New Congressional Report Raises Chance of False Claims Act Scrutiny for Fintech Companies Involved in PPP Loans: Wiley

What:

A recently issued congressional report raised concerns that certain financial technology companies (fintechs) were involved in processing improper loans through the Paycheck Protection Program (PPP) and recommended, among other things, that the Department of Justice (DOJ) investigate potential violations of the False Claims Act (FCA).

Background:

Program fraud by individuals and companies taking out OPS loans has been widely publicised, and prosecution of this fraud is still ongoing. Separately, the Select Subcommittee on the Coronavirus Crisis (Select Subcommittee) has focused on the role of fintechs in the processing of PPP loans since mid-April 2020. On December 1, 2022, the Select Subcommittee issued a report alleging that fintechs “facilitate[ed] a disproportionately high proportion of fraudulent and otherwise non-qualified loans through [PPP]” and “handled 75 percent of the approved OPS loans that had been linked to fraud by [DOJ].”

In addition to examining specific companies in the report, the Select Subcommittee informed that “[a] A comprehensive review of lenders and their third-party service providers will be critical for lawmakers to better understand what worked and what failed in PPPs, in order to incorporate these lessons into future aid programs.”

The Select Subcommittee also recommended that the DOJ investigate potential FCA violations related to whether fintech companies, employees or principals made, or caused, false statements in connection with PPP applications that they submitted or processed. The Select Subcommittee pointed to alleged “cases where fintech principals may have committed PPP fraud” and also “instances where fintech principals, executives or managers acknowledged that they were aware of a risk of fraud in the loans they approved but directed that employees continues to approve such loans.”

Takeaway:

This recent congressional scrutiny of fintechs and their partners involved in processing PPP loans may prove to be just the beginning. The DOJ has aggressively used the FCA to address PPP fraud, and this latest congressional report is likely to encourage the agency to increase its efforts even more. Indeed, the FCA is a particularly potent tool as it allows the government to recover treble damages plus penalties. In FY2021, the government obtained more than $5.6 billion in FCA settlements and judgments.

FCA includes qui tam provisions so that companies can also face whistleblower lawsuits. The FCA allows individuals (called relators) to file claims on behalf of the US government. These cases are filed to give the government time to investigate. Cases filed by relatives often remain under seal in the court system for months (if not years), so cases may already be pending against companies without their knowledge. As an incentive for relators to report these cases, the FCA gives relators a percentage of any damages recovered. The select subcommittee actually referred to at least one allegation made by a whistleblower in the report. With the Select Subcommittee’s report referencing potential FCA violations and whistleblower allegations, the relator’s counsel are sure to have taken notice.

Companies involved in PPP loans should pay close attention to any indications that they are being investigated. If the company receives a civil investigative demand (CID), subpoena, or even an informal request for documents from the government, the company should engage an attorney. Even those companies that are concerned about potential FCA liability but have not been approached by the authorities should carefully consider how best to proceed, as FCA cases, whether brought by the authorities or a relator, often take years to resolve, and the impact of the Select Subcommittee’s report will be felt for some time