Government Stimulus Spending Likely to Lead to False Claims Act Investigations and Enforcement Actions
Through the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the federal government has passed an emergency stimulus package that will result in an unprecedented US$2 trillion infusion into the private and public sectors. However, to receive the benefits available through the CARES Act, individuals and entities will have to make a host of representations to the government regarding their circumstances to establish eligibility and, if they receive funds, to describe how the funds are used. Those who assist them to do so, open themselves up to civil liability and severe penalties under the False Claims Act (“FCA”). Historically, FCA enforcement has been most intense in the wake of government spending related to a national crisis.
A. The False Claims Act
The FCA was enacted in 1863 due to concerns that suppliers of military goods were defrauding the Union Army during the Civil War.1 Various amendments over the years have increased penalties, expanded the scope of conduct within the purview of the FCA, and lowered the level of knowledge required to establish a violation.2
The current version of the FCA creates liability for any person who: (1) knowingly submits, or causes another to submit, a false claim to the Government, or (2) knowingly makes a false record or statement, or causes another to make a false record or statement, in order to get a false claim paid by the Government.3 For an individual to be found liable under the FCA, they need not have actual knowledge of the falsity of the claim, as the FCA now explicitly covers instances where an individual acted with “deliberate ignorance” or “in reckless disregard” of the truth.4
Consequences for violations of the FCA can be harsh—civil penalties of up to US$10,000 per false claim in addition to triple the amount of damages the government suffered.5 Damages are typically measured by the difference in value between what the government bargained for and what it received.6 However, where government funds are expended for the benefit of a third party (e.g., government funding for a research grant), courts have measured damages at the full amount the government paid, subject to trebling per the statute.7 In those instances, courts have found that the government was denied an intangible benefit and do not require proof that the government suffered any tangible damages.8
B. History of DOJ Activity in the Wake of National Crises Foreshadows Increase in FCA Enforcement
FCA violations are investigated and prosecuted by the Civil Division of the Department of Justice (“DOJ”) and its local U.S. Attorney’s Offices. Attorney General William Barr has already issued a press release “urging the American public to report Covid-19 fraud,” and has directed all U.S. Attorneys to focus their enforcement efforts on investigating and prosecuting fraud schemes related to Covid-19.9 This comes as no surprise, as DOJ has historically focused on cases involving allegations that recipients of government funds took advantage of expenditures during times of crisis.
For example, in the wake of Superstorm Sandy in 2012, the U.S. Attorney’s Office for the Southern District of New York brought FCA claims against New York City for improperly seeking reimbursement from the Federal Emergency Management Agency (“FEMA”) for vehicles that were not actually damaged by the storm.10 After Hurricane Katrina in 2005, the U.S. Attorney’s Office for the Middle District of Louisiana brought FCA claims against a contractor, and its individual partners, who accepted a US$5.3 million payment on a Government contract to build and operate a base camp for first responders, despite not completing the contracted work.11 In the years following the 2008 financial crisis, the Department of Justice reported record-breaking recoveries through FCA actions, which included, in the fiscal year 2014 alone, US$3.1 billion recovered “from banks and other financial institutions involved in making false claims for federally insured mortgages and loans.”12
In addition to the DOJ’s heightened focus on Covid-19 fraud, the CARES Act creates a new inspectors general office—the Office of the Special Inspector General for Pandemic Recovery—tasked with the duty to “conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury” under the Act.13 The Act also establishes a Pandemic Response Accountability Committee, which is comprised of inspectors general from relevant agencies.14 Among the committee’s responsibilities is to conduct and coordinate oversight of the covered funds and Coronavirus response, which includes supporting the inspectors general in their oversight, in order to “detect and prevent fraud, waste, abuse, and mismanagement." 15
This is not the first time Congress has created a new inspectors general office to police funds distributed in an economic relief program. After the 2008 financial crisis, Congress enacted the Emergency Economic Stabilization Act (“EESA”), which, in addition to creating the Troubled Asset Relief Program (“TARP”), also created the Office of the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”).16 In the years following the financial crisis, SIGTARP worked hand in hand with the DOJ to investigate financial crimes, fraud, and abuse related to TARP. This resulted in a number of FCA enforcement actions against financial institutions that made false representations regarding qualifications to secure benefits under TARP.17
There is every reason to expect that the oversight of CARES Act expenditures will also lead to referrals of matters to the DOJ. If history is any guide, those matters are likely to result in FCA cases.
C. Applicants Will Need to Make Numerous Representations to Receive Benefits Under the CARES Act
The CARES Act’s roughly US$2 trillion dollar cash infusion consists of approximately US$560 billion (estimated) to individuals, US$500 billion to large corporations, US$377 billion to small businesses, US$339.8 billion to state and local governments, US$153.5 billion to public health, US$43.7 billion (estimated) to education/other, and a US$26 billion dollar safety net, which provides a second wave of funding for major food security programs (e.g., food stamps and other community food distribution programs).18 The Act establishes various programs, each with unique eligibility requirements.
For example, the Paycheck Protection Program dedicates nearly US$350 billion in government-backed loans to small businesses to provide eight weeks of cash-flow assistance.19 Select categories of businesses and individuals qualify for the program, including businesses that meet Small Business Administration (“SBA”) size standards, sole proprietors, independent contractors, and self-employed persons.20
The Lender Application Form for the Paycheck Protection Program, found on the SBA website, requires applicants to certify to, among other things, the applicant’s general eligibility, the amount of loan needed based on the applicant’s monthly payroll, whether the applicant is currently subject to any formal criminal charges or whether the applicant has been convicted or pled guilty to a felony within the past five years, and whether the applicant currently has delinquent loans from the SBA or other Federal agencies.21 Misrepresentations with respect to these certifications, either with knowledge of falsity or even with a reckless disregard for the truth, fall within the purview of the FCA.
Moreover, in some circumstances, a recipient of funds under a CARES Act program will likely have to continue to make representations regarding their use of the funds. For example, loans disbursed under the Paycheck Protection Program are to be forgiven in their entirety if all employees of the recipient business are kept on the payroll for eight weeks and the money provided under the program is used for payroll, rent, mortgage interest, or utilities.22
With respect to larger businesses, Title IV of the CARES Act allocates US$500 billion in emergency relief, in the form of loans, loan guarantees, and other investments, “to provide liquidity to eligible businesses, States, and municipalities related to losses incurred as a result of coronavirus.”23 Under Title IV, US$46 billion is allocated to businesses in certain essential or distressed sectors, such as air carriers and businesses critical to maintaining national security.24 The remaining US$454 billion is allocated to programs that are to be established by the Board of Governors of the Federal Reserve, including, pursuant to § 4003(c)(3)(D), a prospective program targeted towards midsize businesses, which is to provide “financing to banks and other lenders that make direct loans to eligible businesses including, to the extent practicable, nonprofit organizations, with between 500 and 10,000 employees.”25
As with the Paycheck Protection Program, entities that receive a direct loan through the mid-size business program contemplated by § 4003(c)(3)(D) will be required to make a number of certifications as to their eligibility, needs, and use of funds. The certifications include, but are not limited to, certifying that “the uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient,” that “the funds it receives will be used to retain at least 90 percent of the recipient’s workforce[] at full compensation and benefits” until a specified date, that “the recipient is not a debtor in a bankruptcy proceeding,” and that “the recipient is an entity or business that is domiciled in the United States with significant operations and employees located in the United States.” 26
FCA cases premised on allegations of false statements made to obtain government funds under the CARES Act and/or to describe how such funds were used will no doubt be coming in the months and years ahead.
Conclusion
The history of FCA enforcement following government spending in response to a crisis, along with the oversight mechanisms built into the CARES Act, suggests a surge in FCA investigations and enforcement is likely. Individuals and entities applying for or who receive funds under the Act should proceed carefully and consider consulting counsel. Businesses should perform due diligence to ensure all eligibility criteria are met before applying for funds or, at least, before using the funds. Moreover, businesses should establish and maintain sufficient safeguards and oversight mechanisms to ensure they are complying with all post-loan requirements, such as segregating CARES Act funding and tracking how funds are spent. While there is an understandable focus on current problems, it is important to keep in mind the potential for costly investigations and lawsuits down the road, particularly given the intense scrutiny CARES Act expenditures will eventually receive.
Footnotes
1 DEPARTMENT OF JUSTICE, The False Claims Act: A Primer (April 22, 2011).
2 See, e.g., P. L. No. 99-562, 100 Stat. 3153 (1986) (amending the FCA by, among other things, establishing liability for “deliberate ignorance” or “deliberate disregard” of the truth and increasing civil penalties for FCA violations); see also Pub. L. No. 111-21, § 4(a), 123 Stat. 1621 (2009) (amending the FCA by, among other things, expanding conspiracy liability under the statute and redefining the word “claim” in favor of a more expansive definition).
3 31 U.S. Code § 3729(a)(1)(A), (B).
4 31 U.S. Code § 3729(b).
5 31 U.S. Code § 3729(a)(1)(g).
6 U.S. ex rel. Feldman v. van Gorp, 697 F.3d 78 (2d Cir. 2012).
7 Id. at 91.
8 Id. at 91-92.
9 DEPARTMENT OF JUSTICE, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (March 20, 2020).
10 DEPARTMENT OF JUSTICE, Manhattan U.S. Attorney Announces $5.3 Million Proposed Settlement Of Lawsuit Against New York City For Fraudulently Obtaining FEMA Funds Following Superstorm Sandy (February 20, 2019).
11 DEPARTMENT OF JUSTICE, Hurricane Katrina Contractor Accepts $4 Million Judgment Under the False Claims Act (April 24, 2009).
12 DEPARTMENT OF JUSTICE, Justice Department Recovers Nearly $6 Billion from False Claims Act Cases in Fiscal Year 2014 (November 20, 2014).
13 Pub. L. No. 116-136 § 4018(c)(1).
14 Pub. L. No. 116-136 § 15010.
15 Pub. L. No. 116-136 § 15010(d).
16 Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343 § 121 (2008).
17 OFFICE OF THE INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM, United States Settles TARP Related False Claims Act Action Against Estate and Trusts of Layton P. Stuart for $4 Million (October 19, 2015); OFFICE OF THE INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM, $85 Million Settlement Reached with Fifth Third Bancorp Over Failure to Self-Report Defective Mortgage Loans (October 6, 2015).
18 NATIONAL PUBLIC RADIO, What's Inside The Senate's $2 Trillion Coronavirus Aid Package (March 26, 2020).
19 U.S. SENATE COMMITTEE ON SMALL BUSINESS AND ENTREPENUERSHIP, Paycheck Protection Program (last visited on April 19, 2020).
20 U.S. SMALL BUSINESS ADMINISTRATION, Paycheck Protection Program (last visited on April 19, 2020).
21 U.S. SMALL BUSINESS ADMINISTRATION, Paycheck Protection Program Lender Application Form.
22 U.S. SMALL BUSINESS ADMINISTRATION, Paycheck Protection Program Lender Application Form.
23 Pub. L. No. 116-136 § 4003.
24 Pub. L. No. 116-136 § 4003(b)(1)-(3).
25 Pub. L. No. 116-136 § 4003(c)(3)(D).
26 Pub. L. No. 116-136 § 4003(c)(3)(D)(i)(I)-(X).
