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Fraud related to small business loans is on the rise — and the federal government is on high alert. Here's how to protect yourself in case of an audit or investigation.

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  • This week, the first charges were filed against two people who allegedly fraudulently sought Paycheck Protection Program (PPP) loans.
  • With the government on high alert, businesses should be prepared in case of an audit.
  • Make sure you have documentation for all of the funds you allocate, and return the money if you're worried about not meeting the right certifications.
  • Demonstrate that you acted in good faith when applying for the loan, and remember that an audit will look at your statements beyond just PPP use.
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The US is currently in one of the most fraud-rich environments in our economic history, according to the CEO of one of the largest accounting networks in the world.

Brad Preber Grant Thornton's CEO

"It is as if a bank vault had been opened around the country and a welcome sign for crooks hung outside the door," said Brad Preber, CEO of Grant Thornton LLP, referring to loans issued under the CARES Act economic stimulus package.

In fact, on May 6, the first charges were filed against two people allegedly fraudulently seeking Paycheck Protection Program (PPP) loans. In a statement released by the US Attorney's Office of the District of Rhode Island, the US Justice Department charged Rhode Island applicants David A. Staveley and David Butziger with "conspiring to seek forgivable loans guaranteed by the SBA." The lawsuit also claims that Staveley and Butziger sought funds to cover "dozens" of employees' wages at four companies, none of which exist.

Staveley and Butziger are accused of knowingly defrauding both the PPP and their lender — Staveley requested more than $438,500 for restaurants that were closed, not in operation during PPP application guidelines, and/or that he had nothing to do with, while Butziger applied for $105,381 in payroll and other relief for wireless company employees who had never worked there. 

This move by the Department of Justice follows earlier comments by Treasury Secretary Steven Mnuchin showing that the government is taking steps to prove they are serious about enforcement, Annie Railton, a New York-based partner in the white-collar defense group at Goodwin LLP, told Business Insider. 

Annie Railton, Goodwin LLP

"The recent statements from the Treasury Secretary and the updated guidance from the SBA indicate that they're on high alert for fraud, and I think that should impact the way borrowers who believe they need funds think — they should keep that perspective front of mind," Railton said. "History shows that any time there is government aid, there will be investigations years down the road, and the worry about fraud impacts how closely the government will scrutinize."

Railton suggested the following approach that companies can take to minimize the risk of trouble and justify their use of funds in the event of an audit.

Act as if an audit is inevitable

Railton recommended acting as if you expect an audit, and to not get caught up in the current stress-intensive environment by making rash decisions. 

"Borrowers should expect and plan for an audit at a high level," Railton said. "You should put yourself in the best position should the audit occur, and take steps to ensure you're approaching every process thoughtfully so that if you're asked down the road you're able to explain that process."

Second, borrowers should be prepared to show they acted on a good-faith basis when applying for the loan — including when certifying its necessity. Remember, on the PPP loan application, one of the certifications borrowers make is "current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant." If the signatory of the application — the borrower — is found in violation of that certification, penalties could result. 

"Think about the basis for meeting the certifications, and how to best position yourself to establish good faith," Railton said. In doing so, be aware that in a post-PPP loan audit, authorities will review your business from an overall standpoint, looking at more than just spending connected with your PPP funds. 

"Think about how the business is doing generally," she said. "Think holistically on the business/financial outlook, [in terms of] what steps is the company taking and how that might be viewed in terms of necessity."

Documentation is key

Railton also stressed the importance of creating and retaining more than the normal amount of documentation. 

A potential audit won't examine only financial records such as bank documents and payroll accounts. In such a process, examiners will also want to break down the decision logic that surrounded any and all transactions. 

"There could be a range of audits or government investigations, and under the False Claims Act, that's a process that can require pretty substantial documents, as well as interviews, potentially, and an exchange of a pretty significant amount of information," Railton explained. 

In short, when you're making a move, track why that decision was made. In hindsight, you'll be glad you did.

Not confident you made the proper certification? Return the money.

If business owners have any concern about the "necessity" certification or any others they signed off on when applying for a PPP loan, there's always the option to return the funds, Railton said. On May 6, the SBA extended the deadline for such returns without any penalty until May 14 — known as the "safe harbor period." 

Businesses may decide to return funds even if they do strictly meet the standard of "necessity."

"At a high level, there are several reasons a company might return the funds," Railton said. "[Accepting funds] could impact a company's ability to get new investors, it could pose a PR risk — all of those factors play in."

Additionally, the term "necessity" leaves a lot of room for interpretation, which is evolving on a minute-by-minute basis. The SBA is expected to provide further guidance on what constitutes necessity in the coming days. 

In other words, business owners contemplating returning their PPP funds may be well served to wait for the SBA for further guidance before making such a move, keeping the new May 14 safe harbor deadline in mind.

SEE ALSO: The best benefit options for business owners to keep staff happy and engaged while working from home

NOW READ: Small business loans could trigger 'one of the biggest fraud disasters in our country's history' if entrepreneurs don't take crucial steps to protect their data, according to risk-management experts and CPAs

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