The COVID-19 pandemic has caused enormous pain and financial harm and it will take months, or even years, before we know its full impact. As of the time that this article is published, there will be over 1.4 million known cases of the coronavirus resulting in over 80,000 deaths, including over 380,000 cases and 12,000 deaths in the United States alone. With the federal government extending its social distancing guidelines through the end of April and many states extending shelter-in-place orders into June, there has also been a tremendous toll on the economy. Naturally, law enforcement is not immune from the effects of COVID-19, and there may be dramatic changes in how the government approaches and prioritizes the enforcement of white collar crime. Below are some updates on what you should expect, both in the short term as the public and private sectors continue adjusting to COVID-19 and associated relief efforts, and in the medium and long terms once government offices are able to return to normal.
In the Short Term, White Collar Criminal Investigations and Prosecutions Will Slow Down.
COVID-19 is already impacting the government’s ability to investigate and prosecute white collar crime. The courts in the Southern District of New York further curtailed operations in response to the pandemic, closing the Thurgood Marshall Courthouse for all SDNY activities and leaving open the Daniel Patrick Moynihan Courthouse for emergency matters only (defined as “urgent criminal matters” and those requiring a temporary restraining order under Rule 65(b) of the Federal Rules of Civil Procedure).
Like the courts, the Department of Justice and local U.S. Attorney’s Offices, in addition to the Securities and Exchange Commission and other civil and administrative agencies, are rightly prioritizing the safety and security of their prosecutors, regulators and federal agents, which will have a practical effect of limiting enforcement activity. As one can imagine, FBI agents will be less than enthusiastic to draft a search warrant that requires them to visit and search businesses that could be infected by an invisible virus, nor will they want to conduct knock-and-talk interviews of targets and witnesses, which typically are among the most effective forms of gathering evidence and admissions in cases.
We also will see delays caused by third parties who are unable to respond to subpoenas in a timely fashion, which will slow down the ability of law enforcement to investigate cases, since they will not be able to obtain or analyze the information they need. As people are working from home or being furloughed from their jobs, less resources are available to assist law enforcement, and prosecutors and courts are likely to grant long-term extensions to companies under the circumstances. In addition, with the inability for grand juries to convene, cases that are in the pipeline will be delayed as the government is unable to return indictments.
The pandemic is also having a real effect on the ability of prosecutors and agents to develop cooperating witnesses, which typically requires in-person meetings to develop trust. While videoconference technology has helped to bridge gaps in communication, it is less likely to be used in such highly sensitive plea negotiations, and this too, will slow the ability for the government to move cases.
It also will impact the government’s ability to bring corporate cases, since companies are not likely to want to discuss confidential financial information over technology that is not yet equipped with proper encryption or security measures. Moreover, companies that are suffering from the economic fallout associated with COVID-19 will be more likely to want time to assess their financial condition before they can engage in meaningful discussions about fines or settlements.
This slowdown in white collar enforcement is likely to be especially acute in international cases, in light of stricter restrictions at international borders and prohibitions on travel. While the past few years have seen an unprecedented spike in enforcement of the Foreign Corrupt Practices Act and there is a good deal of momentum for additional anticorruption enforcement, we should expect to see a relative slowdown in FCPA cases this year as travel is curtailed and the government focuses on domestic enforcement priorities.
In the Medium to Long Term, Government Will Likely Focus on Domestic Fraud Related to CARES Relief.
While international investigations and certain other white collar matters are slowing down, criminal fraud cases, and related civil investigations — especially those related to the receipt of federal relief provided under the recently passed CARES Act — are sure to increase in the medium to long term.
The CARES Act is the largest stimulus package in U.S. history, and includes over $2 trillion designed to help companies and individuals overcome the ongoing economic crisis and includes $500 billion to the Secretary of the Treasury to provide loans, guarantees and other investments to support of eligible businesses, states and municipalities. Moreover, the “Paycheck Protection Program” portion of the CARES Act substantially expands the Small Business Administration’s current business loan program and provides for $349 billion to fund those loans. Given this enormous government expenditure, Congress also established the Office of the Special Inspector General for Pandemic Recovery (“SIGPR”), which will have authority to oversee loans to distressed businesses to detect fraud and ensure that funds are spent in the manner that is intended. SIGPR will have significant funding to investigate waste, fraud and abuse and refer cases for criminal investigation and civil enforcement.
This expected increase in such oversight and enforcement activity would be in line with past government enforcement trends in the wake of national crises. For example, the federal government opened numerous investigations and prosecuted hundreds of individuals across the country for fraud related to the receipt of relief funds intended for those impacted by Hurricane Katrina. Similarly, in the years since the passage of the Troubled Asset Relief Program (“TARP”) in the aftermath of the 2008 Financial Crisis, the Office of the Special Inspector General for TARP has convicted hundreds of fraudsters related to the misuse of TARP funds, and recovered approximately $11 billion in misused funds.
The focus on fraud enforcement related to COVID-19 relief is underscored by recent statements out of the Department of Justice. On March 16, 2020, the Attorney General issued a memorandum directing “[e]very U.S. Attorney’s Office . . . to prioritize the detection, investigation, and prosecution of all criminal conduct related to the current pandemic[,]” and further encouraging individual offices “to consult with the Civil Division’s Consumer Protection Branch[], the Criminal Division’s Fraud Section[], and the Antitrust Division’s Criminal Program[] for additional guidance on how to detect, investigate, and prosecute these schemes.”
What This Means For You
There likely will be a slowdown in enforcement activity in the near term and some change in enforcement priorities moving forward. If your company is seeking to take advantage of federal relief, there will likely be intense scrutiny on submissions and on how funds will be used after relief is granted. Misstatements on an application or improper expenditures could give rise to investigations for criminal fraud or violations of the False Claims Act. Relatedly, public companies must continue to ensure they are making accurate statements and disclosures in public filings and in statements to investors, including with respect to specific risks presented by COVID-19.
As many companies continue to pivot to equip their workforce to work remotely or work to protect their population of essential workers who are unable to work from home, in-house legal departments should pay close attention to their compliance programs and make sure they are up to date. These steps are especially crucial for companies planning to apply for aid. It also behooves companies during this time to remind employees of their obligations under internal ethical rules, and of existing whistleblower hotline and protections — or to create such hotlines and protections if not already in place. There will be increased pressure for business units to produce, and that creates heightened risk, demanding more attention to compliance and transactional due diligence.
