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The Government’s Long Game For Investigating COVID-era Relief Fraud – White Collar Crime, Anti-Corruption & Fraud


In a recent article in the New York Times, David
Fahrenthold outlined the big issue facing prosecutors investigating
COVID-era fraud: the sheer magnitude of it. The title of the
article, “Prosecutors Struggle to Catch Up to a Tidal Wave of
Pandemic Fraud,” is dead on.

The various COVID relief programs pumped $5 trillion into the
economy, incredibly quickly, and with relatively minimal vetting.
Within that enormous and necessary set of economic stimulus
packages was likely the greatest amount of fraud committed on the
government in the shortest amount of time in history.

COVID relief unleashed a gushing river of free money that few
could resist taking from. While certain businesses like restaurants
and hotels were instantly and obviously impacted by the pandemic
restrictions, few businesses were un-affected and virtually all
business owners were concerned about COVID’s impact on their
workforces and bottom line. All told, almost 15 million different
recipients applied and received 22 million loans and grants
totaling almost 5.3 trillion dollars. Many recipients were in
desperate need of a cash infusion to keep their employees paid and
to keep paying the mortgage or rent in the face of slashed revenue.
But some opportunistic fraudsters looking for a quick score simply
invented a business or a workforce, applied and collected easy
money from the government. It must have felt like taking candy from
a baby.

The vast majority of money recipients did not commit fraud but
did engage in some amount of handwringing before deciding to apply
for a loan or grant. Many recipients were not sure if or how their
business would be affected. Every one of them experienced
uncertainty and every one of them did not want to let free money
that they were entitled to pass them by. Many companies consulted
lawyers or accountants to help them navigate the application and
certification process, none of them certain about the rules or
process – because the government itself was figuring it out
on the fly. But before the programs ended, 15 million recipients
and many more applicants certified, as required, “in good
faith” that “[c]urrent economic uncertainty makes this
loan request necessary to support the ongoing operations of the
Applicant.”

From my perspective as a lawyer representing those under
investigation by the government, the PPP certification standard is
quite forgiving and leaves a lot of wiggle room given the genuine
uncertainty felt by all during the pandemic. With minimal guidance,
millions of businesses made the certification and cashed the checks
rather than miss out on the gravy train. Many recipients truly
needed the lifeline; many, it turns out, did not. But regardless,
genuine uncertainty meant genuine entitlement to the money whether
or not business declined, increased or carried right along. And as
long as the money was used appropriately, the loan was forgiven
– free money indeed!

As with all large fraud investigations, the government –
in this case the federal government through various agencies,
offices of inspectors general and the Department of Justice (DOJ)
– is slow to ramp up. Often likened to a battleship turning,
it does so slowly and carefully, but when it has turned and if
it’s facing you, it can be terrifying.

The government knows there has been a huge amount of fraud and
that tens or hundreds of billions of dollars have likely been
received based on misrepresentations during the application process
and misrepresentations about how the money was used. The government
is good at rooting out fraud having learned many lessons in the
health care space, where the government expends a huge amount of
money but has an excellent return on investment investigating and
prosecuting fraud via the criminal health care fraud statutes and
the civil False Claims Act.

Taking the lead is the Pandemic Response Accountability
Committee or PRAC, a taskforce made up of 21 Inspectors General and
with a staff of about 50. PRAC helps coordinate the oversight
efforts of the various agencies responsible for administering loans
and grants and for finding fraud.

As in the health care space, pandemic fraud hunters are using
leading edge data analytics to identify potential fraud. While the
Small Business Administration (SBA), which oversees PPP loans, at
one time intended to audit every single loan over $2 million,
recognizing the sheer enormity of that task, it is shifting to a
risk-based model for scrutinizing loans and loan forgiveness. By
cross referencing loan application or forgiveness information or
documentation with financial data the government has access to, its
data analytic models are able to key in on anomalies or
inconsistencies that may warrant further investigation by an
Inspector General or the FBI.

PRAC has aggregated all disbursement information on a slick
publicly available website in order to seek the public’s help
in sifting through the data to find anomalies. Whistleblowers
either inside or outside a company can see how much money the
company received and are incentivized to file qui tam
suits secretly alerting the government to possible fraud and
setting themselves up for a windfall in the event the government
investigates and makes a recovery.

As Mr. Fahrenthold illustrated in his New York Times article,
prosecutors are playing catch-up. To date, there have been many
prosecutions of pandemic fraudsters, but for the most part those
cases have involved egregious frauds, not a deep probing of whether
funds received were necessary, or as the standard should be
applied: whether the recipient believed they were necessary in
light of then-existing uncertainty.

Those cases will come in time. Qui tam cases, filed
under seal, can take a long time to play out while the government
investigates. Recognizing that the government needs time and is
playing a long game, in early August, Congress and President Biden
enacted laws lengthening the time the government has to bring
criminal or civil actions against pandemic fraudsters to ten
years.

For any recipient of funds that wasn’t quite sure if they
qualified but took the money anyway, that’s a long time to wait
to see if the government will audit or investigate those specific
circumstances. Hundreds of thousands of PPP loan recipients never
applied for loan forgiveness, which itself is not proof of fraud,
as the loan proceeds may not have been able to be used as required
for forgiveness. In those cases, the loans must be paid back. But
PRAC has determined that failure to apply for forgiveness may be an
indicator that the initial application was fraudulent and may
investigate further.

Certain recipients may feel uneasy about having taking the loan
and/or having had it forgiven. As it did for overseas tax avoiders,
the government may consider an amnesty program to allow the return
of funds with a minimal penalty but avoidance of the serious
consequences of a bank fraud or wire fraud conviction or the cudgel
of the False Claims Act’s treble damages. The government will
certainly seek to make an example of companies or individuals for
whom it can prove they did not need the funds and there was no
genuine uncertainty. The government will want to send a deterrent
message for the future and likely will also encourage
self-disclosure of ill-gotten funds, promising leniency under the
DOJ’s established cooperation credit policies.

Consistently through each successive administration for the last
decade, the DOJ has emphasized its interest in prosecuting the
individuals who direct a company’s wrongdoing and not just the
company itself. In deciding which cases to pursue, the government
will be on the lookout for overly aggressive conduct by executives,
board members or investors. Lawyers representing whistleblowers
know this and will use this as a selling point in pitching an
investigation to the DOJ or in filing a qui tam suit.

Many relief fund recipients will continue to wonder if the
battleship will ever turn to face them and whether their
certifications and specific situation at the times of application
or forgiveness will be scrutinized by the government. The
government cannot investigate every single loan so it will continue
to rely on data analytics, tips from whistleblowers and luck to
root out fraud. The government is chasing a tidal wave but their
tools will get better and better and they have a long time to do
it.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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