowers should be cognizant of the potential civil and/or criminal liability that may result from improper use of PPP loans.

Our prior client updates, CARES Act: Paycheck Protection Program – Forgivable Loans for Small Businesses and Paycheck Protection Program: Borrowers Must Plan Now to Maximize Loan Forgiveness, describe how the Paycheck Protection Program (PPP), enacted by Congress as part of the CARES Act, enables eligible small businesses to obtain forgivable loans to be used primarily in meeting payroll costs.

Since then, the government’s position on various issues related to eligibility has continued to evolve, sometimes on a daily basis.

On April 23 and 28, 2020, the Treasury issued additional guidance regarding loan eligibility, the most significant of which is an attempted clarification on the criterion of whether a PPP loan is “necessary” to sustain the business. The Treasury also set a “safe harbor” deadline of May 7, 2020 for any business that applied for a PPP loan to safely return the funds if, upon further review, it determined that the loan was not necessary, thereby avoiding potential civil or criminal liability.

The import of these actions is that, this week, businesses that received PPP loans should reexamine their certification of “need” under the new criteria and make the important decision of whether they in fact satisfy the eligibility criteria for these loans, or whether they should return them.

The Good Faith Certification of Necessity

The PPP loan application form requires the borrower to certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” While the Fourth Interim Final Rule issued on April 20, 2020, attempted to clarify what “ongoing operations” meant, it was not until April 23 that either Treasury or the Small Business Administration (SBA) addressed what “necessary” meant in the context of the certification.

Treasury Issues Guidance on “Necessity,” Provides for a Safe Harbor

On April 23, 2020, the Treasury Department published on its website an updated FAQ regarding the PPP loans, which was later incorporated in substance into the Interim Rule released on April 28. Included in that FAQ publication was the question:

Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP loan?

While Treasury’s response reiterated that the CARES Act “suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere,” it went on to state that “borrowers still must certify in good faith that their PPP loan request is necessary.”

The Treasury publication explained further that “[b]orrowers must make this certification in good faith, taking 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.”

In an attempt to clarify the seeming tension here, the Treasury provided the following example:

[I]t is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA … the basis for its certification.

These issues are important because, as described elsewhere, false certifications can be the basis for both False Claims Act and other civil claims, as well as potential criminal liability for false statements in the application, and also because the government announced that all loans of at least $2 million will be audited.

At the same time, the Treasury also announced a “safe harbor” deadline of May 7, 2020, for the return of PPP funds if, in light of the new guidance, a loan recipient determined that it was mistaken in its certification of necessity. Any borrower that returns the money by May 7, 2020 will be deemed to have made its previous certification of necessity “in good faith.”

Treasury Limits Aggregate Loan Amounts to Corporate Groups, Announces Intent to Audit

On April 30, 2020, the Treasury issued further guidance in the form of another new Interim Rule, stating that PPP loans are capped at $20 million in aggregate to any “single corporate group.” The Interim Rule defined single corporate group as “businesses … majority owned, directly or indirectly, by a common parent.” The Treasury stated that any single corporate group that has applied for more than $20 million must cancel or withdraw its request for undisbursed loan amounts beyond that cap; failure to do so would result in the entire loan amount being ineligible for forgiveness.

Finally, and equally significantly, Treasury has advised that all recipients of PPP loans of $2 million or more will be audited in the future.

Important Considerations for PPP Loan Recipients and Potential Civil and Criminal Exposure

The Treasury’s guidance leaves much to be desired, and there is no simple answer as to whether a business has properly certified in good faith that a PPP loan is “necessary to sustain its ongoing operations.” Nevertheless, there are several strategic considerations that PPP loan applicants and recipients should consider immediately before the May 7, 2020, safe harbor deadline expires.

First, any business that has applied for or received PPP loans should review whether it followed the best practices suggested in our prior bulletin (Paycheck Protection Program: Borrowers Must Plan Now to Maximize Loan Forgiveness) regarding how best to position the business for loan forgiveness. Many if not all of these practices would equally serve the business in supporting its good faith certification of necessity. In particular, a business should make sure that its PPP loan application was submitted following sufficient diligence to support its good faith determination. In the same vein, a business should take care to document its processes and deliberations relating to its PPP loan application.

Second, a business should consider the threat of potential civil liability and/or criminal prosecution. While the risk of either cannot be predicted, the more PPP funds a business received, the greater government scrutiny it is likely to attract, with a corresponding increase in the risk of potential civil actions (such as claims under the False Claims Act) and/or criminal investigation and prosecution.

PPP loan recipients should be mindful of the recent announcement by Attorney General William Barr that the Justice Department will be paying close attention to all manner of COVID-19-related fraud, and each U.S. Attorney’s Office has been directed to designate an assistant U.S. attorney as its COVID-19 fraud coordinator. It takes no stretch of the imagination to conclude that the Justice Department will find PPP loan application inaccuracies to be a species of potential COVID-19 fraud worthy of investigation.

The last similar emergency federal loan program, the Troubled Asset Relief Program (TARP), saw numerous civil proceedings, including by the federal government, which resulted in substantial monetary recoveries as well as criminal prosecutions. This precedent, coupled with the Treasury’s pronouncement that all recipients of loans of $2 million or more will be audited, means any business that receives PPP funds should be prepared for heightened scrutiny from plaintiff-whistleblowers, DOJ False Claims Act attorneys, regulators and, possibly, criminal investigators and prosecutors.

In sum, all PPP loan recipients should carefully consider the ramifications of retaining PPP loan funds. This includes close review of the Treasury Interim Rules and related guidance, and reconsideration of the necessity of the PPP loan in light of all available guidance. In doing so, loan recipients should clearly document their analysis and rationale supporting the loans’ necessity. Finally, all PPP borrowers should be prepared for the increased attention they are likely to receive, e.g., in the form of False Claims Act lawsuits or government prosecutions, as PPP loans are audited and their recipients investigated, particularly in connection with their future requests for forgiveness.

Keep Abreast of What’s Next

Thompson Hine is staying abreast of continuing developments related to the CARES Act and the PPP. Please visit our COVID-19 Task Force page for details on this and other information and resources.


For more information, please contact:

Riccardo M. DeBari

David D. Watson

Suzanne C. McNabb

Brian K. Steinwascher

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