In its massive new pandemic relief and stimulus package, Congress has significantly modified the Paycheck Protection Program (PPP) to allow for second draws from the program, to simplify the loan forgiveness process, to provide restaurants access to greater relief and to extend the program through March 2021.
The proposed law also includes economic disaster grants and debt relief provisions, as well as bolstering the Small Business Administration’s existing Microloan Program.
The Coronavirus Response and Relief Supplemental Appropriations Act is massive. This alert highlights some of the basic provisions related to Second Draw PPP Loans and gives an overview of funding and policy changes that aim to help small businesses, including minority-owned businesses and nonprofits recover from the pandemic.
PPP Second Draw Loans
The law earmarks $325 billion to small businesses, including $284 billion for PPP expansion.
It provides long-awaited changes to the PPP:
- Eligible borrowers may receive a second PPP forgivable loan for the hardest-hit small businesses and nonprofits with 300 or fewer employees. Condition for loan: demonstration of 25% loss of gross receipts in any quarter during 2020 when compared to the same quarter in 2019;
- A dedicated $15 billion set-aside for lending through community financial institutions, including Community Development Financial Institutions and Minority Depository Institutions to increase access for minority-owned and other underserved small businesses and nonprofits;
- A set-aside for very small businesses – those with 10 or fewer employees – with an emphasis on small businesses located in distressed areas;
- Expands PPP eligibility for more critical access hospitals, local newspapers and TV and radio broadcasters, housing cooperatives, and 501(c)(6) nonprofits, including tourism promotion organizations and local chambers of commerce;
- Allows for small businesses in the restaurant and hospitality industries to receive larger awards of 3.5 times average total monthly payroll, rather than 2.5 times;
- Adds PPE expenses associated with outdoor dining, and supplier costs as eligible and forgivable expenses;
- Simplifies the forgiveness process for loans of $150,000 and less;
- Repeals the requirement of deducting an EIDL grant from the PPP forgiveness amount;
- Allows for tax deductibility of PPP expenditures.
PPP Loan Amount
Subject to the exceptions noted below, the amount of new PPP loans, called “Second Draw PPP Loans”, are calculated by multiplying 2.5 x the average total monthly payroll cost expenditures incurred or paid during, at the Borrower’s option, either the one-year period before the date in which the loan is made, or the calendar year 2019. The maximum loan amount is $2 million. For seasonal employers, the Borrower should use the average total monthly payroll cost expenditures for any 12-week period between February 15, 2019 and February 15, 2020. If you are in the hospitality industry (NAICS Code 72), your multiplier is increased to 3.5% with the same $2 million cap.
Second Draw Eligibility
Second Draw PPP Loans are available through March 31, 2021. Only companies with no more than 300 employees (rather than the 500 employee cap under the CARES Act) are eligible for Second Draw PPP Loans. Applicants must meet the “25% reduction in gross receipts” test discussed below. An eligible applicant is entitled to only one Second Draw PPP Loan.
To be eligible, the applicant must demonstrate that it had gross receipts during the first, second, third or fourth quarter of 2020 that were at least 25% lower than the gross receipts of the applicant during the same quarter in 2019. As written, the law appears to allow the applicant to choose the relevant quarter so that, if it only suffered this reduction in one quarter during 2020 compared to the comparable quarter in 2019, it would qualify. The term “gross receipts” is not defined in the Act. If the applicant was not in business during any quarter in 2019, the Act provides for alternative measurement periods for those companies. There is a special rule for applicants for loans of not more than $150,000. They need only certify that they meet the 25% reduction in gross revenues test, but must submit documentation to back that up on or before submitting an application for loan forgiveness.
Entities that are ineligible include:
- Publicly traded companies;
- Companies that were not in operation on February 15, 2020;
- Recipients of “shuttered venue operator grants”;
- Any entity for which a Chinese or Hong Kong entity holds 20% or more direct or indirect interest, including those formed under PRC or Hong Kong law or with significant operations in those jurisdictions;
- Entities that have a China resident on its board of directors;
- Anyone registered under the Foreign Agents Registration Act; and
- Certain other grant recipients under the Act.
A “shuttered venue operator” consists of live venue operators or promoters, theatrical producers, live performing arts organization operators, relevant museum operators, motion picture theatre operators, and talent representatives that meet certain requirements of the Act and experience a reduction in gross earnings
Borrowers have the same option as currently available to select between an eight-week or a 24-week covered period. The period begins on the date of the loan.
The Act adds several new categories for authorized uses of loan proceeds. They include:
- Payments for business software and cloud computing services that facilitate certain business operations;
- Uninsured costs related to property damage and vandalism or looting due to public disturbances during 2020;
- Supply chain expenditures for goods that are essential to the operation of the applicant’s business and which are made pursuant to a contractual commitment; and
- Operating and capital expenditures to facilitate the applicant’s business to comply with certain Covid 19 governmental requirements or guidances.
Now included in payroll costs are group life, disability, vision and dental benefit payments. This change applies to all existing loans that are not already forgiven.
Loan Forgiveness Application
The Act introduces a new simplified process for loan forgiveness applications for loans of $150,000 or less. Borrowers with loans of $150,000 or less only need to execute a one-page certification as to the number of employees the company was able to retain, the estimated amount of the covered payroll costs and the total loan value. There are recordkeeping requirements, and the SBA reserves the right to audit the certification. But this should simplify the loan forgiveness process for smaller loans. It should also be noted that this provision applies to existing PPP loans for which forgiveness has not yet been applied. Once the SBA publishes the new forgiveness application, existing PPP borrowers of these small loans can quickly and easily apply for forgiveness.
Deductibility of PPP Expenses
Another notable and important provision is the reversal of the current IRS position on deductibility of PPP authorized expenses, such as payroll, rent and utilities. In IRS Revenue Ruling 2020-27 issued earlier this fall, the IRS indicated that those expenses typically would not be deductible. The Act overrides that Revenue Ruling and provides that the expenses are deductible, despite the fact that the loan proceeds are not includable in income.
EIDL Grant Program – $20 Billion
Small businesses and nonprofits in low-income communities that suffered an economic loss are eligible to receive a $10,000 EIDL grant. Any small businesses and nonprofits in low-income communities that received an EIDL grant previously are also eligible to receive the full $10,000 if their award was less in the first round of grants.
EIDL grants are not taxable and businesses will not forgo a tax deduction for qualified expenses paid for with EIDL Funds. In addition, the Act repeals the prior requirement that an EIDL grant would reduce the amount of PPP forgiveness.
Grants for Venue Operators – $15 Billion
The bill provides $15 billion for SBA grants up to $10 million to live venues, independent movie theaters, and cultural institutions to address the economic effects of the pandemic. Grants can be used to cover expenses such as payroll costs, rent, utilities, and personal protective equipment. A set-aside of $2 billion is also reserved for entities with 50 or fewer employees.
SBA Debt Relief Payments – $3.5 Billion
This bill provides $3.5 billion to resume debt relief payments of principal and interest (P&I) on small business loans guaranteed by the SBA under the 7(a), 504 and Microloan Programs. All borrowers with qualifying loans approved by the SBA prior to the CARES Act will receive an additional three months of P&I, starting in February 2021. Going forward, those payments will be capped at $9,000 per borrower per month. After the three-month period described above, borrowers considered to be underserved—specifically those hardest-hit by the pandemic— will receive an additional five months of P&I payments, also capped at $9,000 per borrower per month. SBA payments of P&I on the first 6 months of newly approved loans will resume for all loans approved between February 1 and September 30, 2021, also capped at $9,000 per month.
Enhancements of SBA Lending Programs – $2 Billion
This bill provides $2 billion to enhance SBA’s core programs, including 7(a), Community Advantage, 504, and the Microloan Program, by making them more affordable and useful to small businesses. It also provides $57 million for the SBA Microloan Program to provide technical assistance and leverage about $64 million in microloans for minority-owned and other underserved small businesses.
November 23, 2020 – Alerts
An unprecedented explosion of government investigation and enforcement is at hand as federal regulators focus their efforts on ferreting out any fraud or abuse of the $1 trillion in COVID-19 relief funding programs through loans, grants and tax credits.
For pharma and bioscience companies, it is imperative to take steps now to limit the risks and consequences of such investigations. Regulatory threats to these companies may be forestalled by quick action to preserve evidence and correct systemic problems.
Increased scrutiny and automatic audit triggers were built into the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and its Paycheck Protection Program (PPP). Congress has also created a Special Inspector General for Pandemic Recovery (SIGPR) to oversee CARES Act funding distribution, and the Department of Justice and Securities and Exchange Commission (SEC) have already begun investigations and fraud prosecutions.
Bioscience and pharma companies must be particularly vigilant about protecting against future SEC enforcement risks. These are highly regulated industries facing an enforcement perfect storm – fast cash, limited guidance and retrospective review. Further, they are at the forefront of the COVID-19 relief efforts, making them prime targets for unscrupulous persons as well as government investigations. There can be no deliberate omission, misrepresentation or falsification of information, or these companies will face potentially severe consequences.
Whistleblowers will not be far behind, and we can expect a plethora of civil actions to accompany these governmental inquiries as well.
Preparation, protection and response are the integral components in a company’s risk planning.
In preparing to meet the challenges that may arise from participating in a particular program, companies should focus on:
- eligibility requirements
- representations made in the application process
- use of the funds
- any required follow-up certifications
Documentation is vital to demonstrate prudent business decisions. This preparation should leverage compliance resources as well as documenting the application/funding process along with the ultimate use of the money.
Senior management should be involved in every critical stage, including an interim internal review. The company’s review must include an assessment of its responses to any complaints and an essential check to preserve documents and information.
Companies that prepare will reduce risk by demonstrating compliance. Protection, therefore, directly correlates with reducing risk.
For example, companies must recognize the interplay between cybersecurity and trade secret protection. Ensuring that corporate best practices are in place for managing and protecting patents and trade secrets will require an inquiry into credible threats to its intellectual property from various sources.
Employees are a first step in the protection process. Critical aspects of the employee lifecycle must be considered to protect the company. Companies should review the on-boarding and exit interview processes to identify issues relating to trade secrets. Remote workforces pose distinct risks and require specific mitigation measures.
Companies should consider using the latest cybersecurity tools to detect both external and internal threats and monitor for misappropriation. Plans to manage risk must also include joint venture partners and vendors, as well as independent contractors.
When a misappropriation occurs – regardless of preparation or protection efforts – certain responses are mandatory. Governance lapses will potentially lead to criminal prosecution, civil litigation and damages.
Companies must anticipate and prepare to be at the mercy of judicial and government priorities. Even the casual observer can see that the future possibly holds decisions regarding criminal or civil enforcement as well as decisions relating to cooperation with government investigations. Regulators will focus on statutes and available forums, for enforcement, and seek to obtain non-monetary relief – TROs and injunctions – and monetary relief. There are different damages approaches, trends, and litigation best practices, including discovery, trial presentation strategies, and coping with COVID-19 challenges. Further, the DOJ will also focus on hackers targeting COVID-19 vaccine researchers.
Ultimately, companies must be poised to protect their intellectual property in a variety of forums.
All public companies should expect SEC scrutiny. Companies must stay current on SEC guidance, and conduct internal audits regarding COVID-19-related disclosures to forestall SEC scrutiny and disruptions. The SEC will likely investigate and bring enforcement actions, and, accordingly, the SEC’s enforcement role in monitoring relief funding must be evaluated.
The SEC’s role in monitoring disclosures around COVID-19 and insider trading will be critical in any analysis. Finally, company insiders must avoid potential insider trading allegations while in possession of material, non-public information.
Pharma and bioscience companies in particular must monitor spending; avoid overlap; and save interim HHS and industry guidance to protect themselves from future SEC enforcement rules.
Preparation, protection and response are crucial components of coping with the coming wave of federal scrutiny any enforcement. Evaluating team knowledge, and ensuring every regulation and guidance is followed are the first steps in safeguarding any company’s future.
The IRS intends to issue proposed regulations to permit a partnership or an S corporation to deduct specified income tax payments made to a domestic state or local jurisdiction.
In Notice 2020-75, the IRS clarifies that state and local income taxes imposed on and paid by a partnership or S corporation with respect to its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment, and are not subject to the state and local tax deduction limitation for partners and shareholders who itemize deductions.
This workaround to the state and local tax deduction limitation will provide a benefit to partners and S corporation shareholders in states that impose an entity-level tax on partnerships and S corporations. This is done by treating payments of those items by the pass-thru entity as a deduction by the entity, thereby reducing taxable income of the partnership or S corporation that ultimately flows to the partners or S corporation shareholders.
State and Local Tax Deduction Limitation
The 2017 Tax Cuts and Jobs Act added Section 164(b)(6) which limits an individual’s deduction to $10,000 for the aggregate amount of the following state and local taxes (SALT) paid during the calendar year:
- real property taxes
- personal property taxes
- income, war profits, and excess profits taxes
- general sales taxes
The SALT Deduction Limitation – which applies for taxable years beginning after December 31, 2017 and before January 1, 2026 – significantly impacts individual taxpayers who itemize deductions in states where income, property and sales tax rates are higher.
In an attempt to relieve taxpayers of the undue burden associated with the SALT Deduction Limitation, the IRS published Notice 2020-75 which permits partnerships and S corporations to deduct state and local income taxes imposed on the partnership or S corporation.
The Notice provides that a partnership or S corporation will be permitted to claim the deduction for state and local income taxes regardless of whether the state gives a full or partial tax credit, deduction or exclusion to a partner or S corporation shareholder and regardless of whether the state entity-level tax is mandatory or elective.
The Notice provides that the proposed regulations will apply to specified income tax payments made on or after November 9, 2020. The notice also provides that the proposed regulations will permit a deduction for specified income tax payments made by a partnership or S corporation for taxable years ending after December 31, 2017 and before November 9, 2020 provided that the income tax payment is made to satisfy a state and local tax liability imposed on the partnership or S corporation pursuant to a state law enacted before November 9, 2020.
State Entity-Level Taxes
Currently, six states have enacted an entity-level tax on partnerships or S corporations: Connecticut, Louisiana, New Jersey, Oklahoma, Rhode Island and Wisconsin. Connecticut is the only state that provides for a mandatory entity-level tax, while the remaining five provide for an elective entity-level tax.
For example, New Jersey recently enacted the Business Alternative Income Tax (BAIT), which is an elective entity-level tax on partnerships and S corporations. If a New Jersey S corporation elects to have the BAIT apply, then the S corporation would pay tax at the entity level and according to Notice 2020-75 the S corporation would be able to claim a deduction for the entity-level tax. The federal income tax deduction for the New Jersey BAIT taken at the S corporation level would reduce the S corporation’s net income that would ultimately flow through to the shareholders, thus permitting the shareholders to work around the $10,000 SALT Deduction Limitation and ultimately receive a tax benefit.
Businesses in states that provide for an election to tax a partnership or S corporation at the entity level should consider whether to make such an election to take advantage of Notice 2020-75 and the forthcoming proposed regulations.
If you have any questions about this alert, please contact Eric Michaels at 973.994.7505 or email@example.com, Adam Young at 215.444.7237 or firstname.lastname@example.org, or any member of Fox Rothschild’s national Taxation & Wealth Planning Practice.
On October 26, the Small Business Administration (SBA) published a notice in the Federal Register seeking approval from the Office of Management and Budget to release two new forms to be sent to borrowers under the Paycheck Protection Program (PPP) in preparation for audits by the agency. Because these audits have significant legal implications for borrowers such as disqualification and potential civil and criminal liability, entities that obtained PPP loans should consult counsel and exercise great care in answering questions on the forms.
SBA has created separate forms for nonprofits and for-profit loan recipients. For-profit borrowers will receive Form 3509, and nonprofit borrowers Form 3510. While the SBA has not published the forms, the media has distributed Form 3509. Form 3509 states that it is designed to “maximize program integrity and protect taxpayer resources” and that the information to be submitted by the borrower “will be used to inform SBA’s review of your good faith certification that economic uncertainly made your loan request necessary to support your ongoing operations.” This language is in reference to the statutory language under the CARES Act, embodied in the PPP loan application form in the form of a certification made by the borrower applicant when submitting the loan application. As a result of the publicity regarding PPP loans made to purportedly financially solid companies such as Shake Shack and the Los Angeles Lakers, the SBA and Department of the Treasury announced that the SBA would audit all PPP loans in excess of $2 million to determine whether the borrower’s certification that the loan was necessary can be substantiated. The notice in the Federal Register provides for a 30-day comment period prior to the forms’ final issuance.
Business Activity and Liquidity Assessments
The SBA designed each form to be sent to a PPP borrower by its lender. The borrower must complete it within 10 business days after receipt and then return it to the lender, which will then be responsible for sending it to the SBA. If the borrower does not submit the form, the SBA may retract eligibility, seek repayment of the PPP loan or “pursue other available remedies.” Therefore, as currently structured, the filing of this form by a borrower is essentially mandatory.
Form 3059 is divided into two categories of information requests: a “Business Activity Assessment” and a “Liquidity Assessment.” In some instances, detailed disclosure is required. Under the “Business Activity Assessment” section, the form requires information regarding the following items in the form of a series of questions for each such item:
- A financial revenue comparison from the second quarter of 2020 to the second quarter of 2019 (with special rules for seasonal employees), or if the company was not in business in the second quarter of 2019, to the first quarter of 2020.
- Information on changes in the business operations after March 13, 2020 (the date of the issuance of the National Emergency Declaration issued by President Trump) due to the pandemic, including the impact of state and local emergency orders and any cash outlays caused by the changes in business operations.
- Information on voluntary measures taken after March 13, 2020 due to the pandemic, including cash outlays caused by changes in the business operations.
- Capital expenditure projects after March 13, 2020 due to the pandemic, and the approximate cash outlay for these projects.
The Liquidity Assessment section of the form requires information regarding the following items in the form of a series of questions for each such item:
- The borrower’s cash position and any payment of dividends during the period commencing March 13, 2020 through the end of the loan forgiveness covered period for the PPP loan (the “Liquidity Assessment Period”).
- The payment of any dividends during the Liquidity Assessment Period, excluding dividends for any pass-through estimated tax payments.
- Any prepayments of any outstanding debt during the Liquidity Assessment Period.
- Compensation payments in excess of $250,000 to any employee or to any owner employed by the borrower.
- The market capitalization on the date of the PPP loan application for a borrower that is a public company and for any 20% publicly owned parent of a borrower.
- If the borrower is a private company, the book value of the borrower in the last calendar quarter prior to the loan application.
- For borrowers that have 50% foreign ownership by a parent company, the market cap of the parent company if it is a public company listed on a U.S. or non-U.S. securities exchange.
- For borrowers that are 20% owned by a private equity fund, a venture capital fund or a hedge fund, either directly or indirectly, disclosure of that relationship.
- Disclosure of any foreign state enterprise that owns 50% or more of, or is affiliated with, the borrower.
- Information on other funding under the CARES Act.
The borrower has the option to write additional comments to any question under both the Business Activity Assessment and the Liquidity Assessment. The purpose of that option is unclear.
The borrower is also required to provide supporting documentation in the form of financial data with respect to the quarterly comparison disclosed under the Business Activity Assessment section and the cash position, payment of dividends, prepayment of outstanding debt and excessive compensation payments disclosed under the Liquidity Assessment section.
Finally, the borrower must certify that it has made “reasonable inquiry of people, systems, and other information available to Borrower.” No clarification is given as to the meaning of “reasonable inquiry,” but the borrower should be diligent in completing the questionnaire to avoid any liability to the SBA due to any misrepresentation or inaccuracy.
Questions and Concerns
It is anticipated this form will not be well received by borrowers or lenders. First, it contemplates a “rearview mirror” analysis. For example, requesting a revenue comparison at the end of the second quarter of 2020, which for many borrowers occurs after the date of making the loan, is not contemplated under the CARES Act. The certification for the PPP loan was made as of the date of the loan application, and there were no accountability standards for the future financial condition of the company after the date of the loan. In fact, the genesis of the PPP Loan Program was to keep companies in business and assist them financially in the hope of minimizing a company’s loss of revenue. Likewise, some of the information addresses business activities occurring after the date of the loan application.
The form also introduces criteria to the PPP Loan Program that did not exist at the time of application. It inquires about compensation to employees and to owner-employees who earned in excess of $250,000. One has to question why that should be a factor in the audit. There are no compensation limitations under the PPP Loan Program except with respect to the determination of the proposed amount of the loan. One also has to question the purpose of estimating the market capitalization or value of a company. Is this a new separate consideration under the PPP Loan Program? In addition to the difficulty many borrowers will have in determining their value as of the specified date, it is unclear why this is relevant. Does this indicate that the SBA is reviewing a borrower’s compliance with eligibility requirements? If so, the value of a company generally was not one of the criteria for determining eligibility.
Similarly, why are there questions on foreign ownership and investment fund ownership? Perhaps that is designed to provide information to the auditor in conducting an eligibility review or in determining the borrower’s access to capital at the time of the PPP loan application.
Complete With Caution
Most importantly, this form will most likely be used by auditors to prepare for audits of PPP loan borrowers. The audit has legal implications, such as disqualification of a borrower and potential civil and criminal liability. A borrower must be careful in answering these questions and should seek legal advice before submitting the application. A borrower may be inclined to respond to the open-end solicitation for additional information, but we recommend against completing any of these sections without the advice of counsel. If not stated correctly, the response to such an open-ended question could inadvertently be turned against a borrower by an auditor. A borrower will be certifying to the truthfulness of this form, and there is potential legal liability if it incorrectly presents the information. Moreover, any statement made in this application would constitute an admission in any civil or criminal action brought by the SBA based upon the audit.
As mentioned at the outset of this article, this form has not yet been published by the SBA. The above discussion is subject to any changes in the form or its procedures in its final promulgation by the SBA. It is subject to a 30-day comment period. Hopefully, the form will be pared back in its final iteration or safeguards for borrowers will be added.
By Marissa Koblitz Kingman
Since the pandemic began, the federal courts have been inundated with Compassionate Release applications from attorneys seeking the immediate or early release of clients in custody. Compassionate Release is indeed a feasible option for some people who are incarcerated or about to surrender to a federal prison. Because Compassionate Release is a worthwhile opportunity, it is extremely important that you have a knowledgeable attorney to assist you during the process.
What is Compassionate Release?
A person requests Compassionate Release through 18 U.S.C. § 3582, which was amended by the First Step Act. The law allows a reduction of an inmate’s term of imprisonment if the court finds that:
- extraordinary and compelling reasons warrant a reduction in the person’s prison sentence;
- the reduction would be consistent with applicable policy statements of the Sentencing Commission; and
- the applicable sentencing factors are met.
Extraordinary and Compelling Reasons Standard
Since COVID-19, “extraordinary and compelling reasons” can usually be demonstrated by having a medical ailment or co-morbidity that increases the risk of severe illness from the virus that causes COVID-19 (i.e., cancer, type II diabetes, obesity, heart conditions, sickle cell disease) and a showing that COVID-19 cases in the prison are rising or likely to rise. Other factors, such as advanced age or compelling family circumstances, can also sometimes satisfy the “extraordinary and compelling” standard.
Applicable Policy Statement
The Sentencing Commission’s policy statement addressing the reduction of a sentence under 18 U.S.C. § 3582 provides that a defendant’s physical and medical condition, age, and family circumstances may all serve as independent grounds for the existence of a compelling reason to reduce one’s sentence.
Applicable Sentencing Factors
The applicable sentencing factors, as set forth in 18 U.S.C. § 3553(a), include, but are not limited to:
- the nature and circumstances of the underlying offense
- the history and characteristics of the defendant
- the need for the sentence imposed to reflect the seriousness of the underlying offense
- the need for the sentence to provide adequate deterrence
- the need to protect the public from further crimes of the defendant
- the need to avoid unwarranted sentence disparities
In weighing these factors, courts look to weather the underlying offense was violent, if the defendant had a violent history or posed any threat to the community, and if the prison sentence was long enough and/or is necessary to deter the defendant’s conduct.
When Can You File for Compassionate Release?
While less courts have granted pre-surrender Compassionate Release, meaning that the defendant has not yet surrendered to the prison, it is possible to win such an application. A defendant can request that the court, Warden and/or counsel for the Bureau of Prisons (BOP) modify the defendant’s sentence to time served and convert the unserved prison term to supervised release with the additional condition of home confinement even before the defendant has ever stepped foot inside a prison. While a person must satisfy all of the requirements outlined above for a pre-surrender Compassionate Release application, it is also important to show some kind of changed circumstance from the date of sentencing to the date of the Compassionate Release application.
You can file a Compassionate Release application at any time while incarcerated and after exhausting one’s administrative remedies. The shorter the prison sentence, and the more time the defendant has served of that prison sentence, the higher the probability that the applicable sentencing factors will be weighed in the defendant’s favor.
Who Should You Address Your Compassionate Release Request to?
The short answer is – everyone.
BOP Senior Counsel
There is a BOP senior counsel who is assigned to the different prisons and regions. It is important that a Compassionate Release application be sent to that person. It is also important that your attorney contact the BOP counsel and discuss the defendant’s specific circumstances. The BOP counsel can be a helpful ally throughout the Compassionate Release process.
In some jurisdictions, contacting the Warden prior to filing a Compassionate Release application is required. The Compassionate Release statute previously permitted sentence reductions only upon motion of the Director of the BOP. Currently, however, the statute permits courts to consider motions filed by the defendant as long as the defendant has exhausted all administrative rights. In order to exhaust one’s administrative rights in the Compassionate Release context, one must make a Compassionate Release request to the Warden. Once the request is made to the Warden, and the Warden either denies the request or 30 days has passed, (whichever is earlier), the person may then file a Compassionate Release motion before the Court. The request to the Warden must contain specific language in order to begin the 30-day clock.
The Compassionate Release Motion should be filed before the district court judge who sentenced the defendant.
While most Assistant United State Attorneys (AUSA) do not “consent” to a compassionate release application, an AUSA will occasionally “take no position” on the application – which is as good as it gets from the government. So, it is important that your attorney communicates with the AUSA assigned to your case and understands the government’s position on a potential Compassionate Release application.
The process for applying for Compassionate Release can be complicated. It requires the ability to communicate with the Warden, BOP Counsel, Court and the assigned AUSA. Be sure to contact an attorney that has experience in this area of law. For questions about compassionate release, or assistance in filing a Compassionate Release application, please contact Marissa Koblitz Kingman
By Matthew D. Lee and Marissa Koblitz Kingman
While the $525 billion Paycheck Protection Program (PPP), enacted as part of the CARES Act, has undoubtedly helped millions of deserving businesses survive the COVID-19 pandemic, it has also provided a unique opportunity for fraudsters to take advantage of the government’s unprecedented largesse. The Justice Department has already filed charges against dozens of borrowers alleging PPP loan fraud, but federal authorities are preparing to cast a wider net that will dramatically expand the number of loans that face scrutiny.
As we have written previously, the Justice Department and other federal law enforcement agencies have acted swiftly to identify and prosecute PPP loan fraud — in many cases while loans were still being made by the Small Business Administration (SBA). Since the CARES Act passed barely seven months ago, the Justice Department has filed criminal charges against 65 borrowers who it alleges collectively tried to fraudulently obtain $227 million in PPP loan funding, in loan amounts ranging from $30,000 to $24 million. These early criminal cases represent the most brazen examples of PPP fraud, such as borrowers claiming phantom employees and using PPP funds for personal items. But these early cases are just the beginning, as government investigators move beyond the most egregious examples of fraud to focus on more nuanced issues of potential fraud, such as eligibility for PPP loans, expenditure of PPP loan proceeds and loan forgiveness. At the same time, the Small Business Administration has vowed to audit all PPP loans in excess of $2 million and Congress has intensified its oversight (and criticism) of the PPP program. In this highly charged environment, we can expect to see more significant scrutiny of borrowers across the PPP loan spectrum, and not just for the most glaring instances of fraud.
Criminal Prosecutions Continue Apace
In an October 7, 2020 speech, Deputy Attorney General Jeffrey A. Rosen announced that the Justice Department has criminally charged 65 individuals with PPP loan fraud in connection with $227 million in relief funds. Eight of those defendants have already pleaded guilty and more convictions are expected.
The PPP loan fraud cases filed by the Justice Department largely fall into two categories. The first category is made up of individuals or small groups who lied on loan applications about having legitimate businesses, or who claimed they needed PPP funding to pay their employees, but instead used the money to purchase luxury cars and jewelry for themselves, finance home renovations and even gamble in Las Vegas. The second category of cases involves organized criminal rings. For example, the Justice Department recently filed charges in Ohio and Florida against 11 individuals, including a professional athlete and his manager, who applied for $24 million in PPP funding.
More criminal cases involving PPP fraud are undoubtedly on the horizon. In a recent speech, Acting Assistant Attorney General Brian Rabbitt emphasized that the Justice Department is not slowing its efforts in this area. To would-be fraudsters, he delivered a stern warning: “You will be identified. You will be held accountable. You will face the severest of consequences for trying to exploit your fellow Americans’ suffering for your own personal gain.”
Intensifying Congressional Oversight
Over the summer, the Senate Select Subcommittee on the Coronavirus Crisis opened an investigation of the PPP following allegations that it favored larger companies over small businesses. The subcommittee reviewed data on all 5.2 million PPP loans approved by the Small Business Administration, and issued its preliminary analysis on September 1, 2020, concluding that “tens of thousands of loans issued by the administration could be subject to fraud, waste, or abuse.” The Select Subcommittee also concluded that the administration “appears to lack the appropriate oversight mechanisms to identify and root out these problems,” noting that the SBA has stated it will only audit PPP loans in excess of $2 million, leaving the remaining 99.4 percent of funded PPP loans with no scrutiny whatsoever.
The Select Subcommittee identified a series of issues with the PPP that suggest a high risk for fraud, waste and abuse, described below:
- The SBA’s PPP rules provided that businesses were not permitted to apply for more than one loan. The Select Subcommittee determined that over $1 billion in loan proceeds went to companies that received more than one PPP loan. The Select Subcommittee identified 10,856 loans in this category, and noted that only 65 of these loans were in excess of $2 million and therefore subject to SBA audit.
- Many PPP loans went to companies that have been debarred or suspended from contracting with the federal government. Pursuant to the SBA’s PPP eligibility criteria however, such companies were ineligible for PPP loans. The Select Subcommittee identified 613 loans totaling $96.3 million in this category.
- Government contractors with known performance and integrity issues received PPP loans. The federal government’s Federal Awardee Performance and Integrity Information System (FAPIIS) database tracks contractor misconduct. The Senate Subcommittee found that the SBA approved 353 loans worth $195 million to companies identified in FAPIIS.
- By comparing data contained in the federal government’s System for Award Management (SAM) with PPP loan applications, the Senate Subcommittee identified numerous red flags involving more than 11,000 borrowers and nearly $3 billion in PPP funding. The discrepancies identified by the Senate Subcommittee include:
- Key information in PPP loan applications that does not match data in SAM
- Inconsistent business addresses
- Companies that were created after February 15, 2020, and were therefore not eligible for PPP loans.
- Many PPP loan applications omitted key information about the borrower and were nonetheless approved. For example, hundreds of loan applications failed to identify the name of the borrower in the “borrower name” field, and several hundred additional applications did not have complete business addresses for the borrower.
The Senate Subcommittee’s report concluded with a series of recommendations to improve oversight of PPP.
- First, the subcommittee recommended that SBA and Treasury should improve internal controls for loan forgiveness, including making use of existing federal and commercial databases to verify information provided by borrowers.
- Second, the subcommittee recommended that the administration should improve its audit plan for PPP borrowers. As noted, the SBA’s stated plan is to audit only those PPP loans in excess of $2 million and “other PPP loans as appropriate.” Finding this plan to be “plainly insufficient,” the Senate Subcommittee recommended that the SBA implement a risk-based audit program and utilize random sampling techniques. The subcommittee further recommended that SBA audits should be accompanied by public outreach to warn borrowers about criminal penalties and to encourage whistleblowers to come forward to the SBA’s Office of Inspector General.
- Third, the Senate Subcommittee stated that Treasury and the SBA must improve their cooperation with oversight bodies such as Congress and the Pandemic Response Accountability Committee.
Enforcement 2.0: What’s Next
The Justice Department’s unrelenting torrent of criminal charges against PPP borrowers shows no sign of easing, so we expect to see more announcements of new criminal cases and additional guilty pleas in the months to come. But as we noted, identifying and prosecuting the most brazen examples of PPP loan fraud — the “low-hanging fruit” — was the easy part.
Now comes the hard part: auditing some reasonable sample of the more than 5.2 million PPP loans that were funded. To this end, we anticipate that a variety of government agencies will engage in a new wave of enforcement activity. To start, we expect the SBA to follow through on its promise to scrutinize larger PPP loans. While the SBA previously announced that it would focus its limited audit resources on loans in excess of $2 million — which comprise only .6 percent of all PPP borrowers — it was careful to qualify that statement by stating that it would also audit “other PPP loans as appropriate.” This means borrowers with loans under $2 million are not immune from scrutiny and should be prepared for inquiries from government investigators.
Congressional oversight of the entire PPP framework can be expected to drive additional regulatory scrutiny of borrowers. The Senate Subcommittee report from September 2020 was highly critical of the administration’s approach to PPP implementation, and identified five categories of loans in which fraud and abuse were most likely to be prevalent, and recommended that SBA adopt a risk-based approach to audit selection.
Finally, we anticipate that other regulatory agencies may assist the SBA in its herculean task of auditing PPP borrowers. The Department of Labor has already begun auditing PPP loan recipients under the guise of routine wage and hour inquiries. Other federal agencies may support the SBA in this effort in the coming months.
Any business owner concerned about PPP loan compliance should immediately consult counsel and not wait to be contacted by law enforcement. Any business owner who has already received a subpoena or inquiry from any law enforcement agency regarding a PPP application or loan should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding to any such subpoena or inquiry.
For additional information on the topic of this alert, contact Matthew D. Lee at email@example.com or 215.299.2765; Marissa Koblitz Kingman at firstname.lastname@example.org or 973.548.3316; or any member of the firm’s national White-Collar Defense & Regulatory Compliance Practice.
PPP Fraud Prosecution Tracker
Fox Rothschild’s White-Collar Criminal Defense & Regulatory Compliance Practice Group is tracking in real time all federal criminal cases alleging PPP loan violations.
To access our PPP Fraud Prosecution Tracker, contact White-Collar Criminal Defense & Regulatory Compliance Practice Group Co-Chairs Matthew S. Adams at email@example.com or 973.994.7573 and Matthew D. Lee at firstname.lastname@example.org or 215.299.2765.
On October 14, 2020, FinCEN posted an incorrect message on its Bank Secrecy Act (BSA) E-Filing website. The message incorrectly stated there was a new filing extension until December 31, 2020, for all filers of Reports of Foreign Bank and Financial Accounts (FBARs). The extension until December 31, 2020, however, was intended only as an accommodation for victims of recent natural disasters covered in FinCEN’s October 6, 2020 notice.
FinCEN has apologized for the error and any confusion this has caused, and has coordinated with the IRS to address the concerns of filers who may have missed their filing deadline due to the October 14, 2020 message.
Filers who file their 2019 calendar year FBAR by October 31, 2020, will be deemed to have timely filed. As set out in the October 6 notice, FBAR filers impacted by recent natural disasters continue to have until December 31, 2020 to file their FBARs.
For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.
The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has announced that victims of the California Wildfires, the Iowa Derecho, Hurricane Laura, the Oregon Wildfires, and Hurricane Sally have until December 31, 2020, to file Reports of Foreign Bank and Financial Accounts (commonly referred to the FBAR form) for the 2019 calendar year. The FBAR for calendar year 2019 otherwise would be due on or before October 15, 2020.
FinCEN is offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance as a result of the California Wildfires, the Iowa Derecho, Hurricane Laura, the Oregon Wildfires, and Hurricane Sally. Should FEMA designate FBAR filers in other localities affected by these natural disasters as eligible for individual assistance at a later date, they will receive the same filing relief automatically.
In addition, FinCEN stated that it will work with any FBAR filer who lives outside the disaster areas and whose records that are required to meet the deadline are located in the affected areas. FBAR filers who live outside the affected areas seeking assistance in meeting their filing obligations (including workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization), should contact the FinCEN Regulatory Support Section at 800-767-2825 or electronically at email@example.com.
For more up-to-date coverage from Tax Controversy and Financial Crimes Report, please subscribe by clicking here.
By Matthew S. Adams, Matthew D. Lee and Christopher J. Pippett
The Small Business Administration (SBA) has opened the portal for applications for forgiveness of Paycheck Protection Program (PPP) loans established under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The commencement of the loan forgiveness application process raises two important questions for many borrowers:
- To what extent will the loan be forgiven?
- Will the loan and application be audited by the SBA?
The answer to the first question is fairly straightforward. A borrower’s loan forgiveness will be determined predominantly by its compliance with the requirements of the CARES Act in terms of its use of proceeds and the documentation it provides as part of its forgiveness application. If a borrower has used the proceeds of a PPP loan for the permitted uses as set forth in the CARES Act and applicable guidance, and provides adequate documentation of that use, the loan should be forgiven.
The question of whether or not a PPP loan will be audited is more complicated. The issue of loan audits arose following news reports on some high-profile companies that obtained PPP loans in the initial round of funding. The SBA responded by issuing somewhat murky guidance regarding the need certification borrowers were required to provide in conjunction with their loan applications. The guidance stated that it would be “unlikely that publicly traded companies that have substantial market value and access to capital markets will be able to make the required certification [regarding need] in good faith.” The combination of bad press and unclear guidance led many large companies to return their loan proceeds and take advantage of a safe harbor provision included in a subsequent guidance stating that if funds were returned by May 14, 2020 the need certification would be deemed to have been made in good faith.
Any PPP Loan Can Be Audited
In conjunction with establishing the safe harbor, SBA stated in the guidance that it would review all loans in excess of $2 million. This has led many borrowers and their advisors to conclude incorrectly that loans of less than $2 million will not be reviewed. However, the language in the guidance clearly states that the SBA “will review all loans in excess of $2 million, in addition to other loans as appropriate, following lender’s submission of the borrower’s forgiveness application.” Consistent with this language, the SBA’s interim final rule clearly states that the SBA may review “any PPP loan, as the Administrator deems appropriate” for the purposes of verifying borrower eligibility, loan amounts and use of proceeds and loan forgiveness amounts. The interim final rule further states that such review may be undertaken “at any time.” Thus, while PPP loans in excess of $2 million are clearly subject to review, no borrower should expect that its loan cannot be audited.
The SBA has not released guidelines or protocols for PPP loan audits. Borrowers should be careful, not only in making certifications and providing documentation in conjunction with forgiveness applications, but in responding to follow-up requests for additional information or documentation. While some of these contacts may seem innocuous, they could be a prelude to further scrutiny of the loan. An adverse PPP loan audit outcome could result in denial of forgiveness or, in a worst-case scenario, civil or criminal penalties or prosecution of responsible individuals. For this reason, borrowers should involve counsel upon the first contact from the SBA following submission of a PPP loan forgiveness application.
If contacted by the SBA, borrowers should gather the following basic documentation before contacting an attorney:
- PPP loan application and supporting documentation.
- 2019 tax returns and financial statements.
- Corporate organization and ownership structure
- Number of affiliated employees
- PPP loan documentation executed
- PPP Loan Forgiveness Application and supporting documentation
- Copies of all emails or other correspondence with lender or SBA
Fox Rothschild has assembled a multidisciplinary team of corporate and white-collar criminal defense attorneys who are well versed in the PPP loan requirements, have developed a procedure for handling PPP loan audits and are available to assist borrowers in navigating the process and limiting the risk of an adverse outcome should a PPP loan be audited for any reason.
Federal and state governments have numerous criminal, civil and regulatory tools at their disposal to pursue COVID-19-related investigations targeting small and midsize businesses. While the issues these inquiries raise are novel, the strategies that must be deployed to blunt their impact do not differ markedly from other white-collar criminal defense and regulatory compliance engagements.
For additional information on PPP Loan audits, contact Matthew S. Adams at firstname.lastname@example.org, Matthew D. Lee at email@example.com, Christopher J. Pippett at firstname.lastname@example.org, or Paul B. Edelberg at email@example.com.