The Trump administration will begin auditing recipients of small business COVID-19 rescue loans above $2 million before the loans can actually be forgiven, warning that companies that may have cheated the new program could find themselves at the end of a criminal investigation.
Known as the Paycheck Protection Program, applications went live Monday morning for a $310 billion round of funding of federal aid from the U.S. Small Business Administration, after the prior $349 billion ran dry in two weeks.
The program has fallen under intense public scrutiny into whether federal aid money went to well-financed companies that never needed it in the first place, rather than struggling Main Street, mom-and-pop shops that have seen revenues dry up amid the global pandemic.
“Before we forgive these loans, we’ll check every single one over $2 million,” U.S. Treasury Secretary Steven Mnuchin told Fox News in a recent interview. “So anybody that took the money that shouldn’t have taken the money, one it won’t be forgiven, and two, they may be subject to criminal liability, which is a big deal.”
Many publicly traded companies with access to vast quantities of money have been publicly pressured to return those funds.
They include the Los Angeles Lakers, which was pressured to return its $4.4 million loan; the Kura Sushi chain, which returned its $6 million loan; Shake Shack, which returned its $10 million; and Ruth’s Chris Steakhouse, which returned its $20 million loan.
Any other well-to-do, publicly traded companies have to show in “good faith” that they actually need the loans, or return them by May 7, lest they face criminal liability.
Treasury guidelines indicate that “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith.”
“To further ensure PPP loans are limited to eligible borrowers, the SBA has decided” to “review any loans” above $2 million, reads a joint Tuesday evening statement from Mnuchin and SBA Administrator Jovita Carranza.
The PPP program was signed into law by U.S. President Donald Trump as part of the $2.2 trillion federal CARES (or Coronavirus Aid, Relief, and Economic Security) Act on March 27, with the goal of injecting sorely needed cash into businesses that have taken a financial hit amid the COVID-19 pandemic and government responses to the outbreak.
In New Jersey, businesses have been ordered to shutter their doors in a statewide effort to stop the spread of the virus, while nationwide tens of millions of Americans have lost their jobs, spent less money, or avoided most travel to reduce any risk of exposure.
PPP loans are capped at $10 million and equal roughly 2.5 times monthly payroll costs. They will be forgiven if businesses use the funds to cover payroll expenses and other operating costs; eligibility extends to companies with up to 500 workers.
But under the new approach from the Treasury, that forgiveness would not come for loans above $2 million until a federal audit would gauge whether the applicants are actually in need of the funds.
“This was a program designed for small businesses. It was not a program that was designed for public companies that had liquidity,” Mnuchin told CNBC in a recent interview.
More than 220 publicly traded companies were awarded at least $870 million under the program, according to FactsSquared, a Washington, D.C-based analytics firm.
But of the 1.6 million loans awarded overall, 74 percent were for less than $150,000, according to SBA spokesperson Matt Coleman.
Under the first iteration of the program, 33,519 New Jersey businesses were awarded a total of $9.5 billion.
“We’re not going to be able to check all the loans before they go out the door because there are over 26,000 of these loans, but before we forgive these loans, we’ll check every single one over $2 million,” Mnuchin said on Fox News.
“I encourage everybody to look at this and pay back these loans now so we can recycle the money if you made a mistake.”