Update: Investigations Under the CARES Act Ramp Up Even as Oversight Roles Remain Vacant

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The recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES Act) injected previously unthinkable amounts of stimulus funds into the struggling U.S. economy. To oversee the disbursement of these funds and to curb fraud and misuse, the CARES Act created various oversight and enforcement mechanisms. Notable among these is the Special Inspector General for Pandemic Recovery (SIGPR). As we explained in a recent post, the SIGPR is conferred broad powers to audit and investigate waste, fraud and abuse involving hundreds of billions of dollars in CARES Act funds. Additional primary oversight bodies include the Congressional Oversight Commission and the Pandemic Response Accountability Committee (PRAC).

While arguably the most significant oversight leadership position, the SIGPR remains vacant; however, that may not be the case for much longer. President Trump’s pick for the SIGPR role, Brian D. Miller, has not yet been confirmed by the Senate – although Miller’s confirmation hearings were held on May 5 and his nomination was advanced to the Senate floor on May 12. The actions of similar special inspectors general offices, and in particular that established to oversee the stimulus package Congress passed after the 2008 financial crisis (the Special Investigator General for the Troubled Assets Relief Program, or SIGTARP), suggest the office of the SIGPR will be particularly aggressive in pursuing fraud and misuse related to disbursed CARES Act funds. Yet, even if the Senate confirms Miller soon, considerable time may pass before the Office of the SIGPR can bring to bear its full investigative and audit powers. After all, the Office of the SIGPR is not yet in existence and should Miller, who served as the GSA Inspector General from 2005 through 2014, be confirmed, he will need to lay the agency’s operational groundwork from scratch, including hiring a full staff of employees (Miller expects to hire 75-100 employees), securing office space, and equipping the office, etc.

Furthermore, Congress has not appointed a chairperson for the Congressional Oversight Commission tasked with monitoring how the Administration allocates CARES Act funds. Moreover, the PRAC, established under the CARES Act to promote transparency and oversight of the federal government’s COVID-19 response, is also without a chairperson following Glenn Fine’s removal from his position as Acting Department of Defense (DoD) Inspector General, which made him ineligible to continue as the PRAC chair.

Although these roles are not filled and the formal oversight infrastructure contemplated by the CARES Act is not fully operational, investigations into potential misuses of disbursed funds have begun. The Department of Justice (DOJ), for example, announced several actions to curb fraud among loan applications under the Paycheck Protection Program (PPP), which earmarks approximately $660 billion in CARES Act stimulus funds for potentially forgivable loans to small businesses. Notably, the DOJ has mounted a preliminary inquiry of submitted applications under the PPP and already announced finding “red flags” of fraud among examined applications. The DOJ instructed its Market Integrity and Major Fraud Unit to oversee investigations related to the PPP.

The Small Business Administration (SBA) Inspector General (IG), Hannibal “Mike” Ware, also announced various oversight reviews and investigations into the PPP program, which is administered by the SBA. Ware said the SBA has already initiated dozens of investigations involving complaints of fraud. Moreover, the SBA indicated that it will review all PPP loans in excess of $2 million.

DOJ criminal prosecutions for PPP fraud have already begun. On May 5, two Rhode Island businesspersons were charged by the DOJ for allegedly submitting fraudulent loan applications under the PPP for $500,000. In addition, on May 13, the DOJ announced charges against a Georgia man (who appeared in a reality TV series) for allegedly securing a $2 million PPP loan to assist his trucking business and using most of those funds for blatantly illicit purposes, including for jewelry, a lease on a luxury car, and payments for child support and outstanding loans.  These are the first prosecutions to come out of any CARES Act program, and certainly will not be the last. It is also noteworthy that several agencies assisted in these DOJ investigations (FBI, IRS Criminal Investigation, SBA Office of Inspector General, and the FDIC Office of Inspector General).

Investigations and prosecutions are expected to ramp up as the leadership positions within oversight agencies are filled, and intensify even further as more individuals and businesses apply for, receive and spend stimulus funds, which come with many conditions and restrictions. As noted, hundreds of billions of dollars of CARES Act funds have yet to be disbursed, and the SBA and Treasury Department continue to refine guidance regarding eligibility for the PPP program.

These recent developments underscore the risk attendant to receipt of CARES Act funds and portend that many recipients will experience some level of government scrutiny. Although many businesses understandably are preoccupied with more immediate needs, it is imperative to take proactive steps tailored to withstand an audit or investigation or to avoid these altogether. In that vein, we reiterate the recommendations made in our earlier post regarding applying for, receiving and using CARES Act funds. Businesses should take particular care on the front-end to ensure the accuracy of information submitted in applications and that their certifications are truthful and capable of being complied with. It is likewise imperative to understand program requirements, track guidance and changes released by the government, and implement (and keep current) written compliance regimes to address these restrictions. Further downstream from the application process, recipients should carefully track and document the use of disbursed funds, with an emphasis on implementing procedures for identifying and immediately escalating potential lapses. With that goal in mind, businesses should establish clear procedures for swiftly handling internal complaints and carefully document efforts taken in response. Finally, and perhaps most importantly, recipients must take very seriously any government inquiry, audit or investigation. Many recipients of CARES Act funds are small businesses that likely have had little to no experience dealing with a federal government audit or investigation and, therefore, understandably may not be sensitive to how such inquiries can escalate badly even though the recipient is convinced they did nothing wrong.

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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