At this point, the COVID pandemic and its ongoing implications for public health and policy is a constant topic of debate.
We are not here to discuss any of the politically triggering issues surrounding the COVID pandemic—although this author notes that public health should not be a political issue. However, that seems to be the environment in which some want the discussion to be held.
Nonetheless, the trillions of dollars of government COVID relief funds that have been distributed is of particular note to False Claims Act (FCA) practitioners and provides some unique attributes as it relates to FCA liability.
Keep reading to learn more from a government fraud attorney.
Criminals Snatch $100B in COVID Relief
Of note, the United States Secret Service, which specializes in investigating financial fraud, has stated that criminals have stolen nearly $100 billion of COVID relief funds.
Those funds have been diverted from the Small Business Administration’s Paycheck Protection Program (PPP), the Economic Injury Disaster Loan program, and the program to distribute unemployment assistance funds.
The Secret Service further states that more than $2.3 billion in stolen funds have been recovered to date, which also includes more than 100 arrests, from culpable individuals to organized groups of fraudsters.
Beyond criminal investigations and recoveries, COVID relief fund fraudsters are also subject to civil liability under the FCA. However, even though the amount of relief funds authorized and the scale at which relief funds were defrauded is staggering, there have been very few FCA recoveries to date.
There are several reasons for this, the first among them being the passage of time. These programs are less than two years old, a mere snapshot of time in the FCA enforcement world, believe it or not.
Quick Distribution Led to Less Scrutiny
There are several other issues that make recovering these fraudulently acquired COVID relief funds challenging to do under the FCA.
First, the point of the relief fund programs was to distribute much-needed government funds quickly. Thus, lawmakers chose not to burden those distributing the funds with a “normal” level of scrutiny and provided relatively little—compared with the typical banking industry regulations—in the way of guidance as to how the funds were to be distributed.
As the programs rolled out, compliance guidance for distributing COVID relief funds changed frequently, sometimes monthly, and were difficult to both keep track of and to understand. This compliance guidance is important for FCA liability, which requires at a minimum that someone act with “reckless disregard” of compliance requirements.
When the compliance requirements are confusing, change frequently, or in some cases did not yet exist when funds were distributed, it is hard to argue that the distribution was “reckless.”
Compliance with confusing and rapidly changing agency guidance and the distribution of relief funds primarily affects lenders. On the borrower side, the PPP program is a loan program that provides borrowers government loans with a 1% interest rate that must be paid back—unless the borrower applies for loan forgiveness.
To qualify for forgiveness, a borrower must keep employee and compensation levels the same, use loan proceeds on payroll costs or other eligible expenses, and put at least 60% of the proceeds toward payroll costs.
Hypothetically, then, if a borrower uses a PPP loan for other business purposes that don’t qualify for forgiveness, or arguably even for personal expenses, they could still repay the loan at the very low interest rate of 1% and might not be subject to FCA liability.
Of course, if a borrower purposefully uses false information to either acquire the loan in the first place or to get loan forgiveness, that is a different story and very well may create FCA liability. But the overall point is the same: because the program is a loan program, arguably liability may not attach to a borrower until the point of repayment, lack of repayment, or applying for forgiveness of a loan not used for payroll purposes.
Because outright fraud is easy to prosecute, I think we will continue to hear about some of the low-hanging fruit of COVID relief fund cases, like the Florida man who used relief funds to purchase Lamborghinis and Rolex watches. But rooting out large quantities of fraud may require going after lenders who failed to provide even the minimum required by the CARES Act for due diligence.
Questions? Ask a government fraud attorney.
COVID relief funds were distributed at an unprecedented level in this country. The lax regulatory guidance around those programs was arguably necessary to get the dollars to where they needed to go quickly. But it also opened the door to widespread fraud and it will take a number of different enforcement mechanisms and a lot of time to chase down and recover fraudulent obtained COVID relief funds. Of course, that is why the FCA and other fraud statutes exist.
Bracker & Marcus LLC will continue its pursuit of fraudulently obtained COVID relief funds as well as other schemes that resulted in fraud against U.S. taxpayers. Please contact us if you have questions about COVID relief funds or other government fraud.