Many government entities have already begun review and enforcement actions
related to the Coronavirus Aid, Relief, and Economic Security (CARES) Act
Paycheck Protection Program (PPP) loans. The Small Business Administration
(SBA) and its inspector general are already scrutinizing PPP loan
eligibility certifications and necessity certifications, and the most
recent interim final rules issued with respect to PPP loans indicate that
SBA will review any PPP loan application or forgiveness application it
chooses, including reviews of necessity and eligibility certifications,
loan size and forgiveness amounts.
Separately, the U.S. Securities and Exchange Commission (SEC) and the U.S.
House Select Subcommittee on the Coronavirus Crisis have sent letters of
inquiry and requests for documents to PPP loan recipients based on review
of public documents and SEC filings. These communications seek to verify
recipient compliance with eligibility and spending requirements under the
CARES Act. In addition, the Department of Justice Criminal Division, Fraud
Section, began prosecuting recipients, in collaboration with the SBA and
Internal Revenue Service.
Applicants received notice of SBA’s intention of rigorous enforcement
through the application itself, which stated that SBA would enforce
applicant certifications as well as release applicant information to other
federal, state, local and foreign entities charged with investigation,
enforcement and prosecution of violations. SBA guidance, including
frequently asked question (FAQ) No. 46, reinforced SBA’s right and
commitment to compliance.
Regardless of borrower size or other qualifications, it is vital for
companies to proactively document PPP compliance and prepare for effective
defense of their eligibility and necessity certifications, as well as loan
and forgiveness calculations. Waiting to receive an inquiry to gather
supporting documentation may be too late. Most inquiries provide 5-10 days
for response. This is a very short timeframe for a company to research and
gather supporting documentation. Applicants should consider seeking
competent legal guidance related to collecting supporting materials and
holding them in a central repository, contemporaneously as the
Applicants who receive government inquiries should anticipate the following
types of requests for production as part of initial government
- All documents submitted to the lender as part of the PPP application,
including attachments and evidence that the applicant relied upon
to answer application questions, including: “Is the Applicant or any owner
of the Applicant an owner of any other business, or have common management
with, any other business? If yes, list all such businesses and describe the
relationship on a separate sheet identified as addendum A.”
- Documentation of the applicant’s good-faith analysis of its eligibility
based on its understanding at the time of application submission —
including size and ownership, affiliation, employee count and wage
estimates, entity status and loan amount. Examples of documentation include
- Applicant memorandum or analysis and documents relied upon, corporate
formation documents, management agreements, memoranda of understanding that
may indicated common management or control, payments or other financial
transactions between affiliates such as shared service agreements over the
preceding three years, financial statements, payroll records, policies and
procedures, organizational charts, and contractual agreements between
- Evidence of the applicant’s exclusion from affiliation including SBIC
financial assistance documentation, evidence that the company qualifies for
SBA franchise designation, franchise agreements and documentation of
company revenues from NAICS code 72 (accommodation and food services).
- Documentation of the applicant’s analysis of eligibility in response to
the applicant’s determination of necessity. This includes response to this
application certification: “Current economic uncertainty makes this loan
request necessary to support the ongoing operations of the Applicant.”
Documentation should include the applicant’s analysis of the SBA Safe
Harbor guidance and related FAQs.
- Documentation of payroll, tax and other IRS submissions, as well as all
documentation required under the documentation directions in the
Proactively preparing for the common inquiries outlined above will assist
companies in completing submission of a timely and transparent response.
This increases the likelihood of an expedited and successful audit or
In addition, executives should seek competent legal guidance to perform
internal investigations and take appropriate and prompt remedial action
where evidence exists to suggest inaccurate application submission.
McGuireWoods is prepared to assist your company every step of the way. If
your company requires assistance in navigating these complex standards,
please contact one of the authors of this alert or your regular
McGuireWoods attorney. McGuireWoods has a robust COVID-19 compliance and
defense team, including attorneys extensively experienced in government
contracts, regulatory compliance, lending, internal investigations and
white collar defense.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.