A federal lawsuit filed by a fintech company revealed that it has been under investigation by the Department of Justice (“DOJ”) regarding its Paycheck Protection Program (“PPP”) loan approval practices for over a year. This rare disclosure of a pre-indictment DOJ investigation signals that the government is refocusing its enforcement efforts on fintechs and financial institutions that managed PPP loans.
The fintech under investigation is an online loan servicing company that provides loans to small businesses, and processed over $7 billion in PPP loans to at least 300,000 businesses. The fintech revealed 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 false PPP loan applications to the fintech. Apparently unaware of the ongoing investigation into the fintech, the government sought court testimony in the criminal case about how the fintech managed PPP loans and loan applications.
The fintech filed a motion to quash the subpoena in June, stating that the DOJ was already investigating its conduct under the False Claims Act (“FCA”) in a separate case on the theory that it improperly approved PPP loans that were clearly fraudulent or not. within Small Business Association (“SBA”) parameters. According to the same filing, the DOJ is also examining the adequacy of fintech’s fraud and anti-money laundering controls. Fintech argued that it should not be compelled 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 revealed investigation adds to the continuing fallout for fintechs that managed PPP loans. Government and news reports have often accused fintechs of being gateways for PPP fraud due to their less robust anti-fraud controls compared to traditional financial institutions. As described earlier here, in June 2021 the House Select Subcommittee on the Coronavirus Crisis opened investigations into the role of four fintechs (including the fintech subpoena 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 is also targeting fintechs that managed CARES Act funds. These enforcement efforts can have extreme consequences for lenders under the FCA, including treble damages and civil penalties for all fraudulent claims submitted to the authorities. Here, the government can bring FCA claims on the theory that financial institutions caused false claims to be submitted to the SBA by failing to adequately screen for false PPP applications. The FCA also allows private whistleblowers to sue on behalf of the government, meaning that any employee of a fintech or financial institution (or even an unrelated person) can bring a case under a similar theory of liability.
Putting it into practice: Lenders who administered PPP loans would do well to review their loan administration protocols to ensure that they complied with their anti-fraud and anti-money laundering responsibilities.