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Why Fraud Could Be the Latest Issue for PPP Loans

A recent lawsuit against one of Wendy’s largest franchisees reveals $1 billion worth of potential fraud that may be within the PPP program.

While the country grapples with the economic fallout caused by the COVID-19 shutdowns, the CARES Act, specifically the Paycheck Protection Program, has proved to be a saving grace for many businesses. Of course, it hasn’t all been good news. Since day one the PPP has been raked with issues, especially in the franchising industry. The program ran out of money less than two weeks after it started accepting applications and was widely criticized for favoring larger companies. Major chains like Shake Shack, Potbelly and Sweetgreen even returned funds after public outcry

Now, things are getting even more complicated as the government starts to crack down on PPP fraud. On July 8, Starboard Group, which operates 101 Wendy’s restaurants in seven states, was accused of defrauding the federal Paycheck Protection Program, according to QSR Magazine.

Sandi Adler, former Vice President of Legal Affairs and Human Resources at Starboard Group, filed a lawsuit against the franchisee, alleging its CEO ordered her to contact landlords, suppliers, vendors and creditors claiming the company was unable to meet its payment obligations because it didn’t receive PPP funds. However, Adler claims Starboard did in fact receive approximately $9 million in PPP loans

Unfortunately, this isn't the first time a company has been accused of PPP fraud. In early May, a Massachusetts man claimed he employed dozens of workers at three restaurants, but those establishments were not open prior to the start of the pandemic when the application was submitted. 

“Tens of millions of Americans have lost their jobs and have had their lives thrown into chaos because of the coronavirus pandemic,” said U.S. Attorney Aaron L. Weisman for the District of Rhode Island in a statement. “It’s unconscionable that anyone would attempt to steal from a program intended to help hard working Americans continue to be paid so they can feed their families and pay some of their bills.

In May, the Justice Department vowed to crack down on such abuse, but more recent data shows that it may not be so simple. This month, Entrepreneur reported that there could be more than $1 billion worth of fraud within the PPP program. According to the article, the Government Accountability Office attributes this to “the number of loans approved, the speed with which they were processed and the limited safeguards.” In a separate report, the GAO agreed that the rushed approval process for PPP loans to small businesses has created a “significant” risk of fraud.

“Every dollar stolen from the Paycheck Protection Program comes at the expense of employees and small business owners who are working hard to make it through these difficult times,” said Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division in a statement. “The Criminal Division is committed to working with our law enforcement partners to root out abuse of the important relief programs established under the CARES Act.”

In the franchising world, the issues are even more complex. Typically, the Small Business Administration classifies business as “small” only if they employ fewer than 500 people. Because of franchisor approval rights and transfer controls in franchise agreements, franchisees are often considered to be affiliated with franchisors and are prevented from accessing SBA funds without special modifications to the franchise agreement. Although some recent modifications may help franchisees, the program has still been widely criticized for favoring larger companies.

Despite the efforts of the PPP program, the Independent Restaurant Coalition has predicted that as many as 85 percent of independent restaurants could permanently close by the end of the year without sufficient aid. The U.S. House of Representatives recently voted unanimously to extend the PPP until August 8, giving small businesses an additional five weeks to apply for funding.

Still, many small businesses have been turned off from applying completely by the program’s strict restrictions. For example, the 25/75 rule that says business owners must use 75 percent of the funds they receive only for payroll, and 25 percent for rent, mortgage payments, utilities and other operating expenses in order to get loan forgiveness.

These issues with PPP have driven numerous calls for continued federal support of the restaurant industry, including the PPP Flexibility Act, a streamlined loan forgiveness program and the Restaurants Act.

While all of this is difficult enough, adding fraudulent claims into the mix certainly isn’t going to help. If it’s found to have committed fraud, it’s unfortunate to hear the $9 million Starboard received could have gone a long way for franchisees or independent operators who truly needed it.