CARES Act’s Substantial Relief Funds Create Fraud Risk

Morgan Lewis

Morgan Lewis

Provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act show that the government intends to closely monitor and oversee management of the relief funds, as the act makes available more than $2 trillion to fund economic relief programs for various sectors of the American economy.

Making such significant funds available to businesses and individuals through government programs carries an inherent risk of fraud, waste, abuse, and mismanagement. Accordingly, the CARES Act includes several provisions to fund existing Offices of the Inspector General (OIG) in several federal agencies, to create an Office of the Special Inspector General for Pandemic Recovery, and to establish a Pandemic Response Accountability Committee, all to promote transparency in the administration of the relief programs and to prevent fraud, waste, abuse, and mismanagement of funds made available under the CARES Act.

  • Section 1107(a)(3) of the CARES Act directly appropriates $25 million in funding for the Small Business Administration (SBA) OIG for expenses associated with monitoring the administration of the hundreds of billions of dollars that the SBA can provide as economic assistance and loans to eligible businesses and self-employed individuals through the Keeping American Workers Paid and Employed program.
  • Section 1109(i) of the CARES Act authorizes criminal penalties, under existing law, for fraud or other misconduct in seeking or using the SBA’s relief funds.
  • Section 4018 of the CARES Act creates an Office of the Special Inspector General for Pandemic Recovery within the US Department of the Treasury to coordinate the auditing and investigation of the management and spending of funds under any program established under the CARES Act.
  • Section 15010 establishes a Pandemic Response Accountability Committee to provide oversight of the funds made available under the CARES Act. The Pandemic Response Accountability Committee, consisting of several IGs, is responsible for preventing and detecting fraud, waste, abuse, and mismanagement of all funds made available to any nonfederal entity under the CARES Act. This responsibility includes the authority to conduct a comprehensive audit of all contracts the federal government enters into pursuant to the CARES Act.
  • Finally, the CARES Act includes appropriations to the OIGs for all government agencies and departments receiving funds under the act to fund oversight and auditing of programs funded thereunder.

These provisions that embed funding for and create offices and committees responsible for auditing and oversight of coronavirus (COVID-19) relief programs send a clear message that the government will seek out those who improperly draw on government funds made available through the COVID-19 relief efforts.

Client Impact

Given the significant impact the COVID-19 pandemic and related business restrictions have had on the American economy, many businesses and individuals will be interested in participating in one or more of the economic relief programs made available under the CARES Act. The programs established under the CARES Act, however, specify eligibility requirements for participation and approved uses for program funds. Many of the programs also require applicants to certify eligibility for participation in the programs.[1]

Applicants should take care to ensure applications, certifications, and any reporting to the government in connection with these programs, if required, are truthful. Applicants also should involve the appropriate legal, compliance, and business contacts to ensure appropriate use of program funds. The act expressly authorizes criminal penalties for violations in connection with the SBA’s relief funds, including potential prison time and/or criminal fines as authorized by the Inspector General Act of 1978.

Additionally, because federal funds are involved, organizations need to anticipate potential risks under the False Claims Act, which carries stiff penalties for individuals and entities who defraud the government. False Claims Act allegations could arise from the fulsome government monitoring and auditing of compliance with program requirements, as provided for in the act, but could also arise from whistleblowers who may bring cases in the government’s name.

By including appropriations to several OIGs to fund oversight and auditing of the programs funded under the act, the government has signaled its intent that the OIGs of agencies and departments responsible for these extraordinary relief funds should actively monitor compliance with and enforce eligibility requirements for participation in these programs.

Two additional provisions further underscore that the government intends to closely monitor and oversee management of the relief funds. The act creates an Office of the Special Inspector General for Pandemic Recovery within the Treasury Department and requires that IG to report to Congress on the details of loans, guarantees, and investments funded through relief programs.

The act also authorizes a Pandemic Response Accountability Committee and makes it responsible for ferreting out fraud, waste, and abuse in the implementation of relief programs. Consistent with responsibilities set forth in Section 15010(d)(1)(B)(x) of the act, this committee, among other responsibilities, will “expeditiously report[] to the Attorney General any instance in which the Committee has reasonable grounds to believe there has been a violation of federal criminal law.”

Businesses and individuals seeking to participate in relief programs under the act should pay close attention to program eligibility requirements and requirements associated with appropriate uses of relief funds to ensure they are complying with those requirements and restrictions. More generally, anyone accepting federal funds now must take careful note that the government will be carefully watching where and how relief funds are spent during this time.

What Remains Uncertain

The CARES Act does not set forth all of the requirements for participation in the relief programs it makes available. Instead, in many instances, the act provides a framework for the relief programs it establishes and requires that responsible agencies and departments issue regulations to carry out those programs.

It is likely that the regulations these agencies and departments promulgate will provide further guidance to applicants regarding eligibility criteria, application requirements, and approved use of funds. Applicants interested in participating in the programs made available under the CARES Act should pay close attention to the regulations implementing those programs to ensure compliance with all program requirements and restrictions.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold.


[1] For example, businesses and self-employed individuals seeking relief funds through the SBA must make good-faith certifications that the applicant meets the eligibility requirements for participation in the programs and will use the funds made available for approved purposes.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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