How Texas Businesses Could be Affected by COVID-19 Relief Fraud

Originally published by Cris Feldman.

The coronavirus pandemic has drastically affected businesses and the daily lives of people across the nation. As businesses begin to slowly reopen their doors, many have looked to the Paycheck Protection Program (PPP) under the CARES Act to assist them in paying their employees. The federal relief program has not been without controversy, and now fraudulent loan applications are becoming the subject of investigation, as one Texas man now faces charges for duping businesses out of $5 million in PPP loan funds.

The CARES Act was enacted in March of this year to provide emergency financial assistance to millions of Americans suffering from the economic effects of COVID-19. The PPP component of the Act loans qualifying small businesses and other organizations funds that must be used on payroll costs, interest on mortgages, rent, and utilities. While many were initially suspicious of the loans – as they were being distributed to larger entities like Shake Shack – many large loan recipients bowed to social pressure to return their loans in order to help smaller businesses that really need them. Despite that positive development, PPP loan fraud has already been found to be rampant, and those who forged applications and received large loans are now being held accountable.

According to the Department of Justice (DOJ), Samuel Yates took out several loans from two different banks under the CARES Act. According to court documents, Yates lied to the banks, claiming he had hundreds of employees, and filing fraudulent loan applications with the two lenders. Court documents detail that Yates had sought $5 million through the PPP by claiming he had over 400 employees and a $2 million payroll. Yates was also successful in obtaining $500,000 from another lender by claiming he had over 100 employees, according to the DOJ.

Within each application, Yates used a list of false names he constructed by using an online name generator in order to forge tax documents. He has subsequently been charged with wire fraud, bank fraud, making false statements to a financial institution, and making false statements to the Small Business Administration.

How Businesses Can Protect Themselves From PPP Related Fraud

Unfortunately this hasn’t been the only instance of PPP-related fraud. As both individuals and businesses look to improve their financial situations amid COVID-19, this will likely not be the last instance of pandemic fraud either. Business can take certain measures to protect themselves from being falsely accused of PPP loan fraud, as well as from scammers posing as SBA officials. These measures include:

Be Aware of Phishing Scams

Phishing scams can happen to businesses of any size and in any industry. These particular instances of fraud most often occur in email exchanges. With regard to PPP related phishing scams, emails can appear to come from the SBA and will likely contain a link or downloadable attachment. These links and attachments will automatically install ransomware or malware onto the email recipient’s computer to steal sensitive information from the business in order to fraudulently apply for a PPP loan.

Phishing scams can also take place over the phone in the form of imposter calls. Scammers will claim to be calling directly from the SBA and request private business information in order to help you apply for a loan or to allegedly “verify” an existing pending PPP application. The scammers can then use this sensitive information to obtain a loan fraudulently using the business’s information.

It’s incredibly important to keep in mind that the SBA doesn’t initiate contact with businesses or invite them to apply for PPP loans. Any sort of solicitation from someone claiming to be a part of the SBA is fraud, as all PPP applications must go through a participating lender in order to be valid.

Don’t Be Tricked Into Paying Fake Fees

Some fraudsters may also contact a business claiming a preliminary fee must be paid in order to apply for an SBA loan or that the loan can be expedited if the business pays to ‘fast-track’ its application. In other instances, scammers may offer a high-interest bridge loan as an advance until the main loan is approved and disbursed.

Since under the PPP, businesses can only receive a loan through a certified, participating lender, such as a bank or credit union, there is no fast-track process and the SBA does not charge fees to apply for the loan.

Certify Your Eligibility

In response to criticism that PPP funding was being awarded to businesses that didn’t need the funds like Shake Shack and Ruth’s Chris Steak House, a rule was implemented discouraging larger companies from monopolizing the limited pool of funding. The Treasury Department has emphasized that PPP borrowers must certify in good faith that the loan is “necessary to support the ongoing operations of the applicant.”

Because of this, it’s important for businesses that applied for PPP loans to carefully review its eligibility rules. Reviewing current business activity and sources of liquidity can also help to determine if they are sufficient enough to keep the business afloat without a loan.

Use Your PPP Loan Funds Correctly

Many applicants have questions about how PPP funds can be used. While the CARES Act delineates which expenses are eligible for forgiveness, it is less clear which expenses could potentially be covered in the event a business is not seeking forgiveness. In a New York Times report, the Chief Executive of the Atlantic Union Bankshares stated, “as long as” businesses are “using the funding for the operating expenses of the business, our interpretation—and we think it’s clear—is yes, you can use it as effectively a working capital loan.”

As lenders may differ in their approaches to permissible use, it’s important to check with the lender to better understand what you can and cannot use the PPP funds for outside of payroll and other eligible costs.

Houston Business Lawyers Attorneys

Navigating business operations in the time of COVID-19 has been incredibly difficult across many different industries. As companies begin to reopen in Texas and across the United States, more instances of coronavirus fraud are likely to crop up along the way. At Feldman & Feldman, as business owners and business lawyers, we understand just how frustrating things can be in these difficult times. Our Houston business lawyers stand ready to assist you and your company with all of its legal needs, so contact us today to learn more about how we can help.

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