Given the rapid pace and scale of the economic aid provided by Congress to combat the COVID-19 pandemic and its economic ramifications, it is not surprising that the federal government has focused heavily on identifying and prosecuting fraudulent behavior related to COVID. US law enforcement agencies now appear poised to launch a new wave of investigations to identify and prosecute additional civil and criminal measures against suspected criminals. However, the complex, rash nature of many COVID-related aid programs can make it difficult for prosecutors to pursue more complex cases where the behavior is less obviously fraudulent.
With the recent passage of the American rescue plan, Congress will have allocated more than $ 5 trillion to help fight the COVID-19 pandemic and the economic crisis it has brought with it. The influx of unprecedented government funds into the economy has already resulted in a multitude of criminal and civil enforcement actions and investigations. To date, the Department of Justice (DOJ) has criminally charged 474 defendants in COVID-related fraud cases with potential losses of over $ 569 million. Most of these law enforcement actions, however, have focused on the low hanging fruit; H. Obvious Cases of Fraud or Abuse. These law enforcement actions are likely just the tip of the prison iceberg.
On March 26, 2021, the DOJ emphasized its ongoing commitment to prosecuting COVID-related criminal and civil enforcement actions. There are signs that this next wave of COVID-related government enforcement actions are increasingly focused on large, complex fraud investigations and the increased use of civil fraud laws such as the False Claims Act (FCA), the Anti-Kickback Statute (AKS) and the law on the Reform, Restoration and Enforcement of Financial Institutions 1989 (FIRREA). Indeed, such a shift seems to have already begun.
In 2021, we anticipate increased criminal and civil action related to COVID in four areas: (1) the paycheck protection program, (2) healthcare, (3) securities, and (4) government contracts and procurements. However, many of these enforcement actions can face significant challenges given the speed with which the aid programs have been implemented and the lack of clear rules, regulations and guidelines from federal agencies.
The paycheck protection program
Over the past year, the Justice Department's Fraud Division (DOJ) has mainly focused on combating fraud related to the Paycheck Protection Program (PPP). The PPP was created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide unsuccessful loans to small businesses of up to $ 10 million. Between March and April 2020, Congress approved funding for approximately $ 670 billion in PPP loans. In December 2020, Congress approved an additional $ 284 billion for first and second PPP borrowers.
The DOJ's fraud department has already indicted 109 defendants in 74 PPP loan fraud cases that totaled more than $ 268 million in losses. There have also been a large number of similar fraud prosecutions related to the Economic Injury Disaster Loans (EIDL) program. Many of these law enforcement actions resulted from data analysis. Prosecutions of PPP or EIDL fraud to date have generally included three categories of easily identifiable fraudulent behavior: (1) obtaining PPP loans using fictitious companies and / or stolen identities, (2) using excessive employment and / or submitting fake ones Payroll documents or tax returns; and (3) using PPP loan funds for improper purchases such as luxury cars and homes.
Although similar law enforcement efforts against PPP loan fraud will continue in 2021 (especially as new PPP loans are granted and businesses start filing applications), the next wave of PPP loan fraud investigations will likely target more complex fraudulent behaviors and target larger PPP loans or individual companies focus groups that have received multiple PPP loans. The DOJ is also expected to increase its use of FCA and FIRREA law enforcement to address PPP loan fraud. In fact, in January 2021, the DOJ announced the first civil settlement of FCA and FIRREA claims in a case involving a fraudulent PPP loan.
Another issue that can lead to heightened law enforcement efforts is the requirement that companies must certify in good faith that the PPP loan was necessary to keep the business up and running. The SBA is reviewing all $ 2M PPP loans and is currently requesting all companies that have received such loans to submit a “needs questionnaire”. While misrepresentation related to an SBA exam or necessity questionnaire can create a criminal liability, the government is more likely to take civil remedial action as it is difficult to prove the falsity of a borrower's belief that a PPP is – Loan is "necessary". The DOJ may also hesitate to pursue criminal charges if a company has provided inaccurate information in connection with the needs questionnaire or has failed to meet the PPP technical eligibility requirements but has used the PPP loan funds for the intended purpose.
Healthcare Fraud
One area where there are still no significant COVID-related enforcement actions is in healthcare. However, this is sure to change in the near future as the DOJ and Department of Health & Human Services (HHS) analyze additional Medicare claims data and / or file more whistleblower qui-tam complaints. As a result, enforcement efforts on criminal and civil health care fraud are likely to increase significantly in 2021.
To date, there have been only a small handful of healthcare fraud related to COVID-19. The first two COVID-related law enforcement actions related to healthcare fraud involved pooling COVID-19 tests with other medically unnecessary "add-on" tests, an area of concern identified by HHS at the start of the pandemic. The DOJ recently accused two pharmacy owners of using COVID-19 emergency override billing codes to bill Medicare $ 30 million for expensive cancer drugs that were never bought, prescribed, or given to patients.
However, the DOJ's focus appears to be expanding. Last month, the DOJ launched the first law enforcement action in the country involving the Provider Relief Fund. The Provider Relief Fund was set up under the CARES Act to provide direct payments to healthcare providers for expenses and lost revenue related to COVID-19. The government has provided US $ 178 billion in funding through the Provider Relief Fund and has distributed more than US $ 100 billion. Given the large sums of money being distributed through the Provider Relief Fund, such law enforcement is likely to become more common in 2021, especially as providers begin filing necessary reports with HHS on their use of the funds. In addition, the DOJ recently reiterated that its civil division will use the FCA to aggressively pursue COVID-related healthcare fraud cases, including cases involving the Provider Relief Fund and telemedicine services (which were used during COVID-19 Pandemic has increased significantly).
The FCA's civil health-care fraud enforcement efforts are also likely to increase in the near future as the DOJ increasingly uses data analytics to identify potential frauds. Indeed, data analysis is already proving to be a game changer. Although qui-tam relators continue to be the leading cause of FCA cases, the DOJ initiated 250 FCA cases in the past year alone – 100 more cases than the DOJ in 2019, and the most non-qui-tam FCA cases have been filed in nearly 30 years. As a result, 922 federal FCA cases were filed in 2020, more than 60% of which were healthcare-related. The combination of a more proactive DOJ and increased federal funding for health care providers from COVID-19 could spark a perfect storm and lead to an unprecedented increase in health fraud for the FCA.
Securities fraud
At the start of the COVID-19 pandemic, the Securities & Exchange Commission (SEC) focused primarily on preventing simpler COVID-related fraud programs against "Main Street" investors. As the economy continues to recover in 2021, the SEC may become increasingly focused on whether public corporations have fully disclosed to their investors the impact of the COVID-19 pandemic on their finances and operations.
Just like with fraudulent PPP loans, the SEC's enforcement efforts have focused on the low hanging fruits. The vast majority of COVID-related security enforcement measures to date have involved pump-and-dump systems with microcap or penny stocks and / or blatantly false statements that artificially increased a company's share price. For example, between March and May 2020, the SEC stopped trading more than 30 different securities due to false or misleading claims regarding their ability to sell PPE or develop COVID-19 tests or treatments. The SEC's initial trading suspensions have led to a number of subsequent civil lawsuits by the SEC and several parallel criminal prosecutions.
However, the SEC's recent civil settlement with The Cheesecake Factory is likely a preview of the various types of securities enforcement measures that are about to be launched. In December 2020, the SEC announced that it had reached a $ 125,000 settlement with The Cheesecake Factory for making misleading claims about the business and financial condition of the COVID-19. This was the first time the SEC has made such claims since the pandemic began. As the long-term financial impact of COVID-19 on businesses becomes clearer, similar SEC actions based on false, misleading, or inadequate financial statements are likely to occur more frequently.
Public procurement and procurement fraud
In the past year, numerous government contracts and grants were awarded to combat the COVID-19 pandemic. Federal agencies have already allocated more than $ 53 billion in contract spending on COVID-19, and that number is sure to increase in 2021 and with the passage of the US rescue plan. However, there have also been ongoing reports of fraud related to these COVID-related government contracts and grants. The DOJ has always had a strong focus on public procurement and procurement fraud and criminal and civil activity in this area is expected to intensify in 2021.
The DOJ filed the first major prosecution for procurement fraud related to COVID-19 in January 2021. Robert Stewart Jr., the CEO of a Virginia-based company, had agreed to sell more than $ 38 million of 19 types of Personal Protective Equipment (PPE), including N95 masks, to the Federal Emergency Management Agency (FEMA) and the Department of Veterans Affairs (VA), although his company had no PPE for sale. Stewart pleaded guilty to government false statements, wire fraud, and theft of government funds.
The Stewart case is likely to be the first of many law enforcement actions against procurement fraud in 2021. For example, the DOJ's Procurement Collusion Strike Force (PCSF) had already launched more than two dozen grand jury investigations in November 2020, many of which were likely to involve COVID-related procurement fraud. The PCSF was founded in 2019 to investigate and prosecute antitrust and fraud crimes in public procurement. Although the PCSF's primary focus remains on antitrust measures, the PCSF has worked closely with the Pandemic Response Accountability Committee (PRAC) to investigate other COVID-related procurement fraud violations.
The reality is that any company that has received federal funding related to COVID-19, either directly from the federal government or indirectly through state and local governments, could face criminal or civil investigations if the funds are improperly used or misrepresented were made in the contract or grant process. On the criminal side, there are a variety of laws that allow the government to prosecute procurement fraud violations. On the civil side, companies will continue to see claims under the FCA and AKS.
Over the past year, federal, state, and local governments have understandably focused on allocating and spending billions of dollars in relief funds to combat COVID-19 and the resulting economic downturn. However, as this money is distributed, government contracts are fulfilled, and contractors are audited, the government will increasingly turn its attention to identifying and prosecuting fraud or abuse. These investigations are likely already underway and will continue to increase in scope, frequency and intensity in 2021.
The nature of the COVID-19 relief programs will present prosecutors with challenges and opportunities for defense lawyers
Although the availability of more than $ 5 trillion in COVID-19 aid will result in heightened enforcement efforts, the size and complexity of the aid programs and the speed with which those programs have been implemented will affect the prosecutors or regulators who handle these cases pursue, face numerous challenges. Most criminal prosecutions require the government to demonstrate that a defendant acted with fraudulent intent, and law enforcement actions such as FCA claims require at least proof that a defendant knowingly acted. In many complex cases, this is easier said than done.
For example, in implementing the PPP, the SBA appeared to focus more on approving loans and funding businesses than ensuring borrowers and lenders were given clear guidelines on program requirements. Certain program requirements changed each time Congress approved additional PPP funding, and the SBA has often issued new preliminary final rules on a variety of topics. Because of these frequent rule changes, the SBA has already released seven different versions of its Frequently Asked Questions. Should the government take civil action in relation to technical violations of the PPP, it may be difficult for the government to demonstrate that the company understood the applicable rules and program requirements when it submitted its applications.
Similarly, in the healthcare sector, HHS has often changed or modified various requirements and legal or regulatory standards to ease the regulatory burden during the pandemic. These regulatory changes will also make it increasingly difficult to demonstrate knowledge or intent in certain cases.
In summary, while COVID-19 enforcement measures and investigations will become more frequent, extensive and complex in 2021, the success of such measures is not assured. Once the government goes beyond tracking down overtly fraudulent behavior and focuses on more complex cases or technical violations, any ambiguity in the applicable rules or regulations could be used as an effective defense.
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