By Ryan Meyer,1 Johnjerica Hodge,2 Grace Caputo,3 and Reid Gordon4
In the ABA's Winter 2022 White-Collar Newsletter, we published a look back at the first year of COVID enforcement under the Biden Administration and identified several areas of clear risk (i.e., borrowers from COVID-related loan programs) and some areas of risk that had not yet fully materialized (i.e., False Claims Act enforcement and lender risk for COVID loan programs). After another year of the Biden administration settling into power, the Garland-led Department of Justice (DOJ) has moved aggressively on all COVID-related fronts. We discuss below trends related to DOJ's activity in this area. Nor does regulatory scrutiny look set to dissipate in the near future as Congress in August 2022 extended the statute of limitations from five (5) years to ten (10) years for the primary COVID loan programs—Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loan (EIDL) loans. 5
In speech after speech, DOJ officials at all levels have made clear that prosecuting pandemic-related fraud is of the utmost importance. As the pandemic itself has dwindled, DOJ has spent more time focusing on COVID-related fraud and utilizing different prosecutorial avenues to reach that alleged misconduct. DOJ has also put its newly-budgeted resources to work investigating and prosecuting alleged COVID fraud. For instance, on September 14, 2022, DOJ announced the creation of three strike force teams to enhance its existing efforts to combat and prevent COVID-19-related fraud. In launching the strike forces, Attorney General Garland stated "these Strike Force teams will build on the Department's historic enforcement efforts to deter, detect, and disrupt pandemic fraud wherever it occurs." 6 According to Attorney General Garland, as of September 2022, DOJ had seized over $1.2 billion in relief funds that criminals were attempting to steal, and charged over 1,500 defendants with crimes in federal districts across the country.7 In a memorandum announcing the task force, Garland wrote that DOJ "will use every available federal tool—including criminal, civil, and administrative actions—to combat and prevent COVID-19 related fraud." 8
The False Claims Act—Triple the Damages for a Third of the Work
Former Principal Deputy Assistant Attorney General Ethan P. Davis called the False Claims Act (FCA) "one of the most effective weapons in our arsenal" to combat fraud perpetrated against the Government.9 Since the Government often relies on third-parties (relators) to bring FCA cases in the first place (relators can receive between 15-30% of a successful FCA action plus attorney's fees) and FCA cases provide for up to treble damages and per-claim penalties of up to $25,000, 10 DOJ's enthusiasm for the FCA is easy to understand. In addition, since at least the 2008 financial crisis, DOJ has taken a broad view of the FCA's "knowing" element in order to implicate lenders in "fraud."11
As a result, many anticipated DOJ to aggressively apply the FCA to combat pandemic fraud. In fact, in early 2021, Assistant Attorney General Brian Boynton stated that "it is clear to me and my colleagues in the Civil Division . . . that the False Claims Act will play a significant role in the coming years as the government grapples with the consequences of this pandemic." 12 He further noted that DOJ would "monitor and investigate the misuse of critical pandemic relief monies" and expected "significant cases and recoveries."13 However, for much of the first 18 months of the pandemic, that was primarily empty rhetoric as DOJ's use of the FCA for pandemic enforcement was slow to gather steam.
Over the last year, however, FCA activity has finally started to pick up. In particular, in September 2022, DOJ announced the first-ever FCA settlement with a PPP lender. U.S. Attorney Jennifer B. Lowery announced that Prosperity Bank had agreed to pay $18,673.50 to resolve allegations it improperly processed a PPP loan on behalf of an ineligible customer.14 While some may view an $18,000 settlement with a regional Texas bank as nearly frivolous, the settlement is significant because DOJ was sending a message that it views the FCA as a tool against PPP fraud that will allow it to punish "gatekeepers."
Further increasing governmental scrutiny on lenders, in December of 2022, a sprawling congressional report accuses several little-known financial technology companies, or fintechs, of reaping "billions in fees from taxpayers while becoming easy targets for those who sought to defraud the PPP." 15 Congressional investigators found that banks and lending partners collaborating with fintechs admitted to doing little to check for fraud in fintech-approved loan applications.16 The Prosperity bank case is thus likely a signal from DOJ that they will focus on prosecuting financial institutions that failed to act as the last line of defense to combat pandemic fraud even if various governmental organizations were pressuring lenders at the time to get as much money into private hands as quickly as possible. 17
1 Ryan is a partner at Katten Muchin Rosenman LLP based in its Dallas, Texas office and focuses his practice on civil and criminal government and internal investigations stemming from, among other things, allegations of financial and/or health care fraud.
2. Johnjerica is a partner at Katten Muchin Rosenman LLP based in its Washington, D.C. office and focuses her practice on government and internal investigations stemming from, among other things, allegations of fraud.
3. Grace is an associate at Katten Muchin Rosenman LLP based in its Dallas, Texas office and focuses her practice on white-collar litigation and investigations stemming from, among other things, allegations of financial and health care fraud.
4. Reid is an associate at Katten Muchin Rosenman LLP based in its Dallas, Texas office and focuses his practice on federal and state commercial litigation. Additionally, Reid assists the Katten white-collar group in investigations regarding healthcare fraud allegations.
5. Congress.gov. "H.R.7334 - 117th Congress (2021-2022): COVID-19 EIDL Fraud Statute of Limitations Act of 2022," August 5, 2022, https://www.congress.gov/bill/117th-congress/house-bill/7334; Congress.gov. "Text - H.R.7352 - 117th Congress (2021-2022): PPP and Bank Fraud Enforcement Harmonization Act of 2022," August 5, 2022, https://www.congress.gov/bill/117th-congress/house-bill/7352/text.
6. "Justice Department Announces COVID-19 Fraud Strike Force Teams," September 14, 2022, https://www.justice.gov/opa/pr/justice-department-announces-covid-19-fraud-strike-force-teams.
9. "Principal Deputy Assistant Attorney General (PDAAG) Ethan P. Davis Delivers Remarks on the False Claims Act at the U.S. Chamber of Commerce's Institute for Legal Reform," June 26, 2020, https://www.justice.gov/civil/speech/principal-deputy-assistant-attorney-general-ethan-p-davis-delivers-remarksfalse-claims. At the time of the speech, PDAAG Davis was the second in command of DOJ's Civil Division.
10. The False Claims Act (FCA), 31 U.S.C. §§ 3729 - 3733
11. DOJ applied the "broad knowledge standard" to many major financial institutions following the 2008 financial crisis to extract multi-billion dollar settlements.
12. "Acting Assistant Attorney General Brian M. Boynton Delivers Remarks at the Federal Bar Association Qui Tam Conference," February 22, 2021, https://www.justice.gov/opa/speech/acting-assistant-attorney-general-brian-mboynton-delivers-remarks-federal-bar.
14. "Southern District of Texas | First-Ever False Claims Act Settlement Received from Paycheck Protection Program Lender | United States Department of Justice," September 13, 2022, https://www.justice.gov/usao-sdtx/pr/first-everfalse-claims-act-settlement-received-paycheck-protection-program-lender.
15. Austin Fast and Sacha Pfeiffer, "A Congressional Report Says Financial Technology Companies Fueled Rampant PPP Fraud," NPR, December 6, 2022, sec. Investigations, https://www.npr.org/2022/12/06/1140823783/acongressional-report-says-financial-technology-companies-fueled-rampant-ppp-fr.
17. See, e.g., ABA Banking Journal, April 13, 2020, "Lawmakers Call for Flexibility on PPP's 10-Day Disbursement Rule," https://bankingjournal.aba.com/2020/04/lawmakers-call-for-flexibility-on-ppps-10-day-disbursement-rule/.
To view the full article click here
Originally Published by ABA Criminal Justice Section
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.