Through the CARES Act, the Payroll Protection Program (PPP), and other coronavirus (COVID-19) relief programs, the federal government has handed out billions of dollars in grants, loans, and direct payments to American businesses. The funding is intended to, among other things, pay salaries, maintain a workforce, and cover essential business costs and expenses resulting from the pandemic. Recent announcements by the Department of Justice (DOJ) make it clear the government is closely monitoring these relief programs for fraud and other criminal activity, and specifically, whether the money was requested, disbursed, and utilized appropriately.
The next step in the government’s efforts is to investigate and prosecute COVID-19-related fraud across many industries, including: real estate, healthcare, retail, and hospitality. Business owners and business affiliates who received federal relief money could find themselves under a microscope. One ominous sign was Treasury Secretary Mnuchin’s announcement that all PPP loans over $2 million will be reviewed for regulatory compliance by the Small Business Administration (SBA) before any loan forgiveness is granted. Such scrutiny could not come at a worse time as businesses try to rebuild and recover from months of economic distress. Therefore, it is critical for any business that received federal money as part of any COVID-19 relief program to stay abreast of these developments, maintain accurate and complete records regarding the loans and grants, and otherwise be prepared for audits and investigations by authorities.
Who Is Looking?
DOJ is taking the lead in anti-fraud efforts aimed at the COVID-19 relief programs. DOJ is also calling upon its law enforcement partners at the Office of Inspector General (OIG) within each of the major departments as well as other relevant federal agencies like the SBA and the Internal Revenue Services (IRS). In the coming weeks, we will also see the appointment of a Special Inspector General for Pandemic Recovery whose focus will be to conduct audits and investigations of the trillions of dollars disbursed through the CARES Act.
DOJ will be coordinating its enforcement efforts with local United States Attorney’s Offices. Each of those 94 offices spread out across the country have appointed special fraud coordinators to direct COVID-19-related investigations and prosecutions.
DOJ officials have stated that their investigative approach will be modeled after their healthcare fraud strike forces that currently exist in 10 major cities where Medicare fraud seems to be the most prevalent. The strike force model typically consists of teams of auditors, investigators, and prosecutors dedicated solely to reviewing and analyzing data in order to spot outliers who might be engaged in criminal activity. The strike force is designed to respond quickly and stop fraud in real time, often through property seizures, fraud injunctions, or asset forfeiture proceedings instituted by DOJ attorneys.
The use of data analytics has been extremely successful in prosecuting Medicare fraud; therefore, it is not surprising that enforcers will be employing similar tactics when reviewing COVID-19 relief money. As an example, a strike force team could develop algorithms for businesses identified by tax identification number and compare tax filing data with the information that was submitted on PPP loan applications and highlight any reporting inconsistencies. Based on those red flags, investigations of companies could be opened on a massive scale. DOJ’s utilization of the strike force model is a strong indication that it intends to act quickly and decisively in investigating and prosecuting suspected PPP-related fraud.
What Are They Looking For?
Fraud theories involving COVID-19 stimulus money are still being developed. Much of the focus will be dependent upon what the data shows as being problematic, like overstating payroll amounts to obtain higher loan amounts, underreporting the number of employees to qualify for loans, or receiving PPP funds that exceed the proper allocated amount. At minimum, it is safe to assume that authorities will be looking to see if a business provided the government with truthful and accurate information on loan applications.
Accordingly, law enforcement will be closely examining whether an application contains materially false statements or certifications. Other key inquiries might include who is responsible for providing inaccurate or false information? And who knew or should have known about misstatements?
On May 5, 2020, DOJ announced the filing of criminal charges, the first of its kind, against two businessmen for fraudulently seeking more than $500,000 in PPP loans. In their PPP application, the individuals indicated they had dozens of employees at different business locations when, in fact, there were no employees working for any of the businesses. Apparently, the businesses were not even operating prior to the start of the pandemic. It does not appear as though the lender who processed the applications ever released the loan money to the individuals.
An important yet unresolved question is how DOJ will approach the banks and lenders whose responsibility it was to issue the PPP loans. Initially, it appears as though lenders have been given wide discretion to rely upon the borrower’s application and the certifications therein to distribute PPP funds. So if there are false statements on an application, the borrower may be found to be the liable party. DOJ has been highly criticized in the past for failing to investigate and prosecute big banks and lenders following the subprime mortgage crisis and the financial crisis of 2008. Thus, banks and lenders will most likely not get a free pass in these investigations, particularly if the borrowers were long time customers of the banks.
Investigations will also be driven by public perception and concern such as the recent stories of large, private corporations receiving millions in PPP funds to the detriment of small businesses on the verge of closure. Authorities will want to know whether federal relief money was dispensed appropriately and for its intended purposes. Moreover, DOJ is not the only oversight authority interested. There have already been calls for congressional investigations into how pandemic relief funds have been awarded and distributed.
A Lack of Guidance Can Mean Legal Exposure
It has been reported that DOJ has already opened investigations involving the PPP by requesting information from lenders about certain loan applications. It remains to be seen what DOJ is specifically focused on, however, considering the number of applications received for PPP loans (which are forgivable if certain terms are met), there are likely many areas of possible inquiry.
Under the PPP, businesses were required to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.” This was only one of several required certifications on the PPP application form and has been identified by the Department of the Treasury as meriting specific scrutiny. Commentators quickly noted the lack of clarity and guidance from the SBA about what those certifications really meant in deciding whether to apply for the loans. For example, what does it mean for the loan request to be “necessary” to support ongoing operations? Must the analysis take into account an applicant’s ability to access capital markets or other sources of liquidity? To what degree does a business expense paid using PPP funds have to be attributable to “ongoing operations?”
The lack of clear guidance from the SBA makes companies susceptible to allegations of false statements on their applications. After two rounds of PPP loans (with the third round being planned now), the SBA has issued more guidance on PPP requirements and expectations for businesses. However, much of the newer guidance still lacks clarity and actually creates inconsistencies in interpretation. This unfortunate development has created much anxiety among PPP applicants especially at a time when DOJ is investigating COVID-19 relief programs.
What Are The Range of Sanctions?
If a PPP application possibly contains either inaccurate information or statements that the company can no longer certify, then the business may want to consider returning the money before the company becomes the subject or target of a DOJ investigation. The money must be returned within a specified timeframe, and it is certainly an option worth considering since the government has made clear that money can be returned “with no questions asked.”
Organizations such as AutoNation, Ruth’s Chris Steak Restaurant, and the Los Angeles Lakers basketball team all received millions in PPP funds, but they are all being allowed to return the amounts without penalty. This development may be the proverbial “slap on the wrist” belying more stringent enforcement actions to come. Given DOJ’s recent announcements about increased scrutiny, it is unlikely that other businesses in the future will be treated similarly when DOJ decides to make an example out of those who engage in financial misconduct involving federal funds.
Civil enforcement for abuses involving COVID-19 relief money will likely come through the federal False Claims Act (FCA). A FCA case can be initiated by the government through filing a civil complaint or by a whistleblower who can receive a portion of the monetary recovery the government obtains. Under the FCA, the government can recover substantial financial penalties between $11,000 and $23,000 per false claim as well as three times the amount of damage to the government (with PPP, most likely to be measured by the amount of the loan). Liability for false claims will generally turn on two important inquiries. First, whether the business knew or should have known that the information or certification was indeed false, which can be shown through emails, text messages, or meeting minutes. Second, whether the information or certification was material to the government’s decision to disburse the funds.
Where there is a deliberate and intentional scheme to defraud a federal program like the Paycheck Protection Program, a criminal prosecution for false statements, wire fraud, or bank fraud may follow. The range of criminal sanctions is severe considering the underlying misconduct can result in additional charges such as: attempt, conspiracy, or even willful blindness to a fraudulent scheme. Finally, criminal prosecutions are more likely to result when an error or certain misconduct is hidden or part of “a cover-up” during a government review, audit, or investigation.
Businesses seeking COVID-19 relief money should be aware of these developments and take precautionary steps to memorialize their efforts that their requests for government funds are not only made in good faith but also true and accurate. Given the massive amounts of money at issue, government audits and investigations have already started and they will continue for the foreseeable future. Businesses contacted by law enforcement about receipt of federal relief money or those who have any other questions on this topic should consult a qualified and experienced MMM attorney.