Flagged PPP Loans: What is it?

As many US presidents used to say, “small businesses are the backbone of America.” That is why many private lenders and credit unions are working with government agencies such as the Small Business Administration to empower as well as provide assistance to small business owners.

But because of the pandemic, many of them as well as their employees have a hard time coping and keeping their businesses afloat.

So to aid these struggling owners and workers, the Paycheck Protection Program (PPP) loan was created to incentivize small businesses to keep their employees on the payroll.

But, as with many government aid and programs, the PPP has also been the subject of fraud.

So now that the PPP program has officially ended on the 31st of May 2021 and many existing borrowers are scramming to apply for loan forgiveness, let us give you a refresher of what this program was truly about as well as brief you about the PPP loans that were flagged due to alleged fraud or misuse.  

About PPP Loans

The main objective behind PPP loans is to provide small businesses with the resources they need to maintain their employees’ payroll and rehire employees who were laid off because of the pandemic.

Since the government cannot entirely process all this aid and assistance by itself, they tapped into private lenders and credit unions to facilitate the transactions.

Rather than transact directly with the government, they would instead connect and match these business owners to an appropriate lender.

So to put it simply, private lenders and credit unions backed by the government would loan you money enough to cover up to 8 or 24 weeks of your payroll costs plus benefits.


As a business owner, the one thing that you have to worry about is the lender who would provide you with the PPP loan.

Remember that these lenders are private lenders and credit unions, so their terms and requirement might vary slightly from each other.

Even though the government has set some appropriate guidelines for these lenders, there are still bound to be some differences in the way they deal with borrowers as well as the way they enforce their terms and agreements.

With all of these in mind, borrowers or business owners like should still not be too complacent. Even though many private lenders and credit unions are trustworthy, there are still some lenders who would misuse this government program for their own benefit.

Flagged PPP Loans

According to an OIG report, there have been some weaknesses in the way the PPP program was implemented. For example, 6 months after the PPP application officially ended, an SBA independent auditor found that over 27,000 PPP loans worth $488 million did not conform to the CARES Act and the other guidelines initially set by the government.

On top of that, the same independent auditor also stated that the SBA lacked oversight when it comes to loan approvals. They did not ensure the 2021 loan applications met the program eligibility criteria.

To quote directly from the OIG report, “the SBA did not verify all validation checks available from its automated screening process and did not perform a sufficient review of loan applications it flagged to ensure that lenders followed established procedures.”

So on that note, the government, lenders, and even the borrowers are now stuck in a pickle because of noncompliance, lack of oversight, and flagged PPP loans.

What does that mean for you as a borrower?

For some, they might see this as a win because they are able to get a loan despite being ineligible. But, even though you managed to get a loan approval, you would still have to face the consequences and sanctions once you get caught.

It is worth noting that the Department of Justice has been on the move to pursue fraud investigations targeting those who were PPP loan recipients across the country.

The case ranges from big businesses pretending to be small businesses to a single company submitting multiple loans applications. There are many ways in which a borrower can be flagged as fraudulent and several of them have already been caught by the DOJ.

Examples of fraud

Falsified Documents

A Washington Tech Executive was sentenced to 2-year imprisonment as well as fine in the amount of $100,000 and $1,786,357 in restitution. He falsified the documents he submitted to his lender. In truth, he had no employees nor business activity but his records shows that he had dozens of employees, whom he paid millions of dollars for their wages and payroll taxes. Out of the eight applications he filed, five of them got approved and he was able to fraudulently obtain nearly $1.8 million of the pandemic relief funds.

Bank Fraud and Money Laundering

A woman from Oklahoma now faces up to 30 years of imprisonment for conspiracy to commit bank fraud and money laundering. According to the DOJ and as shown on the court documents, the woman conspired to submit at least 153 fraudulent PPP applications that amount to $43.8 million. She admitted that she had falsified information on these applications and submitted the same false information to several financial institutions as well. In total, she fraudulently obtained $32.5 million of PPP loan funds and personally received and keep at least approximately $1.7 million as well.

What about the lenders who were at fault too?

Ever since the PPP program started, the scrutiny and investigations mainly targeted those who received the fraudulent COVID relief fund. The Department of Justice has convicted over 100 individuals over fraudulent PPP loans.

But, remember for the entire PPP program to be effective, you need both the full cooperation and trust of the lenders and the borrowers. The cycle of fraudulent activities would not stop if the lender would simply turn a blind eye to them.

That is why the US requires all financial institutions to aid government agencies in detecting and preventing money laundering as well as other fraudulent activities. Failure of these private lenders and credit unions to comply can result in hefty fines and sanctions from the government.

On March 1, 2022, the Department of Justice published its first criminal prosecution of a PPP lender.  

According to the United States Attorney for the Southern District of New York Damian Williams

“Rafael Martinez faked his way into building his company MBE Capital Partners into an almost $1 billion PPP lender.  Not only did Martinez allegedly lie to a financial institution to obtain almost $300,000 in PPP loan funding for MBE Capital, he then submitted fraudulent financial statements to get the SBA to approve MBE Capital and to obtain over $800 million to issue PPP loans. 

In doing so, Martinez and his company earned over $70 million in lender fees from the SBA, which among other luxury items, he audaciously spent on a villa in the Dominican Republic, a Ferrari, and private jets.”

Impact of the fraudulent PPP loans

Fraud against the PPP programs not only harms those involved, but it also affects other taxpayers and it undermines the public’s trust in our government programs.

Remember that PPP is not the only government program that provides relief to Small Business Owners during the pandemic. There are also other programs that rely on relief PPP funds or taxpayers’ money.

So if these fraudulent activities continue, then those who rightfully deserve these government aids would have a hard time acquiring them.

On top of that, government resources would be maligned. The impact of the pandemic would not only be dire to business owners but it would also disproportionately affect their employees as well.

Workers of small businesses are the ones greatly affected by the economic impact of the pandemic. So it is only right that these small businesses are the ones in front of the line, benefitting from all these pandemic relief and programs, and not those who scheme and use these government programs for their own benefit.

What should you do now?

Now that you finally understand all these inherent problems in the system, what are the things that you should do now as a simple small business owner?

If you did not do any of these fraudulent schemes, then you should not worry too much about the fines and sanctions that we mentioned before.

As a simple and honest borrower, the only thing that you should worry about is how will you manage to repay all these PPP loans you are incurring.

Since the main objective of the PPP program is to alleviate the problem of business owners during the pandemic, the government has also put safeguards on borrowers so that they would be able to ride out the pandemic wave without incurring any more debts.

In view of this, the PPP program also allows for loan forgiveness.

Loan Forgiveness

Very basically, loan forgiveness means that you no longer have to pay back what you owe.

However, before you are granted loan forgiveness, you need to pass several qualifications first.

With that, here are the terms for the PPP loan forgiveness as extracted from the Small Business Administration website

First Draw Term

  • Employee and compensation levels are maintained,
  • The loan proceeds are spent on payroll costs and other eligible expenses, and
  • At least 60% of the proceeds are spent on payroll costs.

Second Draw Term

  • Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan,
  • The loan proceeds are spent on payroll costs and other eligible expenses, and
  • At least 60% of the proceeds are spent on payroll costs.

Whether you managed to get the second draw or only the first draw, you qualify for full loan forgiveness if during the 8- to 24-week covered you managed to complete all of the terms above.

Applying for Loan Forgiveness

Here are the things that you should do to apply for a loan forgiveness

1.       Determine if your lender is participating in direct forgiveness

Depending on your lender, the form may vary.

2.       Gather all your documentation

As part of the loan or audit process, the SBA might require additional documentation to check and review all the information you declare.

3.       Submit the form and documentation

You can either submit it to the SBA direct forgiveness portal or through your lender.

4.       Track the progress of your application

Remember that you have the right to appeal the review decision by the SBA. With that said, make sure that you respond to any notification sent by the SBA.


According to the Small Business Administration website,

“Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.”


Hopefully, you now have a better understanding of what this program is truly about.

So if you happen to be on the receiving end of this program, then you should always be on the lookout for all of the things that we discussed above. This way, you would be able to avoid making mistakes and you would be able to apply for loan forgiveness before the deadline.

The information mentioned above is not meant to be comprehensive nor should be construed as legal advice.