Federal Reserve wields broad disciplinary power to sanction former bank employees who committed PPP loan fraud | McGuireWoods LLP

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On October 13, 2022, the Board of Governors of the Federal Reserve System (“Board”) announced multiple enforcement actions against former employees of several financial institutions because former employees made false statements to obtain US Small Business Administration (“SBA”) economic disaster loans and grants or paycheck protection loans from SBA-approved lenders. The loans and grants were made available to small businesses that were suffering the impact of COVID-19 and needed emergency financial assistance authorized by the Coronavirus Aid, Relief, and Economic Security (PL 116- 136, the “CARES Act”).

The orders, each of which was issued with the consent of the affected employee, all involved a common pattern of fact: the individuals were employees of financial institutions (and therefore subject to the Board’s enforcement power as affiliated parties to the institution under the federal deposit insurance law) who made requests to the SBA for emergency assistance for personally owned and operated small businesses that were likely unrelated to their work within the financial institution. But the CARES Act and related loan/grant programs have specific requirements for the relief requested, including providing accurate information (such as average monthly salary expenses and number of employees) and agreeing that loan proceeds will not must be used only for specifically authorized purposes. .

Each of the former employees made false statements to the SBA as part of the loan/grant applications and then used the proceeds for unauthorized purposes, such as personal expenses. Economic Disaster Loans were obtained by direct application to the SBA and Paycheck Protection Loans were obtained by applications from SBA-approved lenders acting on behalf of the SBA. Even though the misrepresentations were not made in the performance of the official duties of any of the employees, the Commission prohibited all such employees from participating in the conduct of the affairs of the financial institution for which they worked, as well relief to others.

Although these actions were brought against individual former employees (and not against the institution itself), there are several important points to remember.

First, the Commission’s enforcement power is broad, allowing the Commission to take action against any party affiliated with an institution for violating “any law or regulation”. 12 USC 1818(e)(1)(A)(i)(II).

Second, the Board is prepared to exercise this broad power even in cases where the violation of law or regulation appears to have occurred in connection with an employee’s activity unrelated to their employment with the financial institution ( for example, in connection with a personal or parallel business).

Third, it is important that institutions have policies governing outside business interests and other related conduct, as the Board noted that each employee’s action was taken in violation of the policies then in effect. The absence of such policies or weak enforcement puts the institution at risk to the outside business interests of employees.

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