The CARES Act is the largest stimulus package in U.S. history. Recipients of funding  should ensure compliance with agency guidance.

 If the past is any guide, the government funds  being used to help businesses during this downturn will surely produce False Claims Act investigations and litigation. In the five years after 2009,  when Congress passed stimulus bills to respond to  the financial crisis, the government and private  whistleblowers filed nearly 4,000 FCA cases and  recovered almost $23 billion.

On March 27, President Donald Trump signed  the Coronavirus Aid, Relief, and Economic Security Act, which provides $2 trillion in federal  funds to fight the ongoing health and economic  crisis caused by COVID-19. The CARES Act is the  largest economic stimulus package in U.S. history, more than twice as large as the measures  passed in 2009. It provides $349 billion in loans  for small businesses, $130 billion in relief for  hospitals and medical suppliers, and $500 billion in assistance to other businesses, states, and  municipalities.

Many companies desperately need the funds  the CARES Act offers, but they should carefully  ensure that they meet the eligibility requirements.  Any person or business that recklessly submits a  material false statement in connection with a  claim for funds could wind up as the target of an  FCA investigation. As Oliver Wendell Holmes Jr.  famously wrote, "Men must turn square corners  when they deal with the Government." Here are  some tips on how individuals and businesses can  do so.

Know Program Eligibility Requirements

As the FCA's name implies, a claim must be  "false" to give rise to liability. But courts have  recognized two different types of falsity, "express"  and "implied" falsity. Express falsity occurs when  the claim for funds is literally false, such as where  a business requests reimbursements for services  it never provided. Implied falsity, in contrast,  occurs when the claim for funds is literally true,  but the person or entity requesting the funds fails  to meet a broader eligibility requirement. For  example, a business might make an implied false  claim if it provides the services for which it seeks  reimbursement, but fails to disclose that it did not  have a license to do so.

The possibility of making an  implied false claim means that a  recipient of federal funds must  know not only that the facts  they communicate are true, but  also that they meet any and  all material program requirements. Those requirements can  be extensive, spanning several  different statutory and regulatory provisions. Many agencies  also issue less formal guidance  describing their legal interpretations and program expectations.  Entities should be cautious  about this less-formal guidance. In 2018, the Department  of Justice issued a memorandum stating that such guidance  cannot provide the basis for an  FCA claim. Whether subsequent  administrations apply the same  approach, however, remains to  be seen. Recipients of federal  funding should thus continue to  monitor and ensure compliance  with agency guidance.

Implement Rigorous Quality Control Programs

False claims do not create liability under the FCA unless the  person submitting them knows  of the falsity or acts with "reckless disregard." Knowledge and  recklessness are not limited to  individuals. A whole business  can be reckless, and sometimes  in surprising ways.

Several mortgage fraud cases  brought in the last decade accused  large banks of acting recklessly  by failing to maintain a quality  control program that could detect  widespread problems. Even if  individual employees believed  that mortgages met the requirements of government insurance  programs, the bank could still  act recklessly by operating a deficient quality control program  that overlooked issues resulting  from poor training, improper  incentives, or third-party fraud.

To deflect any allegation of  recklessness, funding recipients  must monitor their own compliance with government requirements. That generally requires  them to operate robust quality  control programs that can detect  both express and implied false  claims. Businesses that regularly screen for problems and  quickly correct any they find  will limit their FCA exposure.  And they will also be well-positioned to prove their good faith  in response to any government  inquiry.

Monitor the Relevant Agency's Enforcement Actions

Finally, only "material" false  statements can support an FCA  claim. A statement is material  if it has a "natural tendency" to  affect the government's payment  decision. Materiality depends on  a number of factors, but two considerations are particularly relevant. First, has the government  identified a program requirement  as a condition of payment? Second, when an agency has uncovered past misstatements about  compliance with a particular  requirement, how did it react?  If the government consistently  refused payment or demanded  reimbursement, then misstatements about that requirement  are likely material. But if the  government has always paid  regardless, then it may have difficulty proving materiality.  Funding recipients can analyze the materiality of their  representations by monitoring  agency enforcement actions.  When an agency assesses penalties, debars or suspends someone, or demands repayment,  the requirement it enforces is  likely to be deemed material  under the FCA. Businesses can  thus use agency actions to prioritize the requirements on which  their quality control programs  should focus.


An increase in FCA cases is  a natural byproduct of emergency economic stimulus. When  the government must distribute money quickly to address  a crisis, the unscrupulous seek  to take advantage. Identifying  those engaged in fraud takes  the government time, and many  innocent individuals and entities may be investigated as part  of the process. The practices  outlined above, if adopted, will  help individuals and businesses  respond effectively to any government inquiry.

Originally published in The National Law Journal, April 5, 2020

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