On March 27, the largest stimulus package in American history, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law by President Trump, which will ultimately inject $2.2 trillion into the economy to counter the impact of this unprecedented pandemic. Allocation of the $2.2 trillion package includes a $500 billion corporate loan program for distressed companies, $349 billion to the Small Business Administrations (“SBA”) loan guarantee program and $100 billion to eligible healthcare providers.
The CARES Act includes a number of oversight and enforcement provisions that closely resemble those enacted by the Emergency Economic Stabilization Act (“EESA”) to regulate distributions of TARP (the $700 billion bank bailout issued during the 2008 financial crisis). In large part, the enforcement mechanisms initiated under EESA were successful in identifying and prosecuting recipients of TARP funds who engaged in fraud, waste and abuse. They were also successful in collecting billions of dollars in violations.
With history as our guide, it is undeniable that the expenditures associated with the CARES Act brings with it significant opportunity for fraud, waste and abuse. While this Act incorporates enforcement policies previously utilized with success by our government, it is expected that the law enforcement agencies will also adapt in these changing times. This is especially the case as electronic discovery techniques allow for the collection of significant evidentiary support as employees work remotely. With traditional recovery equated to $1 of enforcement leads to $5 in penalties, there is significant incentive to ensure compliance with the various stimulus requirements and enforcement of existing laws, such as the False Claims Act. The following oversight mechanisms, however, are new and companies should be aware of their jurisdiction.
Office of the Special Inspector General for Pandemic Recovery (“SIGPR”) – A special inspector general, nominated by the President and confirmed by the Senate, will be appointed to the Treasury Department to oversee distributions under the CARES Act. The SIGPR was given a $25 million budget and broad authority to issue subpoenas, take testimony and make warrantless arrests. This SIGPR will be required to submit quarterly reports to Congress, detailing investments by the Treasury, lists of businesses that receive loans and a system for tracking loan repayments.
By comparison, EESA created the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which continues to serve as an independent watchdog targeting financial institution crime and other fraud, waste and abuse related to TARP. SIGTARP was initially provided a $50 million budget and its investigations have resulted in 438 individuals criminally charged, 381 convicted, 300 sentenced to prison and $31 billion ($900 million in 2019) recovered.
Notably, the budget for SIGPR is half of what was initially allocated for SIGTARP. In addition, the number of entities and areas of oversight under SIGPR likely far exceeds that of SIGTARP, whose primary focus was on specific financial institutions receiving TARP funds. Moreover, while SIGTARP’s enforcement functions are still ongoing, SIGPR dissolves in 2025.
The Pandemic Response Accountability Committee (“PRAC”) – An $80 million budget has been established for this Committee, which has been given explicit authority to conduct oversight over the distribution of funds related to this Act. More specifically, PRAC was created by the CARES Act to conduct and coordinate audits and investigations to identify and prevent waste, fraud and abuse under the law. This Committee will be comprised of independent Inspectors General from the Departments of Defense, Education, Health and Human Services, Homeland Security, Justice, Labor, Treasury and the SBA.
PRAC differs from the Financial Stability Oversight Board (“FSOB”), which was established by EESA to identify risks related to the Treasury’s policy for stabilizing financial markets and to make recommendations regarding the Treasury’s actions during the recession. Unlike PRAC, FSOB was not made up of Inspectors General, but consisted of the Secretary of the Treasury, the Chairman of the Federal Reserve, the Director of the Federal Housing Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development. The oversight authority granted to PRAC far exceeds that of the duties and abilities of FSOB. While FSOB focused on recommendations and analysis, PRAC was established to specifically target fraud, waste and abuse.
Congressional Oversight Commission – This five-member Commission will be selected by the Senate majority and minority leaders, House speaker and House minority leader. The Commission will be responsible for providing oversight to the Department of Treasury and the Federal Reserve Board regarding their implementation of the $500 billion loan fund. The Commission will routinely provide updates to Congress regarding the impact and effectiveness of this fund. It has been given the authority to gather relevant information, convene hearings and call witnesses.
This Commission mirrors the Congressional Oversight Panel (“COP”) established by EESA. COP was a bipartisan group of members of Congress charged with overseeing the U.S. Treasury’s actions as it related to the distribution of TARP funds. Similar to the newly established Congressional Oversight Commission, COP was empowered to review official data, hold hearings and report the effectiveness of the Treasury’s actions on the economy to Congress.
Impact of the CARES Act Oversight and Enforcement Provisions
Whether or not these new oversight mechanisms will have the same impact as comparable policies enacted under EESA remains to be seen. Nonetheless, companies may want to anticipate the following Government oversight actions:
- Corporations will be expected to thoroughly document and maintain records related to the manner in which all funds received under the CARES Act were utilized;
- Corporations that receive funds may be audited and will be required to turn over documents and evidence related to their use of the funds; and
- Corporations, as well as individual leaders of corporations who engage in fraud, waste or abuse related to these funds, will be prosecuted.
Companies that receive funds under the CARES Act may want to consider establishing or updating existing compliance policies to ensure continued compliance with applicable laws aimed at curbing fraud, waste and abuse. This includes violations of the False Claims Act and parallel state laws. These policies should generally ensure clear lines of communication within the company and externally with third parties, such as lenders or contracting officers, to avoid misunderstanding. Policies that update whistleblower notices and ensure that a hotline to report potential fraud, waste and abuse is available are also something to consider. If a law enforcement agency contacts an employee, companies should have already directed that such communication be directed to legal counsel or senior management. This direction should generally be a part of company training that highlights existing and any changed policies.
With so many changes to business operations in these uncertain times, companies should consider taking the opportunity to evaluate compliance requirements, whether statutory, regulatory or contractual, and be prepared in case a government enforcement agency initiates an audit or other investigation.
