PPP Loans: DOJ Investigating FinTechs

Compliance with anti-fraud and anti-money-laundering laws

A federal court filing by a fintech company revealed that it has been under investigation by the Department of Justice (“DOJ”) in relation to its Paycheck Protection Program (“PPP”) loan approval practices for over a year. This rare disclosure of a pre-indictment DOJ investigation warns that the government is refocusing enforcement efforts on the fintechs and financial institutions that administered PPP loans.
 

The fintech under investigation is an online loan servicing company that provides loans for small businesses, and processed over $7 billion in PPP loans to at least 300,000 businesses. The fintech disclosed that it was under investigation by the DOJ while responding to a subpoena in an unrelated case in the Southern District of Florida, where an individual was accused of submitting fraudulent PPP loan applications to the fintech. 

Apparently unaware of the ongoing investigation into the fintech, the government in the criminal case sought trial testimony about how the fintech administered PPP loans and loan applications. 

The fintech filed a motion to quash the subpoena in June, stating that the DOJ already was investigating its conduct under the False Claims Act (“FCA”) in a separate case on the theory that it improperly approved PPP loans that obviously were fraudulent or not within Small Business Association (“SBA”) parameters. 

According to the same filing, the DOJ also is investigating the adequacy of the fintech’s fraud and anti-money laundering controls. The fintech argued that it should not be forced to testify as a non-party when it was under investigation for the same conduct it was subpoenaed to testify about, but the court denied the motion shortly after it was filed. 

This disclosed investigation adds to the continued fallout for fintechs that administered PPP loans. Government and news reports often have accused fintechs of being gateways for PPP fraud due to their less robust anti-fraud controls as compared to traditional financial institutions. As detailed previously here, in June 2021 the House Select Subcommittee on the Coronavirus Crisis opened investigations into the role of four fintechs (including the fintech subpoenaed here) in issuing allegedly fraudulent PPP loans.

Most of the DOJ’s enforcement efforts have focused on applicants who fraudulently obtained CARES Act funds, but this investigation shows that the government also is directing enforcement efforts to fintechs that administered CARES Act funds. These enforcement efforts could have extreme consequences for lenders under the FCA, including treble damages and civil penalties for all fraudulent claims caused to be submitted to the government. Here, the government could bring FCA claims on the theory that financial institutions caused false claims to be submitted to the SBA by failing to adequately screen for fraudulent PPP applications. 

The FCA also allows private whistleblowers to bring suit on behalf of the government, meaning that any employee of a fintech or financial institution (or even an unaffiliated individual) could initiate a suit under a similar theory of liability.

Putting it into Practice

Lenders who administered PPP loans would be wise to look back at their loan administration protocols to ensure they complied with their anti-fraud and anti-money-laundering responsibilities.

This article first appeared here.

Author Bios

	A.J. Dhaliwal is a Special Counsel in the Finance and Bankruptcy Practice Group at Sheppard, Mullin, Richter & Hampton, LLP. Visit www.sheppardmullin.com Connect A.J. Dhaliwal
	Matthew Lin is an Associate in the Government Contracts, Investigations and International Trade Practice Group at Sheppard, Mullin, Richter & Hampton, LLP. Visit www.sheppardmullin.com  Connect Matthew Lin