South Carolina PPP Loan Fraud Settlements Show False Claims Act Enforcement Is Still Active

by Mark Xiao and Michaela Buckley

In a recent settlement, five South Carolina companies agreed to pay a combined $7.9 million to resolve allegations that they violated the False Claims Act (FCA) by improperly obtaining over $5 million in Paycheck Protection Program (PPP) loans.  The five companies include EuWe Eugen Wexler US Plastics Inc., Mankiewicz Coatings, LLC, Fukoku America, Inc., AWL Automation, LLC, and Stoba USA Corporation.   According to the U.S. Attorney’s Office for the District of South Carolina, these companies allegedly certified that they met employee-count limits required to apply for PPP loans, but they misrepresented those numbers because they failed to account for the employees at their parent companies and affiliated entities.

These settlements demonstrate that PPP loan fraud enforcement remains active and businesses that fraudulently applied for and received PPP loans may still face FCA liability even years after their loans were forgiven.

What are PPP loans?

PPP loans were created to subsidize small businesses during the COVID-19 pandemic to provide funding to keep workers on payroll.  There are two types of PPP loans: First Draw and Second Draw.

1. First Draw loans were designed to fund business expenses, including payroll costs, operational expenses, costs for mortgages, rents, and utilities, and other costs related to COVID-19. Businesses with more than 500 employees were ineligible for these loans.
2. Second Draw PPP loans funded the same business costs and borrowers were not eligible if they had more than 300 employees.

Pandemic Relief Fraud Cases Remain Active

The U.S. Government Accountability Office noted a heightened risk of fraud in emergency situations like the COVID-19 pandemic due to an increase in spending over shorter periods of time.  The U.S. Small Business Administration (SBA), the United States Attorney’s Office, and other investigators have found numerous cases of PPP loan fraud.  To address this, Congress passed the PPP and Bank Fraud Enforcement Harmonization Act of 2022, which created a ten-year statute of limitations to take legal action against borrowers who commit fraud related to the PPP loans.  This allows private whistleblowers, investigators, and the government to pursue fraud related to PPP loans years after the pandemic.  As the U.S. government continues to audit borrowers of PPP loans and examine potential instances of fraud, cases involving PPP loans remain active and relevant.

Common Risk Areas in PPP Loan Fraud

All five of the companies involved in the PPP fraud settlements in South Carolina allegedly misrepresented or falsely certified that their employee count did not exceed the 500-employee and 300-employee caps on First and Second Draw loans, respectively.  For example, Fukoku America, one of the companies involved in the settlements, received a Second Draw loan from the U.S. government because it certified that the company had 157 employees.  However, Fukoku America failed to include employees of its parent company and affiliates.  Misrepresentation of employee count is a common type of fraud in PPP loan cases since company affiliates should be taken into account in the calculation of total employee count.

Other common types of fraud for PPP loans include misusing government funds for purposes other than those permitted, failing to disclose company relationships with parent entities or affiliates, obtaining loan forgiveness without meeting eligibility requirements, or receiving pandemic relief loans without economic need or meeting organizational eligibility.

How can false certifications create False Claims Act liability?

The FCA provides that anyone who knowingly submits a false claim, or anyone who causes a false claim to be submitted to the government, can be held liable for their actions.

The South Carolina settlements resolved allegations that the companies violated the FCA by applying for PPP loans from the SBA even though their organizations were ineligible.  Companies that knowingly submit false eligibility certifications for PPP loans violate the FCA because they submit false claims to the government for which they receive funding.

The FCA also applies to PPP loan forgiveness applications. Borrowers can apply for and obtain debt relief, provided they use the loans they seek forgiveness for within the allotted five years since the issuing of funds.  However, if a borrower submits a false certification of eligibility and receives loan forgiveness, the borrower may be subject to an FCA enforcement action.

In essence, if an individual or a company submits a false claim, and the government relies on the false claim in its decision to approve or forgive a loan, then the borrower may be liable for FCA enforcement action.

The Role of Whistleblowers in Exposing Pandemic Relief Fraud

Whistleblowers play an important role in exposing PPP loan fraud. Under the FCA, whistleblowers, referred to as relators, can reveal fraud and wrongdoing that the government may otherwise be unaware of, and they can help the government recover damages caused by such fraud.  These relators may be eligible to receive a portion of the damages recovered by the government.

Individuals with information about potential pandemic relief fraud may consider speaking with counsel.  Attorneys at Miller Shah LLP are experienced in FCA litigation, including litigation involving PPP loans.