United States: Enforcement Against COVID-19 Related Fraud: Two-Year Anniversary Update

On the eve of the pandemic's two-year anniversary, the U.S. Department of Justice (DOJ) released updated statistics on its efforts to combat COVID-19 related fraud and announced the appointment of a director of COVID-19 Fraud Enforcement. To date, DOJ has charged over 1,000 individuals with criminal offenses involving losses exceeding $1.1 billion; seized over $1 billion in Economic Injury Disaster Loan (EIDL) proceeds; and conducted over 240 civil investigations into more than 1,800 individuals and entities for alleged misconduct in connection with pandemic relief loans totaling more than $6 billion.¹

This client alert reviews the status of COVID-19 relief, explains recent enforcement trends against COVID-19 related fraud, and predicts future enforcement trends as the pandemic enters its third year. In short, the rush to implement pandemic relief created opportunities for confusion and outright fraud, driving the aggressive pursuit of COVID-19 related fraud. We predict continued scrutiny of COVID-19 relief loans, which may impact financial technology ("fintech") firms and the healthcare industry.

How Companies Can Prepare

Companies can prepare in two ways: (1) by remaining up to date with changes in the COVID-19 enforcement framework and (2) by investing in whistleblower policies and procedures. As to the first point, keeping apprised of how DOJ and its law enforcement partners pursue COVID-19 related fraud will enable companies to remain diligent in their compliance programs and maintain strong internal controls to combat misconduct and mitigate risks related to prior conduct.

As to the second point, companies should also continue investing in their whistleblower programs. Companies should investigate whistleblower claims in a timely and objective manner in order to avoid False Claims Act suits and DOJ action. If an investigation results in a finding of misconduct, a company should consult experienced counsel to weigh the advantage of self-reporting the misconduct and determine how their compliance efforts could potentially mitigate potential fines and other penalties.

Status of COVID-19 Relief

The federal government has allocated over $4.5 trillion in COVID-19 relief over the last two years—a figure that exceeds the entire 2019 federal budget.² Two bills provided most of this funding: the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and the American Rescue Plan Act.

Less than two weeks after the World Health Organization declared COVID-19 a pandemic, Congress passed the CARES Act, which authorized the first Paycheck Protection Program (PPP) loans for small businesses, as well as other types of relief. ³ As our recent client alert explained, PPP loans made to eligible borrowers qualify for forgiveness during the 8-to-24 week period following disbursement so long as employers have met and maintained certain program criteria.⁴

Businesses quickly depleted the first wave of PPP loans.⁵ In late December 2020, the Consolidated Appropriations Act, 2021, extended the PPP, but restricted the eligibility of qualifying businesses.⁶ The PPP eventually stopped accepting new loan applications in May 2021 as vaccinations turned a new page in the pandemic.⁷ Borrowers may still receive forgiveness of up to the full amount of the principal of their PPP loan, in addition to any interest for the eligible costs incurred.⁸ A similar loan program called the COVID-19 EIDL program has also stopped accepting new loan applications.⁹

In March 2021, Congress passed the American Rescue Plan Act, which provided several types of COVID-19 relief, including direct payments to individuals and more generous unemployment benefits.¹⁰ As of September 2021, the federal government has paid out at least $872 billion in pandemic unemployment benefits.¹¹ Although numbers vary, a recent U.S. Department of Labor study estimates that at least $87 billion in unemployment benefits was lost to fraud.¹²

Two Years of COVID-19 Fraud Enforcement

In the early days of the pandemic, federal law enforcement cracked down on individuals seeking to capitalize on the fears surrounding COVID-19 by marketing fake cures and treatments. For example, federal agencies enjoined the sale of products marketed to treat or prevent COVID-19, including industrial bleach and nano silver particles.¹³ DOJ's COVID-19 Hoarding and Price Gouging Task Force pursued price gouging of face masks and other personal protective equipment.¹⁴ More recently, DOJ prosecuted individuals for selling COVID-19 vaccination cards issued by the Centers for Disease Control and Prevention.¹⁵

The vast majority of DOJ's enforcement efforts over the last two years has focused on individuals, organized groups, and companies taking advantage of COVID-19 loan relief programs—namely PPP and EIDL loans. And with good reason. Since the start of the pandemic, the U.S. Secret Service estimates that actors have diverted close to $100 billion in pandemic relief funds.¹⁶ There are two, not mutually exclusive, ways for loan applicants to defraud COVID-19 relief programs: (1) by submitting false loan applications, and (2) by submitting false loan forgiveness applications after misappropriating loan proceeds. Across DOJ, approximately 500 defendants have been charged in over 340 cases with losses of over $700 million.

Federal law enforcement continues to target healthcare fraud. DOJ continues to focus its investigations on fraudulently billed telemedicine fees by healthcare providers in connection with the $180 billion Provider Relief Fund, which was part of the CARES Act.¹⁷ Meanwhile, the U.S. Securities and Exchange Commission (SEC) has charged at least 10 biotech and other companies and individuals with making false and misleading statements to investors, including regarding their abilities to procure protective equipment and testing supplies.¹⁸ Both investors and issuers continue to receive SEC subpoenas concerning COVID-19-related insider trading, although SEC has yet to bring an action in this area.¹⁹

Further Scrutiny of COVID-19 Relief Loans Expected

As highlighted in recent client alerts, we expect to see more fraud—and fraud enforcement—with respect to the loan forgiveness process.²⁰ DOJ's recent appointment of a director of COVID-19 Fraud Enforcement is a strong indicator of enhanced enforcement. The new director emphasized continued reliance on data analytics to detect and disrupt fraud, as well as the creation of strike force teams with analysts and data scientists to review data, agents to investigate the cases, and prosecutors and trial attorneys to bring charges and try the cases.

Even companies with forgiven loans are not necessarily off the hook. DOJ and the Small Business Administration (SBA) retain a lingering right to review loan forgiveness applications up to six years from the date of forgiveness.²¹ Indeed, a recent SBA report shows that SBA's automated system flagged almost 40% of all PPP loans in 2020 for potential noncompliance with program requirements and required a manual review of each of the flagged loans.²² The threat of future enforcement action against noncompliance will remain, even after loan forgiveness.

Future Enforcement Will Focus on Healthcare and Fintech

The healthcare industry will likely be subject to additional False Claims Act cases as DOJ focuses on combatting healthcare and COVID-19 related fraud.²³ In general, 2021 was a record year for False Claims Act recoveries, and healthcare fraud was DOJ's leading source of False Claims Act settlements and judgments.²⁴ DOJ also recently announced its first False Claims Act settlements in connection with the PPP this past year.²⁵ Although additional cases have been slow to unfold, we expect that to change. False Claims Act cases, like many others, take time to investigate and develop. But this steady pursuit suggests that civil enforcement against COVID-19 related fraud has already become a priority for DOJ.²⁶

The pandemic has also heightened scrutiny of fintech companies. Fintech grew rapidly during 2020 as digital finance improved access to COVID-19 relief programs.²⁷ Many fintech lenders facilitated PPP loan applications alongside traditional big banks and community lenders. However, recent studies suggest that fintech's digital platforms may have been less vigorous in vetting loan applications than traditional lenders during the PPP process.²⁸ While this may not necessarily constitute misconduct, DOJ has begun investigating many fintech firms.²⁹

Footnotes

1. Justice Department Announces Director for COVID-19 Fraud Enforcement, available at https://www.justice.gov/opa/pr/justice-department-announces-director-covid-19-fraud-enforcement.

2. How the $4 Trillion Flood of Covid Relief Is Funding the Future, available at https://www.nytimes.com/2021/11/24/magazine/pandemic-aid.html.

3. $2 Trillion Coronavirus Stimulus Bill Is Signed Into Law, available at https://www.nytimes.com/2020/03/27/us/politics/coronavirus-house-voting.html.

4. DOJ Enforcement Actions Involving COVID-19 Relief Fraud: An Update, available at  https://www.mofo.com/resources/insights/210310-doj-enforcement-actions-covid-19-relief-fraud-update.html#_ftn2.

5. Paycheck Protection Program has run out of money for most borrowers, available at https://www.cnbc.com/2021/05/05/ppp-has-run-out-of-money-for-most-borrowers-what-to-know.html.

6. Text of the Consolidated Appropriations Act, 2021, available at https://www.washingtonpost.com/wp-stat/graphics/BILLS-116HR133SA-RCP-116-68.pdf.

7. Paycheck Protection Program, available at https://www.sba.gov/funding-programs/loans/covid-19-relief-options/paycheck-protection-program.

8. DOJ Enforcement Actions Involving COVID-19 Relief Fraud: An Update (September 2021), available at https://www.mofo.com/resources/insights/210910-doj-enforcement-actions.html.

9. COVID-19 Economic Injury Disaster Loan, available at https://www.sba.gov/funding-programs/loans/covid-19-relief-options/eidl.

10. Biden Outlines $1.9 Trillion Spending Package to Combat Virus and Downturn, available at https://www.nytimes.com/2021/01/14/business/economy/biden-economy.html.

11. More than $87 billion in federal benefits siphoned from unemployment system, says Labor Department, available at https://www.cnbc.com/2021/12/02/over-87-billion-in-federal-benefits-siphoned-from-unemployment-system.html.

12. Id.

13. See,e.g., Department Of Justice Acts To Stop Sale Of "Nano Silver" Product As Treatment For Covid-19, available at https://www.justice.gov/opa/pr/department-justice-acts-stop-sale-nano-silver-product-treatment-covid-19;  Justice Department Seeks to End Illegal Online Sale of Industrial Bleach Marketed as "Miracle" Treatment for COVID-19, available at https://www.justice.gov/opa/pr/justice-department-seeks-end-illegal-online-sale-industrial-bleach-marketed-miracle-treatment.

14. Combatting Hoarding and Price Gouging, available at https://www.justice.gov/coronavirus/combattingpricegouginghoarding.

15. Pharmacist Arrested for Selling COVID Vaccination Cards Online, available at https://www.justice.gov/opa/pr/pharmacist-arrested-selling-covid-vaccination-cards-online.

16. Criminals have stolen nearly $100 billion in Covid relief funds, Secret Service says, available at https://www.cnbc.com/2021/12/21/criminals-have-stolen-nearly-100-billion-in-covid-relief-funds-secret-service.html.

17. DOJ Announces Coordinated Law Enforcement Action to Combat Health Care Fraud Related to COVID-19, https://www.justice.gov/opa/pr/doj-announces-coordinated-law-enforcement-action-combat-health-care-fraud-related-covid-19.

18. See, e.g., SEC Charges Biotech Company and CEO With Fraud Concerning COVID-19 Blood Testing Device, available at https://www.sec.gov/news/press-release/2020-327; SEC Charges Companies and CEO for Misleading COVID-19 Claims, available at https://www.sec.gov/news/press-release/2020-111.

19. See, e.g., SEC Obtains Court Order to Enforce Investigative Subpoena for Testimony, available at https://www.sec.gov/litigation/litreleases/2021/lr25261.htm.

20. DOJ Enforcement Actions Involving COVID-19 Relief Fraud: An Update, available at https://www.mofo.com/resources/insights/210310-doj-enforcement-actions-covid-19-relief-fraud-update.html;  DOJ Enforcement Actions Involving COVID-19 Relief Fraud: An Update (September 2021), available at https://www.mofo.com/resources/insights/210910-doj-enforcement-actions.html.

21. Paycheck Protection Program, PPP Loan Forgiveness Application Form 3508S Revised January 19, 2021, available at https://www.sba.gov/sites/default/files/2021-01/PPP%20--%20Loan%20Forgiveness%20Application%20and%20Instructions%20--%20Form%203508S%20%281.19.2021%29.pdf.

22. SBA's Paycheck Protection Program Loan Review Processes, available at https://www.sba.gov/sites/default/files/2022-02/SBA%20OIG%20Report%2022-09.pdf?utm_medium=email&utm_source=govdelivery.

23. Attorney General Announces Task Force to Combat COVID-19 Fraud, available at https://www.justice.gov/opa/pr/attorney-general-announces-task-force-combat-covid-19-fraud.

24. Justice Department's False Claims Act Settlements and Judgments Exceed $5.6 Billion in Fiscal Year 2021, available at https://www.justice.gov/opa/pr/justice-department-s-false-claims-act-settlements-and-judgments-exceed-56-billion-fiscal-year.

25. See,e.g., id.; Eastern District of California Obtains Nation's First Civil Settlement for Fraud on Cares Act Paycheck Protection Program, available at https://www.justice.gov/usao-edca/pr/eastern-district-california-obtains-nation-s-first-civil-settlement-fraud-cares-act.

26. Justice Department's False Claims Act Settlements and Judgments Exceed $5.6 Billion in Fiscal Year 2021, available at https://www.justice.gov/opa/pr/justice-department-s-false-claims-act-settlements-and-judgments-exceed-56-billion-fiscal-year.

27. Coronavirus Drives 72% Rise In Use Of Fintech Apps, available at https://www.forbes.com/sites/simonchandler/2020/03/30/coronavirus-drives-72-rise-in-use-of-fintech-apps/.

28. See, e.g., PPP Loan Scammers Used Fintech Companies to Carry Out Fraud, available at https://www.bloomberg.com/news/articles/2020-10-07/ppp-loans-scammers-used-fintech-companies-to-carry-out-fraud.

29. See,e.g., U.S. Justice Department probing Kabbage, fintechs over PPP loan calculations -sources, available at https://www.reuters.com/article/us-health-coronavirus-usa-probe-idCAKBN2CP020.

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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