Stepped-Up Enforcement Under the CARES Act Creates Dangers for Even the Most Scrupulous and Unwitting of Applicants

The application requires the borrower to make certain certifications which may expose the applicant to scrutiny by federal regulators or law enforcement. As businesses consider whether to avail themselves of this historical level of stimulus funding, company officers and senior managers must not only be cognizant of the eligibility and certification requirements but also the broad legislative mandates for oversight, investigation and enforcement, which are certain to lead to investigations long after the virus is (hopefully) a bad memory. Indeed, Attorney General Barr has made clear that federal prosecutors will “prioritize the investigation and prosecution of Coronavirus-related fraud schemes” and the U.S. Attorney in the Eastern District of Pennsylvania has left little doubt as to the resolve of federal law enforcement saying “anybody who tries to take advantage of the pandemic in this manner will feel the full weight of federal law enforcement.”

Historically, funding for emergency/distress programs has come with a concomitant commitment to target alleged fraud by recipients of these funds. Lessons learned from the Troubled Asset Relief Program (TARP) and emergency appropriations related to Hurricanes Katrina and Sandy have led to the current legislation which builds layers of federal enforcement mechanisms into the CARES Act and related programs. Chief among these is the provision creating a Special Inspector General for Pandemic Recovery (SIG), which like his or her predecessor from the TARP program, will “conduct, supervise, and coordinate audits and investigations” into a wide array of conduct,” including:

• • Fraud directed at individuals who are seeking to apply for funding.
  • Wrongdoing committed by recipients of funds in connection with the misuse of program funds.
  • False statements in the course of applying for funding or in certifying compliance with the CARES Act.

Where criminal activity is detected, the SIG can make referrals to federal and state prosecutors for violations of law, including the False Claims Act, various false statements statutes and the ubiquitous mail and wire fraud statutes. Those investigations could result in stiff penalties, including fines for corporate entities, potential treble damages awards, and the risk of incarceration for individuals.

Many PPP applicants will not have experience in dealing with federal reimbursement programs and the broad certification requirements that come with them. This coupled with the enhanced enforcement under the CARES Act and related programs could be a recipe for future problems. And, while many of the PPP criteria are objective, it is likely that law enforcement will focus on the subjective, “good faith” certifications that must be made. For example, many applicants are already asking about the requirement that applicants certify that the loan is “necessary… to support… ongoing operations?” Still, others are concerned that because money is fungible, how will they show that the funds were used only for approved purposes? These subjective and forward-looking certifications are particularly scary when one considers that FCA liability may be premised upon alleged falsity surrounding certifications that are either expressed or implied. In short, the nature of the PPP-related certifications leaves ample room for the government and whistleblowers to cause problems for unwitting applicants.

There are, however, some common-sense steps that applicants can take to help insulate themselves should they find themselves under government scrutiny. Chief among these is the overarching instruction to keep good records and carefully document the facts and circumstances existing at the time of the application. Specifically:

• • The entity should assign a small team to be responsible for the application process. This group must ask the right questions, keep accurate records of the responses, and maintain the factual back up for the information contained in the application. This team should also be responsible to muster responses that may be necessary as a result of regulatory inquiry, with the assistance of counsel.
  • Seek professional guidance at all stages of the process from competent legal counsel. Federal prosecutors will often decline to bring or further investigate matters where the applicant is relying on the advice of competent professionals. Moreover, having counsel involved may help preserve certain legal privileges, thereby shielding some information from the prying eyes of prosecutors.
  • Prosecutors love to investigate cases brought by whistleblowers who are also motivated to assist the government’s efforts. The best way to insulate the business from false allegations is to make sure that the business has a robust compliance program with a clear channel for reporting and internally investigating, if necessary, alleged instances of wrongdoing.
  • To the extent practicable, stimulus funds should be segregated from operational funds. This will allow for a clear paper trail demonstrating the use of the funds for approved expenditures.
  • Avoid any appearance of self-dealing. Prosecutors will be closely scrutinizing related-party transactions. Also avoid executive bonuses, perks, and excessive, non-essential expenses in the near term that would be inconsistent with the certification that the funds were essential to maintain ongoing operations.
  • Review prior financial statements, loan or credit applications, representations to landlords, or information provided to possible investors to ensure the application is consistent with prior representations.
  • Make sure employees remember not to use emails or internal messaging programs (Teams or Slack for example) except for official purposes. Offhand comments or attempts at humor can be later read out of context and can come back to haunt you.

The PPP program and the other stimulus packages passed by Congress are an essential lifeline for most small businesses. However, even the most scrupulously honest business can unwittingly get caught up in a situation that may trigger an audit or investigation. As such, it is important to plan for that possibility at the outset of the process. If you have a question, now is the time to seek the advice of your counsel. We have expert attorneys available to assist you throughout every stage of this process, including handling and more importantly, avoiding any type of regulatory or enforcement inquiry.

The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.

For more information contact partner Mark Sheppard in the white-collar defense & government investigations practice group at Klehr Harrison.