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 the former employees made false statements to obtain economic injury disaster loans and grants from the U.S. Small Business Administration (“SBA”) or paycheck protection loans from SBA-approved lenders. The loans and grants were made available to small businesses who were suffering from the impact of COVID-19 and needed emergency financial assistance authorized by the Coronavirus Aid, Relief, and Economic Security (P.L. 116-136, the “CARES Act”).
The orders, each of which was issued on consent of the relevant employee, all involved a common fact pattern: the individuals were employees of financial institutions (and thus subject to the Board’s enforcement authority as institution-affiliated parties under the Federal Deposit Insurance Act) who made applications to the SBA seeking emergency assistance for personally owned and operated small business ventures that were presumably unrelated to their work at the financial institution. But the CARES Act and the related loan/grant programs have specific requirements for the relief sought, including providing accurate information (such as average monthly payroll expenses and number of employees) and agreeing that the loan proceeds are only to be used for specifically authorized purposes.
Each of the former employees made false representations to the SBA in connection with the loan/grant applications and then used the proceeds for unauthorized purposes, such as personal expenses. Economic injury disaster loans were obtained by application directly to the SBA and paycheck protection loans were obtained by applications to SBA-approved lenders acting on behalf of the SBA. Even though the false representations were not made in the conduct of the official duties of any of the employees, the Board prohibited all of these employees from participating in the conduct of the affairs of the financial institution at which they were employed, as well as other relief.
While these actions were brought against individual former employees (and not the institution themselves), there are several important takeaways.
First, the Board’s enforcement authority is broad, as it permits the Board to take action against any institution-affiliated party for violation of “any law or regulation.” 12 U.S.C. 1818(e)(1)(A)(i)(II).
Second, the Board is willing to exercise this broad authority even in cases where the violation of law or regulation appears to have taken place in connection with employee activity unrelated to their employment by the financial institution (e.g., in connection with a personal or side 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 then-existing policies. The absence of such policies or weak enforcement places the institution of being in jeopardy for employees’ outside business interests.