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The government forced small businesses to close during the COVID-19 emergency. Then officials claimed they would provide “help” with a loan and vague promises of possible forgiveness. As you might expect, small businesses started scrambling to find banks to submit loan applications. Regulations and guidelines changed daily. The programs were messy. Now that the dust has settled, the government is investigating small businesses for spending the money these businesses were essentially forced to take. This is a collision course given that government bureaucrats work for one of the largest organizations in the world and often do not understand how small businesses work. Often they have never faced the difficulties of running a business and have unreasonable expectations.
Many federal agencies go to great lengths to investigate small businesses that have borrowed funds from the Small Business Authority and / or the Payroll Protection Program (PPP). Small businesses and their owners now need protection from government agencies that have turned on the small businesses they claimed to be trying to help. These investigations are dangerous because they can result in criminal and civil penalties that can destroy a business and its owners. It is important to keep in mind a number of factors that can make the difference between an investigation becoming a minor inconvenience or a life-changing event.
Trigger factors. An investigation can be triggered by various factors. They can start with a complaint from a disgruntled employee, former business partners, or a spouse wanting revenge. They can also be triggered by new reports that business owners have used P3 funds for lavish expenses such as vacations and expensive cars. Nothing promises an investigation more than politicians and government agencies who become embarrassed by the bad press. It is never a good idea to “push the bear” by indulging in gross violations of any government program.
Investigations can also be triggered by more subtle indicators. Government agencies often review reports of suspicious activity submitted by financial institutions, such as banks and other lenders, through the Department of the Treasury. In this scenario, a bank or lender may submit a suspicious activity report that reports unauthorized business expenses such as exaggerated payrolls, non-essential purchases, or exaggerated market losses. The best way to avoid an investigation is to ensure that the PPP or economic disaster loan application documents are accurate and that the funds are properly accounted for.
Navigate a PPP or EIDL loan investigation.Even if your business has taken all preventative measures, investigations may be inevitable. If you or your business is investigated, you need to act quickly, as mistakes early on can lead to disastrous results. Immediately seek a lawyer with extensive experience in handling such investigations. It is important to communicate with the government only through a lawyer so that your statements are not misused by overzealous bureaucrats.
In addition, there are categories of information that must be provided and there is information that is not subject to the jurisdiction of investigators. The “golden loop” approach of providing just enough information to be compliant without producing documents beyond the scope of the investigation is essential. This is a legal minefield that must be handled with care.
Second, there must be a “litigation hold” to prevent inadvertent destruction of documents related to your EIDL or PPP loan. The destruction of documents alone can lead to civil and criminal penalties.
Third, use your accountants, operations department, financial partners, or payroll specialists to account for the use of PPP or EIDL funds. Most PPP or EIDL loan surveys focus on expenses and sometimes a strong defense can be found with proper accounting.
Finally, carefully review all documents submitted in support of your loan application to verify their accuracy and be prepared to provide an explanation for any errors.
Important documents to keep. It is extremely important to keep all documents relating to the EIDL or PPP loan. These documents often contain explanations and defenses that can be used in investigations. For example, documents indicating that the business needed loans to support ongoing operations are essential. Likewise, emails, letters, text messages, or other communications with financial lenders may establish that the company was working in good faith when it sought the loans.
In addition, all records reflecting how the proceeds of the PPP or EIDL fund were spent are essential. Ideally, there will be records demonstrating that the loan proceeds were kept separate from other funds and used only for legitimate expenses. Whether or not the funds were segregated, records demonstrating that PPP or EIDL funds were used for good payroll and other legitimate expenses are essential. Preservation is the key.
In short, these investigations are similar to police investigations. Targets who “plead” early in the process often perform better than those who manage the investigation themselves. Even if your business hasn’t done anything wrong, without proper guidance, government investigators will uncover a technicality that has been violated. Without protection, it will be easier for the government to target your business.
Originally posted by NJBIZ (September 20, 2021).
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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