by John Anthony Castro, J.D., LL.M.
Most companies thought the “hard part” was over when they received loans under the Paycheck Protection Program. In reality, the hard part is only beginning for loan recipients as they attempt to comply with the program’s constantly changing regulatory scheme.
The uncertain nature of the rules and regulations governing the Paycheck Protection Program makes it possible for the leaders of an organization to mistakenly believe it is in full compliance when it’s not. Failure to comply with the rules and regulations governing the program could render the certifications made to obtain the funds false, potentially resulting in severe legal liability under the False Claims Act, 31 U.S.C. § 3729-3733. However, there are certain steps organizations can take now to protect themselves.
Why Paycheck Protection Program Funds Are Susceptible to Qui Tam Actions
The Paycheck Protection Program, part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provides for forgivable loans to small businesses to pay employees and some other restricted expenses during the COVID-19 crisis. However, to obtain the funds, an organization must meet certain criteria and certify that it meets those criteria. Then, for the loans to be forgiven, an organization must meet additional criteria and certify, in advance, that it meets those criteria.
When applying for a loan, an organization must verify its number of full-time equivalent employees and their salaries/wages as well as payments for mortgages, leases and utilities. An organization must also certify that the representations made in its application and the supporting documents submitted are true and that the funds will be used for their intended purpose.
For a loan under this program to be forgiven, the loan proceeds must be used only towards payroll costs, mortgage interest, rent and utilities, over the eight-week period after the loan is made. However, no more than 25% of the forgiven amount may be used towards non-payroll costs. Additionally, for the loan to be forgiven, employee and compensation levels must be maintained.
Borrowers that use proceeds for unauthorized purposes will be expected to repay those amounts. Additionally, loan forgiveness will be reduced if, as of June 30, 2020, an organization’s number of full-time employees decreases or if salaries and wages for employees who made less than $100,000 in 2019 decrease by more than 25%.
Under the False Claims Act, it is unlawful to knowingly submit a false or fraudulent claim to the government. A claim is legally false if the claimant falsely certifies compliance with a material regulation. If Paycheck Protection Program funds are knowingly used for unauthorized purposes, then the certifications previously signed by the organization promising to use those funds for certain restricted purposes are now false. This leaves the organization susceptible to qui tam actions pursuant to the False Claims Act. Relators (individuals who initiate qui tam actions) and the government may use insight gained as the situation unfolds to hold entities accountable for representations that were not false when they were made, but that became false over time.
Employees, tempted by the promise of a reward under the False Claims Act if they bring a successful qui tam action, could serve as whistleblowers and qui tam relators. The False Claims Act incentivizes the very people the Paycheck Protection Program is designed to help – an organization’s employees – to hold their employers accountable for any misuse of the funds and for the resulting false statements. To protect themselves from suits under the False Claims Act, organizations should take proactive steps to ensure compliance with the rules and regulations (both present and future) of the Paycheck Protection Program, to the extent possible.
Proactive Steps You Can Take to Protect Your Organization
I. Document the Organization’s Actions and Intent
Diligence in both compliance efforts and documentation is key. Loan recipients should document how they are spending these funds and that it is their intention to spend these funds in compliance with the rules and regulations of the Paycheck Protection Program, as the recipient currently understands those requirements. An organization receiving such funds should document that it is attempting to, and believes that it is complying with the regulations. Such documentation is important because, to trigger liability under the False Claims Act, the false statement must be made knowingly.
Keeping Paycheck Protection Program funds separate from other organizational funds may also help demonstrate that the funds were used in compliance with the rules.
II. Monitor Changes in Regulations and Circumstances
The rules and regulations governing the permitted uses for Paycheck Protection Program funds are constantly changing, and no one knows if and when they will be finalized. As a result, it is crucial to remain abreast of the latest developments in the legal authority relating to these funds.
It is also very important to monitor your organization’s actions and to periodically reevaluate the truthfulness of any representations made in loan documents. For instance, did the organization bring back as many employees from furlough as it originally intended? Did the organization spend too high of a proportion of these funds on non-payroll expenses such as rent, utilities or mortgages? Did the organization use these funds for disallowed purposes, such as replenishing its inventory or purchasing new equipment?
III. Make a Voluntary Disclosure and Repay Funds, if Necessary
As an organization monitors changes in the law regarding the use of these funds as well as changes in circumstances, it may become clear that it is not complying and/or cannot comply with the rules and regulations governing the Paycheck Protection Program. If that is true, then the certifications that the organization signed in applying for these funds are now false certifications. Unless corrective action is taken, these false certifications open the organization up to liability under the False Claims Act.
If a successful qui tam action is filed under the False Claims Act, an organization may be forced to pay treble damages, steep monetary penalties and attorneys’ fees, which could have catastrophic financial consequences. To avoid liability under the False Claims Act, if an organization has failed to comply with the requirements under the Paycheck Protection Plan, it is important for it to seek assistance of legal counsel to make a voluntary disclosure to the government and repay any funds associated with that non-compliance.
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About the Author
John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.
Bluebook Citation: John Anthony Castro, Protecting Your Organization Against Paycheck Protection Program Qui Tam Actions, Int’l Tax Online Law Journal (May 12, 2020) url.