We are publishing a blog series covering the risks of enforcement against companies that received COVID-19 relief funds under the CARES Act and strategies for mitigating those risks.  This third, and final, installment of our series discusses emerging and anticipated criminal enforcement involving COVID-19 relief programs.

From the inception of the CARES Act and the first distributions of its relief funds, the Department of Justice (DOJ) has made clear that targeting fraud schemes, which seek to exploit the COVID-19 crisis, is a top law enforcement priority.  In addition to the Civil Division’s intention to investigate wrongdoers under the False Claims Act (FCA), the Criminal Division has made similar enforcement promises and has already brought various indictments across the country charging cases of CARES Act related fraud.  While some of the first cases have targeted blatant fabrications to obtain funds, which may not be a pervasive issue, these cases provide a preview of the various statutes that we anticipate the government will continue to use to prosecute purported fraud related to COVID-19 relief programs.

DOJ’s Recent Cases Targeting COVID-19 Relief Programs Fraud

Since the first criminal charges were alleged against applicants fraudulently seeking CARES Act relief funds in May, we have seen new criminal cases brought every week to date.  At an American Bar Association virtual conference in June, the head of the Criminal Division, Assistant Attorney General Brian Benczkowski, discussed the recent charges against applicants of COVID-19 relief programs, in particular the Paycheck Protection Program (PPP).  As Mr. Benczkowski explained, the recent cases have involved individuals who made false statements on loan applications related to payroll expenses and employee numbers as well as the submission of documents by businesses that do not exist or by individuals claiming to own a company that they did not actually own.  “I can assure you there will be many more prosecutions that are coming,” he stated.

Although Mr. Benczkowski has announced that he will leave the Criminal Division in July, criminal enforcement actions related to COVID-19 will surely continue.  In fact, in the June 10th press release announcing his departure, DOJ reiterated its focus on investigating “individuals and businesses who make false statements to defraud the government – and in some instances, banks – to receive stimulus payments from CARES Act programs.”

In the first criminal action mentioned above, prosecutors charged two individuals in Rhode Island with conspiracy to make false statements to influence the SBA and conspiracy to commit bank fraud for allegedly “claiming to have dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses.”  In another case, for example, a software engineer in Washington was charged with wire fraud and bank fraud for allegedly seeking over a million dollars in PPP loans “by claiming fictitious payroll expenses associated with fictitious information technology companies that he created.”  The same day, DOJ charged a Hollywood film producer with wire fraud, bank fraud, false statements to a financial institution, and false statements to the SBA. There, the defendant allegedly made various misrepresentations in his PPP loan applications stating that he would use the funds to support payroll expenses for three film production and distribution companies when in fact, defendant used the funds “to pay off his personal credit card debts and other personal expenses.”  Additionally, in Massachusetts, the owner of an IT services company was charged with wire fraud for allegedly submitting fraudulent applications for over $13 million in PPP loans, in which he “misrepresented the number of employees and payroll expenses and falsely certified that the United States was the primary residence for his employees.”

Anticipated Future Criminal Enforcement

The cases brought to date provide a useful roadmap of the charges that DOJ is likely to continue to bring against CARES Act relief program applicants who have made false statements within program applications, including fraud statutes criminalizing wire fraud, bank fraud, and making false statements.  Additionally, Section 1109(i) of the CARES Act explicitly authorizes criminal penalties for fraud or other misconduct in seeking or using Small Business Administration (SBA) relief funds, under existing law (15 U.S.C. § 645), which criminalizes making false statements to the SBA.  The PPP application itself also advises applicants that knowingly making a false statement to obtain a loan from SBA is punishable under various existing statutes including 15 U.S.C. § 645 as well as 18 U.S.C. § 1001 (false statements), and if applicable, 18 U.S.C. § 1014 (false statements to financial institutions).  All of these statutes too, have been used by prosecutors in charging COVID-19 relief fund cases over the last few months.

The cases brought thus far are the low hanging fruit for DOJ in the sense that they entail outright fraud in some aspect of the loan application.  The closer and more difficult cases and those that will likely make up the bulk of the enforcement actions brought will relate to an applicant’s required good-faith certification of necessity made in its loan application.  The Treasury Department this week released the list of 4.9 million loans provided under the PPP and the businesses that received them, broken out by loan amount.  The SBA has indicated it will audit all recipients of loans of $2 million or more.  The crux of those audits is likely to focus on this certification.

In light of the substantial number of FCA investigations we expect will be initiated related to COVID-19 relief funds, we anticipate DOJ to bring related criminal FCA charges as well.

Finally, we also expect that DOJ will work closely with its law enforcement partners including existing Inspectors General Offices, as well as two entities created under the CARES Act—the Pandemic Recovery Oversight Committee (PRAC) and the Office of the Special Inspector General for Pandemic Recovery (SIGPR).  DOJ press releases announcing recent criminal charges reflect that DOJ is already working closely with the SBA OIG and Treasury OIG, among others, which will undoubtedly continue.  We anticipate that the SIGPR will also use its authority to police the use of CARES Act funds through referrals of civil and criminal action to DOJ.  SIGPR is largely modeled after the Special Inspector General for TARP (SIGTARP), the oversight entity created by TARP legislation passed in response to the 2008 financial crisis.  Since 2009, SIGTARP investigations have resulted in 384 criminal convictions, including nine criminal charges this year.  We expect SIGPR investigative efforts going forward may yield similar results.