On May 13, the Department of Justice announced that now-bankrupt financial technology company Kabbage Inc. (d/b/a KServicing) has agreed to pay $120 million to resolve allegations that it violated the federal False Claims Act (FCA) by “knowingly submitting thousands of false claims for loan forgiveness, loan guarantees, and processing fees to the U.S. Small Business Administration (SBA) in connection with the Paycheck Protection Program (PPP), a COVID-19 pandemic-related financial relief program.

The settlement resolved two different FCA violations.  First, the DOJ alleges that Kabbage systematically finlated tens of thousands of PPP loans, causing the SBA to guarantee and forgive loans in amounts that exceeded what borrowers were entitled to under program rules.  As part of the settlement, Kabbage’s successor company in bankruptcy admitted that Kabbage (1) double-counted state and local taxes paid by employees in the calculation of gross wages; (2) failed to exclude annual compensation in excess of $100,000 per employee and (3) improperly calculated payments made by employers for leave and severance.

Second, the DOJ alleges that Kabbage knowingly failed to implement appropriate fraud controls to comply with its PPP and other obligations, including removing underwriting steps from its pre-PPP procedures to process a greater number of PPP loan application and maximize processing fees. The DOJ further alleged that Kabbage knowingly set substandard fraud check thresholds despite knowledge of SBA’s concerns that fraudulent borrowers might seek to benefit from the PPP, relied on automated tools that were inadequate in identifying fraud, devoted insufficient personnel to conduct fraud reviews, discouraged its fraud reviewers from requesting information from borrowers to substantiate their loan requests and submitted to the SBA thousands of PPP loan applications that were fraudulent or highly suspicious for fraud.

The settlement resolved two seperate whistleblower qui tam actions, one brought by an accountant who submitted PPP loan applications to Kabbage and the other brought by a former analyst in Kabbage’s collection department.  Both will receive a portion of the DOJ’s recovery.