With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the federal government created significant incentives for companies to apply for economic stimulus funding and grants to alleviate the devastating economic impacts from the worldwide COVID-19 pandemic. With upwards to $2 trillion in government aid expected to be disbursed, federal and state law enforcement agencies will inevitably investigate companies and business owners in connection with their receipt of stimulus funding and grants.
In addition to oversight investigations by the U.S. Treasury’s new Special Inspector General, financial services institutions will face audits and reviews by their regulators regarding their acceptance of CARES Act assistance. Also, companies not typically part of the regulated financial system will face increased scrutiny through government investigations and audits. Beyond possible criminal investigations, companies receiving pandemic stimulus assistance could face civil investigations and litigation (including under the federal False Claims Act) in connection with various certifications and reports required by the government as part of the loan application process.
This alert provides an overview of current trends in COVID-19 anti-fraud enforcement by federal and state law enforcement agencies, and highlights why companies receiving federal aid should position themselves to demonstrate compliance and manage enforcement and litigation risk.
Cares Act Economic Relief Programs
The CARES Act was signed into law on March 27, 2020, providing an estimated $2 trillion in financial assistance to all corners of the economy, including $376 billion in relief for American workers and small businesses. In addition to traditional funding programs offered by the U.S. Small Business Administration (SBA), the CARES Act established several new temporary programs to address the COVID-19 outbreak:
- Paycheck Protection Program (PPP): This SBA loan program is intended to help businesses keep their workforce employed during the COVID-19 crisis. SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. Applications are made through any existing SBA 7(a) lender, or through participating federally insured financial institutions.
- Economic Injury Disaster Loan Emergency Advance: This loan advance provides up to $10,000 of economic relief to businesses currently experiencing temporary difficulties. This program is for small businesses with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19. The funds are intended to be made available within days of a successful application, and this loan advance will not need to be repaid.
- SBA Express Bridge Loans: This loan program enables small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 quickly.
- SBA Debt Relief: The SBA is providing a financial reprieve to small businesses during the COVID-19 pandemic. Under this program, The SBA will automatically pay the principal, interest, and fees of certain current 7(a), 504, and microloans for a period of time.
In addition to the SBA programs, the Federal Reserve is starting new programs aimed at lending directly to states, cities, and mid-size businesses that have experienced revenue shortfalls as a result of the pandemic. On April 9, 2020, the Treasury and the Federal Reserve announced the details of a Main Street Lending Program authorized by the CARES Act to help small and mid-sized businesses obtain funding of up to $600 billion. The program establishes two potential lending facilities – an up to $25 million unsecured facility for new loans originated on or after April 8, 2020, and an extension facility of up to $150 million for loans in existence as of April 8, 2020.
As of April 9, more than 550,000 loans worth $141 billion had been approved by the government under the PPP loan program. In addition, nearly four million businesses have applied for funding under the SBA’s Economic Injury Disaster loan program. Visit our COVID-19 Resource Center for up-to-date information regarding the above programs, and other economic relief programs offered by the government.
CARES Act Government Oversight and COVID-19 Related Law Enforcement Actions
The CARES Act builds-in oversight and enforcement measures related to disbursements of funds made through these new economic relief programs. New enforcement and oversight bodies will work with the U.S. Department of Justice (DOJ) and the state attorneys general, all of which have already committed to fighting COVID-19 related fraud and abuse.
- Inspector General for Pandemic Recovery (SIGPR): On April 6, 2020, the President nominated Brian D. Miller to serve as the special inspector general for pandemic recovery. His nomination requires Senate confirmation. The SIGPR will function for five years, has a $25 million initial budget, and is tasked with conducting and coordinating audits and investigations. The SIGPR is empowered with subpoena authority for documents and may refer investigations to other law enforcement agencies.
- Congressional Oversight Commission: The Congressional Oversight Commission conducts oversight of the Treasury Department, Federal Reserve, and the various agencies’ implementation of the CARES Act until September 30, 2025. It has the power to hold hearings, compel the production of documents and witness testimony.
- Pandemic Response Accountability Committee (PRAC): PRAC is tasked with helping inspectors general safeguard CARES Act funds in order to “detect and prevent fraud, waste, abuse, and mismanagement” and “mitigate major risks that cut across programs and agency boundaries.” It has the broadest oversight and enforcement powers of the three oversight bodies established by the CARES Act. PRAC’s functions include “a comprehensive audit and review of charges” made to federal contracts under CARES Act authorities “to determine whether wasteful spending, poor contract or grant management, or other abuses are occurring” and referring matters as appropriate to the inspectors general as appropriate. PRAC has an $80 million budget and may refer investigations to DOJ for criminal or civil investigation. Even without DOJ, PRAC may conduct independent investigations, hold public hearings, and issue subpoenas for both documents and testimony.
In addition to these formally established channels, members of Congress already have warned the Treasury Department and the Federal Reserve that they “will be watching carefully as you hand out these funds.” Companies and business owners can expect oversight investigations not only from traditional law enforcement agencies like DOJ, the Federal Bureau of Investigation, and the Securities and Exchange Commission (SEC), and the newly established bodies under the CARES Act discussed above, but also from political branches of federal and state governments not typically associated with anti-fraud enforcement.
Law enforcement has already started taking action to curb fraud related to COVID-19. For example, on March 16, 2020, the U.S. Attorney General directed all U.S. Attorneys to prioritize investigation and prosecution of coronavirus-related fraud schemes. In a March 19, 2020 follow-up memorandum, each U.S. Attorney was directed to appoint a Coronavirus Fraud Coordinator to 1) serve as legal counsel for the federal judicial district on coronavirus matters, 2) direct prosecution of coronavirus-related crimes, and 3) to conduct outreach and awareness.
DOJ is urging members of the public to report suspected fraud schemes related to the coronavirus by calling the National Center for Disaster Fraud hotline at (866) 720-5721 or sending complaints to firstname.lastname@example.org. These complaints are entered into a centralized system accessible by all federal prosecutors and law enforcement (such as the FBI) to identify and prosecute fraud schemes.
Also, in furtherance of Executive Order 13910 signed by President Trump on March 23, 2020, DOJ created a COVID-19 Hoarding and Price Gouging Task Force (Task Force). The Task Force has already seized hundreds of thousands of hoarded medical supplies, including 192,000 N95 respirator masks, and has redistributed the supplies to health care workers in coronavirus “hot spots” like New York and New Jersey.
While the Task Force has not dictated that individuals and entities must sell masks solely to medical and military purchasers, is clear that sale of masks to medical and military purchasers is strongly preferred, as Attorney General Barr has stated: “Scarce medical supplies need to be going to hospitals for immediate use in care, not to warehouses for later overcharging.” Indeed, the Attorney General emphasized in another recent statement, that: “If you are amassing critical medical equipment for the purpose of selling it at exorbitant prices, you can expect a knock at your door. The [Task Force] is working tirelessly around the clock with all our law enforcement partners to ensure that bad actors cannot illicitly profit from the COVID-19 pandemic facing our nation.”
Recent federal enforcement actions also include:
- March 21, 2020, Texas: Operators of the website “coronavirusmedicalkit.com” allegedly engaged in a wire fraud scheme seeking to profit from the confusion and fear surrounding the coronavirus. The website claimed to offer consumers access to WHO vaccine kits for a $4.95 shipping charge, when in fact, there currently are no legitimate COVID-19 vaccines. The U.S. District Court issued a temporary restraining order to block public access to the website.“ The Department of Justice will not tolerate criminal exploitation of this national emergency for personal gain,” said Assistant Attorney General Jody Hunt of the Department of Justice’s Civil Division. “We will use every resource at the government’s disposal to act quickly to shut down these most despicable of scammers, whether they are defrauding consumers, committing identity theft, or delivering malware.”
- March 25, 2020, Los Angeles, California: A DOJ complaint alleges that a Southern California resident claimed to have personally developed a “patent-pending cure” and a treatment that prevents coronavirus infection, even though there is no specific antiviral treatment for COVID-19 and no vaccine to prevent infection. “During these difficult days, scams like this are using blatant lies to prey upon our fears and weaknesses,” said United States Attorney Nick Hanna. “While this may be the first federal criminal case in the nation stemming from the pandemic, it certainly will not be the last. I again am urging everyone to be extremely wary of outlandish medical claims and false promises of immense profits. And to those who perpetrate these schemes, know that federal authorities are out in force to protect all Americans, and we will move aggressively against anyone seeking to cheat the public during this critical time.”
- March 30, 2020, Newark, New Jersey: Man arrested for orchestrating scheme to defraud health care benefit programs related to COVID-19 and genetic cancer testing.
- April 1, 2020, Los Angeles, California: U.K. man charged with shipping mislabeled and unapproved ‘treatments’ for patients suffering from COVID-19. He allegedly repackaged preexisting “Trinity Remedy” kits as “Trinity COVID-19 SARS Antipathogenic Treatment” kits, even though the kits had not been approved by the U.S. Food and Drug Administration to treat COVID-19 – or for any other use.
- April 9, 2020, Falleteville, Georgia: Georgia resident arrested for selling illegal products claiming to protect against viruses. “We will take quick action through the Georgia COVID-19 Task Force to put a stop to criminals preying on the public with coronavirus-related fraud schemes,” said U.S. Attorney Byung J. Pak
- April 10, 2020, Washington, D.C.: Man is arrested and charged in federal court in the District of Columbia with fraud for attempting to sell millions of nonexistent respirator masks to the Department of Veterans Affairs in exchange for large upfront payments. A criminal complaint charging wire fraud alleges the defendant made and caused to be made a series of fraudulent misrepresentations in an attempt to secure orders from the Department of Veterans Affairs for 125 million face masks and other personal protective equipment (PPE) that would have totaled over $750 million.
Similarly, states throughout the nation are ramping-up their COVID-19 related arrests and enforcement activities. States like California have strict price controls in place to limit price-gouging in times of crisis. In California, price gouging is defined as an increase in the price of goods that is at least 10% higher than what was charged immediately before an emergency declaration. See Penal Code Section 396. Violators of California’s price gouging laws are subject to criminal prosecution that can result in a one-year imprisonment in county jail and/or a fine of up to $10,000.
Violators are also subject to civil enforcement actions including civil penalties of up to $2,500 per violation, injunctive relief, and mandatory restitution. On April 3, 2020, Governor Newsom issued Executive Order N-44-20, which expands consumer protection against price gouging and gives additional tools to the California Department of Justice and Attorney General’s Office, among others, to take action against price gougers. Other states are also taking action to protect the health and safety of their residents through actions designed to enforce social distancing and curbing the spread of the virus, which if intentional, can be considered an act of terror:
- March 18, 2020, San Diego, California: Eight San Diego County residents were arrested for price-gouging after sheriff’s officials said they were allegedly charging exorbitant prices for numerous products that have been scarce amid the ongoing coronavirus pandemic, such as toilet paper and hand sanitizer. The sellers were allegedly offering masks, gloves, disinfectants and toilet paper for as much as 20 times their pre-emergency retail price on websites such as Facebook, Craigslist and OfferUp, a violation of California’s strict anti-price-gouging laws in times of emergency.
- March 22, 2020, Trenton, New Jersey: In New Jersey, a man was charged with terrorist threats after allegedly coughing on a grocery store worker and claiming he had COVID-19.
- March 31, 2020, Cuba, Missouri: Man arrested after he allegedly coughed on the customers of a local business, breathed on merchandise and wrote “COVID” in the condensation inside of a cooler. He was charged with making a terroristic threat in the second degree, a felony in Missouri.
These are representative examples of what the states and the federal government have been focused on in the early stages of this crisis. As time goes on, there will likely be a shift from these more blatant schemes that present an immediate danger to the public safety, to a focus on financial crimes.
The Coming Wave of CARES Act Enforcement, Investigations, and Litigation
The COVID-19 pandemic is unprecedented in recent history. But, as the saying goes, “past is prologue.” Government financial fraud enforcement in the wake of the 2008 financial crisis is a likely indicator of what we can expect in the very near future with respect to the CARES Act. After the 2008 financial crisis, Congress established the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which was meant to deter fraud and abuse relating to the Troubled Asset Relief Program (TARP), which helped stabilize the country’s financial system at that time. TARP was smaller in scale than CARES, in that it made $700 billion available to stabilize the US economy. SIGTARP’s investigations have led to the recovery of $11 billion and prison sentences for over 300 defendants, through enforcement actions brought by various regulators (including DOJ).
Special Inspectors General were also set up to oversee billions of dollars of funds allocated for projects to rebuild Iraq and Afghanistan, which have also resulted in nearly $200 million in funds recovered, over 100 indictments, and nearly 100 convictions. Notably, despite the passage of well over a decade, enforcement work as to all of these programs continues today. We can expect similar rigorous scrutiny as to the funds distributed through the CARES Act. As is the case with the TARP funds, businesses should expect enforcement activity involving CARES Act funds for many years after the COVID-19 pandemic ends.
Importantly, applications for SBA loans are submitted under penalty of perjury, with representations regarding full truth and accuracy. Applicants must verify that the funds are necessary to support the ongoing operations of the borrower and will only be used for authorized purposes. The recently released Paycheck Protection Program rules confirm that if funds are used for unauthorized purposes, borrowers must repay the loans and will be subject to liability for fraud and/or other criminal or civil financial penalties.
In this crisis environment, lending decisions will be made quickly, and will rely on representations made in the applications. Indeed, the SBA and Treasury Department have clarified in recent guidance that lenders have minimal requirements to independently verify applicants’ eligibility, and loan applications will not be subjected to a separate thorough review by the SBA. As such, representations made on applications could form the basis of civil and criminal exposure for statements later proven to be materially false.
For example, there are a number of items on the application (total number of employees, payroll expenses, etc.) that if filled out incorrectly (both due to mistake/inadvertence, and intentional misrepresentations), could lead to federal criminal investigations. These investigations are not only costly and burdensome to deal with in the first place, but could also expose applicants to potential liability for bank fraud, wire fraud, mail fraud, false statements, and loan fraud. Given this potential exposure, companies should be particularly diligent and meticulous when applying for these aid programs, and it is a good idea to keep in mind the old adage: “an ounce of prevention is worth a pound of cure.”
In addition, the SEC is expected to ramp-up enforcement related to the volatility in the market surrounding the COVID-19 crisis. The SEC already has suspended trading of some stocks for making COVID-19 claims. There are likely to be a surge in SEC investigations relating to fraud and disclosure requirements (including the possibility of future private shareholder lawsuits), where the assistance of competent counsel from early stages is essential.
As the crisis evolves, so does the government’s response to it. Companies and business owners should keep a close eye on the enforcement actions taken by traditional federal and state enforcement entities, as well as the newly established CARES oversight bodies, as these will shed light on the government’s enforcement priorities going forward. Those applying for CARES Act relief funds should take steps now to ensure compliance and should be prepared for future investigations, enforcement, and even litigation. JMBM is vigilantly monitoring this ever-evolving area, and we are well equipped to assist clients at any stage of this process.
JMBM’s White Collar Defense & Investigations Group can assist companies with a wide-range of potential issues stemming from the COVID-19 pandemic, such as CARES Act relief compliance programs, internal investigations into alleged misconduct by company insiders, and defending companies in criminal and civil government investigations.
About the White Collar Defense & Investigations Group
JMBM’s White Collar Defense & Investigations Group is keenly focused on our clients’ business objectives and is committed to minimizing the disruption, anxiety, and public scrutiny that can arise from criminal and civil investigations and litigation. We are leaders in the representation of companies, boards of directors, management, and individuals in connection with a broad range of government investigations, enforcement actions, remediation and compliance, administrative proceedings, internal investigations and white collar criminal investigations and prosecutions.
This update is provided to our clients, business associates and friends for informational purposes only. Legal advice should be based on your specific situation and provided by a qualified attorney.