Enforcement Risks for Recipients of U.S. CARES Act and Other Federal Funds

The COVID-19 pandemic has created a seemingly constant state of concern and activity for companies in all sectors, with many businesses trying to launch new initiatives and find new financing to weather the storm and provide much-needed assistance in this unprecedented time. Many companies are stepping into the government contracting space to fill gaps in medical equipment and services, some for the first time. Many businesses will also apply for and receive aid from the U.S. government under the recently-enacted Coronavirus Aid, Relief and Economic Security (“CARES”) Act — a $2 trillion stimulus package that (among other things) provides nearly $350 billion in Small Business Administration (“SBA”) loans, as well as hundreds of billions of dollars in funding and other resources for healthcare companies and others supplying goods and services to support the COVID-19 response. While the receipt of government funds and aid will undoubtedly be a welcome relief, it also comes with significant legal risks. Companies receiving these funds can expect that their activities will be put under a microscope — and should plan accordingly now.

False Claims Act Investigations Are a Particular — and Particularly Costly — Risk

The federal government has powerful tools to investigate and police activity financed by government funding. The federal False Claims Act (“FCA”) is a particularly important and widely-used tool for the Department of Justice (“DOJ”), or for private whistleblowers who may bring actions in the DOJ’s shoes (and stand to receive massive payouts from any recoveries). The FCA applies to many programs involving federal funds, such as federally-guaranteed mortgage insurance, CARES Act and SBA loan relief, and healthcare programs paid for by Medicare, Medicaid, or other federal payors. Under the FCA, a company may be liable for materially false claims or false statements made in connection with the receipt of such funds, including under a broad “implied certification” theory. According to that theory, a company may be deemed to have made an implied false certification, and thus may be liable even without any alleged affirmative or express false statement, where the company failed to disclose that it violated some statute or regulation affecting its eligibility to receive payment.

By its terms, the FCA also extends to companies who merely “cause” the submission of materially false claims or false statements. Recently, the DOJ and private whistleblowers have even pursued FCA actions against private equity fund owners for purportedly “causing” the submission of false claims by portfolio companies that seek reimbursement from the federal government. If liable, companies may face treble damages (i.e., three times the amount of money improperly paid by the federal government) and potentially sweeping penalties. In 2019 alone, the DOJ recovered more than $3 billion in settlements and judgments under the FCA — more than $2 billion of which involved companies and individuals in the healthcare industry, including drug and medical device manufacturers, managed care providers, hospitals, pharmacies, laboratories, and physicians. Healthcare has long been a focus of the DOJ’s FCA enforcement efforts: 2019 represented the tenth consecutive year that FCA recoveries from the healthcare industry exceeded $2 billion.

Companies seeking government aid to weather the COVID-19 crisis should be particularly attuned to the risk of FCA investigations — including in connection with any partnerships they enter into related to the provision of goods or services financed by these funds, which should be carefully scrutinized and monitored. The FCA has its origins in policing fraud in times of crisis: it was enacted to address defense contractor fraud during the American Civil War. It has also been consistently used in the wake of other recent crises, generating massive recoveries. For example, the 2008 financial crisis and the federal financial stimulus package that followed — the Troubled Asset Relief Program (“TARP”) — resulted in widespread FCA enforcement against recipients of those stimulus funds, including banks, mortgage lenders, and other financial institutions. The years following TARP’s passage saw record FCA recoveries: the $13.3 billion that the federal government recovered under the FCA between January 2009 and January 2013 represented the largest four-year total in the DOJ’s history.

Additional Federal and State Oversight Is Expected

Companies can also expect that CARES Act-specific lookbacks and audits will be conducted by other federal agencies. The CARES Act itself creates several oversight bodies for precisely this purpose: a Pandemic Response Accountability Committee empowered to “detect and prevent waste, fraud, abuse, and mismanagement” that may cut across programs and agencies; a Special Inspector General for Pandemic Recovery responsible for conducting investigations related to loans made under the CARES Act; and a five-member Congressional Oversight Committee that will remain in place through fiscal year 2025. These bodies will have the ability to coordinate investigations and audits and refer matters to the DOJ for civil or criminal enforcement, including FCA and other actions.

The 2008 financial crisis — and the federal government’s oversight efforts in relation to companies that received TARP funds — provides a useful point of reference for what companies may expect going forward. In 2008, the federal government formed the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) to conduct, supervise, and coordinate audits and investigations of any company suspected of wasting, stealing, or otherwise abusing TARP funds. In the years since, SIGTARP’s efforts have yielded more than 350 convictions, and resulted in the recovery of more than $10 billion to the federal government as a result of settlements and judgments against financial institutions, mortgage lenders, bankers and bank borrowers, among others. SIGTARP has also used its wide-reaching investigatory powers to audit TARP housing programs at risk of fraud, waste and abuse, as well as TARP recipients obligated to comply with all requirements attached to the federal dollars they received.

Companies can expect that representations made in applications for CARES Act and other federal funding to aid in responding to the COVID-19 crisis, as well as in connection with ongoing reporting obligations following the receipt of such funds, will be similarly scrutinized. Among other things, these representations may include those related to eligibility and forgiveness requirements for SBA loans. The CARES Act expands SBA lending through a new Paycheck Protection Program (“PPP”) that provides low-cost funding for eligible borrowers with fewer than 500 employees. To receive such funds, borrowers will need to make good faith certifications, among other things, that proceeds will be used only for permissible business-related purposes under the PPP, including to retain workers, maintain payrolls, and cover existing overhead costs. In addition, PPP loans are eligible for forgiveness, subject to certain conditions and a detailed application and documentation process, including certification that a loan was used exclusively for its intended purpose. CARES Act fund recipients should be mindful of these obligations — and take care to ensure the accuracy of the representations they make, in both their applications now and throughout the life cycle of any funding they receive.

In addition to federal oversight, companies should also be mindful of any state-specific obligations: there are also likely to be investigations by state Attorneys General offices related to companies’ activities during and after the pandemic, which may include scrutiny of pricing for goods and services provided during this time, among other areas. For example, the New Jersey Attorney General’s Office has announced the formation of a joint federal-state task force that will investigate and prosecute a wide range of misconduct arising from the COVID-19 pandemic, including price gouging, the unlawful hoarding of medical supplies, procurement fraud, insurance fraud, and false and misleading investment opportunities.

Takeaways

With all of this in mind, despite the government’s indication of a willingness to provide expedited funding, companies applying for government aid or launching new initiatives paid for by government dollars should not cut corners in this process. History has repeatedly shown that a crisis is precisely when the government will scrutinize business activities even more closely, sometimes years after the fact — and particularly as it concerns applications for and use of government funds. Companies should be mindful of these potential risks, tread carefully in their applications for and use of government aid, and actively seek advice if they have questions about potential exposure.

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