As the Department of Treasury, the Small Business Administration and the Internal Revenue Service continue to issue guidance on compliance with the Paycheck Protection Program, the Department of Justice announced this week its first indictments in connection with the program. The DOJ announced on Tuesday that two Rhode Island businessmen were indicted for allegedly applying for more than $500,000 in forgivable PPP funds by claiming to have dozen of employees working at four different businesses when, it is alleged, none of the employees actually existed.
While an extreme example, the DOJ’s announcement comes the same week that the SBA announced it was extending its PPP Safe Harbor deadline until May 14, 2020. [UPDATE: As of 5/13/2020, the safe harbor deadline has been extended to May 18, 2020] As KJK previously covered, the SBA issued guidance advising both public and private companies that borrowed PPP funds to analyze 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.” See SBA Guidance at ##31; 37. Further, the SBA advised that public companies that had “substantial market value and access to capital markets” likely would not be able to meet the good faith certifications required under the program. And while the SBA offered no similarly specific guidance to private companies as to which would be deemed to be unable to meet the certifications due to their access to other sources of liquidity, it certainly made clear that its guidance regarding liquidity applied to private, as well as public, companies. However, in issuing this ruling, the SBA recognized that it was fundamentally changing the terms of the program.
Accordingly, the SBA included a safe harbor provision, allowing companies that have access to “other sources of liquidity sufficient to support their ongoing operations” to not risk the penalties associated with failing to comply with the program. Specifically, the safe harbor provision allows companies that repay their PPP loans in full on or before May 18, 2020 to be deemed to still have satisfied the good faith certifications required under the program. Recent guidance also allows the companies that repay the loan in full under the safe harbor guidance to take advantage of the Employee Retention Credit contained in the CARES Act (which is not available to borrowers under the PPP).
Failing to meet the good faith certification requirements of the Paycheck Protection Program comes with steep penalties. Companies that are deemed to not have made the certifications in good faith risk penalties of fines of $5,000 to $1 million and one to 30 years in prison. See 18 USC § 1014; 18 USC § 1001 and 3571; 15 USC § 645. As such, it is recommended that PPP borrowers carefully review their finances and seek advice from their accountants and legal advisors to determine if they should take advantage of the safe harbor provisions and to ensure that they are in full compliance with the program.