PPP Loan Forgiveness Applications and Increase in Federal Investigations Pose Risks for Small Businesses


By Terrance P. Flynn, Joshua D. Steele of Harris Beach PLLC
Published December 03, 2020

A significant part of the March 2020 CARES Act, the federal government’s Paycheck Protection Program (PPP) provided a lifeline for hundreds of thousands of small businesses across the nation, helping struggling owners pay employees and cover costs associated with remaining in business during the pandemic. Assuming the borrowers provide lenders and the Small Business Association (SBA) with proof that the proceeds were used appropriately, those debts would be forgiven. More than $100 billion in PPP funding remained when the program closed in August of this year, and small businesses hope that the current or new administration agrees to a second round of stimulus in the coming months, to help offset looming restrictions or shutdowns.

We have reached a point where multiple components of the PPP program are converging—capturing both opportunity for small businesses to remain solvent, but also risk. First, and as mentioned, businesses that received loans as part of the initial stimulus package are either beginning to apply for loan forgiveness, or have already done so. However, despite the SBA and Treasury Department releasing simplified forgiveness applications for businesses that borrowed $50,000 or less, confusion remains about the timing of the application process, as well as the tax implications. 

Second, investigations of PPP recipients are gaining steam, as reports of waste and abuse have captured the attention of government watchdogs and federal prosecutors. Authorities seem to be targeting businesses that did not apply for loans in good faith or use the funds appropriately for payroll, utilities, rent, or other permitted expenses.

Finally, it is possible that a second stimulus bill will be put forth by the current or incoming administration, unlocking a second round of available funds for businesses. However, the politics make this uncertain. 

Regardless of where your business stands, it is important to engage your attorney to help facilitate the process and mitigate risks associated with the application or forgiveness process. We have several takeaways and common misconceptions that have arisen over the past several months of the PPP as investigations heat up:

  • Investigations are not exclusively focused on misuse of proceeds. There are many reports of businesses receiving loans despite exceeding the 500-employee workplace limit, taking more money than they were eligible for, or using funds on ineligible expenses. However, investigators are also looking at technical or clerical errors with statements made on original PPP applications.
  • Investigations are not isolated to large sum loans. We are seeing examples of loans under $50,000 facing scrutiny.
  • Investigations are location agnostic, and not isolated to the largest U.S. districts. In April, AG Barr directed every U.S. Attorney’s Office to “prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic.” The result is that in some districts the United States Attorney has appointed a lead Assistant U.S. Attorney for each separate geographic regional office in the district. The delegation of such a priority with multiple Assistant U.S. Attorneys, along with dedicated law enforcement officers and resources in such federal law enforcement agencies as the HHS, FBI, Department of Homeland Security, Department of Postal Investigation Services among others, has created a heightened focus on discovering and prosecuting criminal conduct related to COVID-19 throughout New York state.
  • The impetus for flagging a loan for investigation varies, and could be spurred by a whistleblower, the lender, or the federal agencies tasked with pursuing instances of fraud.

As your business proceeds with any component of the PPP process—from loan forgiveness to new loan origination—it is important to work with partners who understand the application and investigation landscape and can support your efforts to keep your organization running effectively. Both during and after the loan forgiveness process, PPP loans can also complicate certain types of corporate transactions, including the sale of a business. PPP borrowers that are considering a sale transaction, a financing or other significant corporate transaction should similarly work with advisors who are familiar with the PPP landscape and how these loans and the forgiveness process impact the execution of these deals.

Terry FlynnTerrance P. Flynn is a member of Harris Beach PLLC. He is a former presidentially appointed United States Attorney for the Western District of New York. He represents businesses and individuals across industries in both civil and criminal government investigations which include conducting internal corporate probes and independent monitorships. He can be reached at or 716.200.5120.

Josh SteeleJoshua D. Steele is a member of Harris Beach PLLC. He represents private and public sector employers in a wide range of employment law matters, from wage and hour class action lawsuits to litigation and administrative proceedings under Title VII, the Americans with Disabilities Act, Age Discrimination in Employment Act, Family and Medical Leave Act, and the New York Labor and Human Rights Law. He can be reached at or 585.419.8846.