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By Matthew Adams, Joseph DeMaria and Marissa Koblitz Kingman

Recent remarks to the American Bar Association’s National White Collar Criminal Defense Institute by Deputy Attorney General Lisa O. Monaco serve as a clear warning to businesses that the Biden Justice Department will demand prosecutions of individuals who have engaged in corporate criminal enforcement misconduct when resolving its investigations.

During the last years of the Obama administration, then Deputy Attorney General Sally Yates issued a memorandum emphasizing that if a corporation sought cooperation credit with the Justice Department in resolving a federal corporate criminal investigation, the corporation would be expected to identify individuals within the corporation who were personally responsible for the misconduct, and provide the Justice Department with evidence to support a prosecution of those individuals. The Yates Memorandum was highly criticized because of the conflict of interest it could create between the corporation and its officers and employees. The Department’s emphasis on ferreting out individual misconduct in this manner could cause the company to become an arm of the Justice Department in conducting federal criminal investigations. Several high-profile federal prosecutions were infected by corporate counsel moving too aggressively against the company’s own officers and employees in an effort to persuade the Justice Department to resolve the investigation of the corporation.

The Trump administration, through then Deputy Attorney General Rod Rosenstein, issued guidelines that withdrew the emphasis on pressuring corporations to turn individuals in to the Justice Department in an effort to resolve criminal investigations. In her October 28 remarks, Monaco returned to the emphasis of the Yates Memorandum on searching for individual prosecutions of corporate misconduct. Indeed, Monaco’s guidelines appear to provide even more emphasis on individual prosecutions than the Yates Memorandum.

Monaco informed the federal defense bar that the Justice Department would be providing more resources and support, including dedicated agents, to assist prosecutors in uncovering and prosecuting the most sophisticated corporate criminals. For example, a new squad of FBI agents will be dedicated exclusively to the Department’s Criminal Fraud Section. Monaco also emphasized that the Department will review and assess a company’s prior misconduct, even if unrelated to the current investigation, in deciding an appropriate resolution. The Department will work closely with other federal and state regulators to understand the scope of a company’s prior misconduct. Monaco expressed that a record of past corporate misconduct may reflect a company’s lack of commitment to compliance programs and the appropriate culture to discourage criminal activity. Further, Monaco emphasized that the Department would be looking to use corporate monitors more than the previous administration as a method to monitor corporate compliance with a resolution of a criminal investigation, especially in connection with Deferred Prosecution or Non-Prosecution Agreements that are commonly used to resolve such investigations.

What Corporations Can Expect Next

Monaco’s remarks left no question that corporations and their officers will be under close government scrutiny. Significant resources will be spent on combatting corporate crime. Monaco specifically stated that, “our mission must remain the same — enforce the criminal laws that govern corporations, executives, officers and others…We will hold those that break the law accountable…Accountability starts with the individuals responsible for criminal conduct…it is unambiguously this Department’s first priority in corporate criminal matters to prosecute the individuals who commit and profit from corporate malfeasance.”

To avoid ending up in the crosshairs of a criminal investigation, companies should work with counsel to ensure they are demonstrating a commitment to compliance programs and making efforts to root out criminal activity. Additionally, if a corporate officer or employee is to be questioned by corporate counsel in connection with allegations of misconduct, and/or in response to a criminal investigation, counsel must be careful to protect the rights of the individual, including consideration of advising the officer or employee of his or her right to retain individual counsel. The conflict of interest that can be created by the Justice Department’s expectation that corporate counsel will identify individual wrongdoers to the government, and provide evidence that the DOJ can use to prosecute those individuals, compels a careful approach to such internal investigations.

For more information on corporate compliance and government investigations, contact the authors: Matthew S. Adams at madams@foxrothschild.com or 973.994.7573; Joseph A. DeMaria at jdemaria@foxrothschild.com or 305.442.6547; or Marissa Koblitz Kingman at mkingman@foxrothschild.com or 973.548.3316; or another member of the firm’s White-Collar Criminal Defense & Regulatory Compliance Practice.

A Fox Rothschild podcast brought to you by the White-Collar Criminal Defense and Regulatory Compliance Practice

The Presumption of Innocence is a new podcast on hot topics in the world of white-collar criminal and regulatory enforcement featuring Matthew S. Adams and Matthew D. Lee, Co-Chairs of Fox’s White-Collar Criminal Defense & Regulatory Compliance Practice Group.Taking turns as host, Adams and Lee will be joined by guest speakers with distinct perspectives to take a deeper dive into issues that are front of mind for our clients.

Episode One: The Anatomy of a PPP Fraud Investigation 

In episode one, Adams is joined by Jessica Hollobaugh, CPA/ABV, CFE, a partner in the forensic evaluation services group at Withum, to discuss the Paycheck Protection Program and the fraud enforcement efforts that surround it.

By Matthew D. Lee and Marissa Koblitz Kingman

The U.S. Justice Department’s COVID-related health care fraud crackdown continues to intensify. On a single day in September 2021, the Justice Department announced criminal charges against 138 defendants in 31 federal districts throughout the United States, alleging about $1.4 billion in losses. Among those charged are 42 doctors, nurses and other licensed medical professionals.

For businesses that took advantage of the $2.2 trillion in federal pandemic aid programs, this latest enforcement action demonstrates that an audit or investigation may be inevitable. Therefore, it is essential to ensure that compliance protocols are in place to avoid criminal consequences.

The CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, provided emergency financial assistance in the form of forgivable loans to businesses to cover payroll and other specified expenses through the Paycheck Protection Program (PPP). It also included the Provider Relief Fund, which provided needed medical care to Americans suffering from COVID-19.

From the outset, the government vowed to ensure that it would take measures to prevent recipients from fraudulently taking advantage of the CARES Act programs.

Focus on Fraud in Health Care Sector

The Justice Department has been focused on COVID-19 health care related fraud since the pandemic’s inception. As Assistant Director Calvin Shivers of the FBI’s Criminal Investigative Division recently stated, “health care fraud targets the vulnerable in our communities, our health care system, and our basic expectation of competent, available care. Despite a continued pandemic, the FBI and our law enforcement partners remain dedicated to safeguarding American taxpayers and businesses from the steep cost of health care fraud.”

A coalition of federal and state law enforcement agencies are working together to investigate and prosecute alleged COVID-19 related fraud. The agencies include the Department of Health and Human Services Office of Inspector General, the FBI, the Drug Enforcement Administration, the Health Care Fraud Unit of the Criminal Division’s Fraud Section, the Health Care Fraud and Appalachian Regional Prescription Opioid Strike Force and the U.S. Attorneys’ Offices throughout the country.

Recent COVID-Related Criminal Charges

Recent criminal charges associated with the COVID-19 pandemic include a variety of allegations related to false billings. The defendants are alleged to have misused patient information to submit claims to Medicare for unrelated, medically unnecessary, and expensive laboratory tests, including cancer genetic testing.

Individual defendants are also alleged to have misused Provider Relief Fund monies for their own personal expenses, including for gambling at a Las Vegas casino and payments to a luxury car dealership.

Other recent charges include individuals accused of telemedicine fraud. In 11 judicial districts, charges have been filed against 43 defendants who allegedly paid doctors and nurse practitioners to order unnecessary durable medical equipment, genetic and other diagnostic testing, and pain medications, either without any patient interaction or with only a brief telephonic conversation with patients they had never met or seen.

Durable medical equipment companies, genetic testing laboratories and pharmacies then purchased those orders in exchange for illegal kickbacks and bribes. Prosecutors allege they also submitted more than $1.1 billion in false and fraudulent claims to Medicare and other government insurers. The claims included sham telehealth consultations that did not occur. The proceeds of the scheme were allegedly spent on luxury items, including vehicles, yachts, and real estate.

Criminal charges also included allegations that the defendants made false and fraudulent claims for tests and treatments for patients seeking treatment for drug and/or alcohol addiction through a national sober homes initiative program. Other medical professionals have been charged with over-proscribing millions of doses of opioids and other prescription narcotics and submitting false billings.

What to Expect Next

The federal government will soon make available an additional $25.5 billion for health care providers affected by the pandemic, including $8.5 billion allocated to the American Rescue Plan for providers who serve rural Medicaid, Children’s Health Insurance Program or Medicare patients, and $17 billion to the Provider Relief Fund.

The federal government’s estimate of $1.4 billion in alleged fraud losses to date underscores why its enforcement efforts are rapidly intensifying. Health care professionals and business owners should proceed with caution when taking advantage of the latest round of aid funding.

The recent spate of charges shows that even health care fraud unrelated to the pandemic is a top priority for federal investigators. Any health care business owner who is concerned about compliance with the CARES Act or is concerned about potential fraud exposure should consult counsel and not wait to be contacted by law enforcement. Those who have already received a subpoena or inquiry from any law enforcement agency should immediately consult with counsel who can assess the full potential for civil and criminal exposure prior to responding.

By Matthew D. Lee and Marissa Koblitz Kingman

The owner of a Florida jet company has agreed to pay a large penalty for using government aid – which was directed to his business – on his own personal expenses.  The scheme came to light because of a whistleblower lawsuit that was filed by a former employee of the company on behalf of the government. The employee received almost $60,000 as a result.  Such suits, brought under the False Claims Act (FCA), are a key part of how the federal government is rooting out fraud relating to the Coronavirus Aid, Relief, and Economic Security (CARES) Act and its Paycheck Protection Program (PPP).

The CARES Act

The CARES Act, enacted in March 2020, was intended to provide emergency financial assistance to those suffering economic losses related to COVID-19. It included $2.2 trillion in economic aid for Americans and their businesses. The law provided forgivable PPP loans to small businesses to cover payroll and other specified expenses and included the Provider Relief Fund, which was designed to provide needed medical care to Americans suffering from COVID-19.

Almost immediately after the act was passed, the DOJ began working to investigate and prosecute pandemic-related fraud. But in addition to criminal prosecutions, the government used civil tools like the FCA to address CARES Act-related fraud. The FCA permits the government and private citizens to seek monetary recovery for penalties related to false claims for federal funds.

The False Claims Act

The FCA, 31 U.S.C. §§ 3729 – 3733, is a federal statute originally enacted in 1863 in response to defense contractor fraud during the American Civil War. The FCA allows the government to recover damages and penalties for false claims made to the government in an attempt to gain some kind of federal payment. The FCA states that violators are liable for treble damages, plus a penalty that is linked to inflation.

In addition to allowing the government to pursue claims against people for fraud, the FCA also allows private citizens to file suits on behalf of the government (“qui tam” lawsuits).  Private citizens who successfully bring a qui tam lawsuit could receive a portion of the government’s recovery. This financial incentive motivates employees to bring whistleblowers actions. Companies should be aware that current and former employees who believe they have uncovered such fraud at their employer’s company will therefore likely want to bring a qui tam action. As discussed in our prior alert, because the FCA permits private citizens to seek monetary recovery for penalties related to false claims for federal funds, businesses should expect whistleblower actions pursuant to the FCA to continue to intensify.

The Government’s Fraud Task Force

On May 17, 2021, the government enhanced its efforts to investigate and prosecute fraud. U.S. Attorney General Merrick B. Garland announced the establishment of a task force to marshal the resources of the DOJ in partnership with other agencies to enhance enforcement efforts against COVID-19 related fraud.

In announcing the creation of the task force, the DOJ said it had already been working together with its partner agencies to hold hundreds of bad actors accountable. The task force was created to incorporate the existing coordination mechanisms within DOJ and is expected to work closely with other government agencies to combat fraud. The task force includes several entities within the DOJ, including the Criminal and Civil Divisions, the Executive Office for United States Attorneys and the FBI.

Other government agencies have also been invited to be part of the task force, including the Department of Labor, the Department of the Treasury, the Department of Homeland Security, the Small Business Administration, the Special Inspector General for Pandemic Relief and the Pandemic Response Accountability Committee. The task force bolsters efforts to investigate and prosecute the most culpable criminals and other alleged bad actors.

Recent FCA Settlement

Following an investigation by the task force, Seth Bernstein, the owner of a jet charter company, agreed to pay $287,055 to settle allegations that he used PPP loan proceeds for his personal expenses. The government alleged that Bernstein applied for and received a PPP loan totaling $1,173,382.  Within a day of receiving the loan proceeds, Bernstein allegedly diverted $98,929 of the funds to pay for personal, non-company related expenses.

A former employee of the jet charter company subsequently brought a suit under the qui tam provision. From 2017 until early May 2020, the former employee served as a Senior Accountant and, after a promotion, Assistant Controller for Bernstein’s company.

On March 9, 2020, the company’s Chief Financial Officer and Co-Chairman, Daniel Hebert, informed the former employee and whistleblower that the company would be laying her off with three months’ severance pay. During her severance period, she was encouraged to still come into work, which she did until she accepted another position. The whistleblower’s last day at the company was on May 7, 2020.

What to Expect Next

The aggressive crackdown of fraud related to the COVID-19 pandemic has been unwavering. But in addition to criminal charges, the public should expect a steady increase in civil FCA settlements.

Federal authorities have continued to receive an outpouring of complaints from whistleblowers related to suspected fraudulent activity.

The government makes reporting alleged fraud easy for the public by having a national hotline dedicated to pandemic-related fraud as well as an accessible online complaint form.

Any business owner who is concerned about compliance with the CARES Act or about potential exposure to COVID-19 related fraud allegations should immediately consult counsel.

Do not wait to be contacted by law enforcement.

Those who have already received a subpoena or inquiry from any law enforcement agency should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding.

By Matthew S. Adams, Kelley Hodge, Matthew D. Lee and Marissa Koblitz Kingman

The Department of Justice (DOJ) has intensified its already aggressive crackdown on fraud related to COVID-19, recently announcing criminal charges against a telemedicine company executive, a physician, marketers and medical business owners for losses exceeding $143 million. These recent prosecutions provide a clear warning to all health care-related businesses that there will be enhanced scrutiny of the use of government funds related to the COVID-19 pandemic.

The CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, was intended to provide emergency financial assistance to those suffering economic losses related to COVID-19. It included $2.2 trillion in economic aid for Americans and their businesses. The law provided forgivable loans to small businesses to cover payroll and other specified expenses through the Paycheck Protection Program (PPP), and included the Provider Relief Fund, which was designed to provide needed medical care to Americans suffering from COVID-19.

The CARES Act also provided an opportunity for service providers to take advantage of COVID-19-related government assistance. Immediately after the CARES Act was passed in March 2020, the DOJ began efforts to investigate and prosecute pandemic-related fraud.

COVID-19 Related Health Care Fraud Crackdown

On May 26, 2021, more than a year after the CARES Act was enacted, the DOJ announced criminal charges against 14 defendants —11 newly-charged and three who were charged in superseding indictments — in seven federal district courts for their alleged participation in health care fraud schemes that resulted in over $143 million in false billings.

Deputy Attorney General Lisa O. Monaco described the alleged conduct as “theft from American taxpayers through the exploitation of the national emergency,” and that those charged “took advantage of the COVID-19 pandemic to line their own pockets instead of providing needed health care services during this unprecedented time in our country.” Monaco emphasized the government’s commitment to prosecuting bad actors and holding them accountable for exploiting government programs that were designed to help the American people.

As the DOJ announced the prosecutions, the Center for Program Integrity, Centers for Medicare & Medicaid Services (CPI/CMS) separately announced that it took adverse administrative actions against over 50 medical providers. The providers allegedly abused CMS programs that were designed to encourage access to medical care during the pandemic.

COVID-19 Health Care Crimes

The defendants are alleged to have committed various COVID-19 health care-related crimes, including but not limited to:

  • Offering COVID-19 tests to induce victims to provide their personal identifying information and thereafter misusing the victims’ information to submit claims to Medicare for unrelated medical tests
  • Submitting false claims to Medicare for sham telemedicine encounters
  • Offering and paying bribes in exchange for medical professionals’ referrals of medically unnecessary testing
  • Submitting false claims to Medicare for allergy and COVID-19 testing that did not occur
  • Misappropriating funds from the CARES Act Provider Relief Fund and submitting false loan applications and false loan agreements to the Economic Injury Disaster Loan Program
  • Obtaining billing privileges for multiple pharmacies by using nominees to serve as the purported owners and supervising pharmacists and then allegedly submitting false and fraudulent claims to Medicare

Deputy Inspector General for Investigations Gary L. Cantrell of Health and Human Services – Office of Inspector General (HHS-OIG) stated that his “agency and its law enforcement partners are aggressively and effectively investigating these egregious crimes, which is made equally clear given the results of this takedown. We will continue to support the unprecedented COVID-19 public health effort by holding accountable people who use deceptive tactics to profit from the pandemic.”

FBI Director Christopher Wray similarly stated that the “FBI, along with our federal law enforcement and private sector partners, are committed to continuing to combat health care fraud and protect the American people.”

Currently, the DOJ Fraud Section is prosecuting cases in the following districts: Western District of Arkansas, Northern District of California, Middle District of Louisiana, Central District of California, Southern District of Florida, District of New Jersey, and the Eastern District of New York. The National Rapid Response Strike Force of the Health Care Fraud Unit of the Criminal Division’s Fraud Section, in conjunction with the Health Care Fraud Unit’s Medicare Fraud Strike Forces (MFSF) led the enforcement actions. The DOJ also had the assistance of the FBI, HHS-OIG, U.S. Postal Inspection Service, Internal Revenue Service Criminal Investigation, Veterans Affairs Office of Inspector General, Department of Defense Office of Inspector General, Federal Deposit Insurance Corporation, Louisiana Medicaid Fraud Control Unit, and other federal and state law enforcement agencies in bringing these charges.

What to Expect Next

The aggressive crackdown on health care fraud related to the COVID-19 pandemic is consistent with the government’s focus on rapidly investigating and prosecuting COVID-19 related fraud, as discussed in our previous alerts “Justice Department Continues Historic Level of Enforcement Against COVID-19 Fraud” and “DOJ Announces First Criminal Prosecution for Misuse of COVID-19 Relief Funds Dedicated to Health Care Providers.” Federal authorities have continued to receive an outpouring of complaints related to suspected fraudulent activity from whistleblowers. The government makes reporting alleged fraud easy for the public by having a hotline dedicated to pandemic-related fraud as well as an accessible online complaint form. There will likely be a steady increase in prosecutions.

Any health care business owner who is concerned about compliance with the CARES Act or about potential exposure to COVID-19 related fraud allegations should immediately consult counsel and not wait to be contacted by law enforcement. Those who have already received a subpoena or inquiry from any law enforcement agency should immediately consult with counsel who can assess the full potential for civil and criminal exposure before responding.

For up to date information on prosecutors’ efforts in combating COVID-19 related fraud, consult Fox Rothschild’s proprietary PPP Fraud Prosecution Tracker, an interactive tool that monitors new case filings and the disposition of cases surrounding alleged fraud and abuse in connection with PPP nationwide.

For access, contact Matthew S. Adams at madams@foxrothschild.com, Kelley Hodge at khodge@foxrothschild.com, Marissa Koblitz Kingman at mkingman@foxrothschild.com or Matthew Lee at mlee@foxrothschild.com.

By Matthew S. Adams and Marissa Koblitz Kingman

Businesses that are asked to complete SBA Form 3509 face considerable risk because many companies did better than expected financially after receiving a PPP loan, despite the initial economic hit due to the pandemic.

If the SBA ultimately determines that the PPP Borrower Application was not completed in good faith because the loan was not “necessary” for the company’s operations, the borrower could face civil or even criminal penalties.

What is SBA Form 3509?

The SBA requires for-profit borrowers to complete SBA Form 3509 if the borrower received a PPP loan of $2 million or greater. The SBA’s stated purpose of the form is to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that borrowers made on their PPP Borrower Application that economic uncertainty made the loan request necessary.

What Information Must You Provide?

SBA Form 3509 requests extensive information about the borrower’s finances before and after the receipt of a PPP loan, including:

  • Gross revenues for the first and second quarters of 2020
  • What business operations were altered or disrupted due to the pandemic
  • What operations were reduced due to the pandemic
  • What capital improvement projects were done
  • How much cash does the company have
  • What dividends or other capital distributions were made
  • What prepaid debt was paid
  • If any employees received over $250,000 on an annualized basis

The questions in SBA Form 3509 are focused on whether the PPP loan was necessary to support the ongoing operations of the borrower.

Why You May Need Legal Guidance

In March and April 2020, many companies across the country were faced with great economic uncertainty. It was abundantly clear in the first few weeks of the pandemic that some businesses were going to be severely negatively affected by COVID-19. But those dire predictions evolved over the next few months, and it turned out that some companies actually had a successful financial year.

For businesses that fared better than expected, SBA Form 3509 may pose a challenge. An addendum to the form may be necessary to explain why the company certified that its “current economic uncertainty” made the PPP loan request “necessary to support the ongoing operations,” when it ended up doing financially well.

A supplemental memorandum to the SBA, with the assistance of counsel, can explain the company’s thought processes and deliberations that went into preparation of the application for the PPP loan. Specific detail regarding the nature of the business, the company’s workforce, a timeline of relevant events, business activity at the time of the loan, expenses and mitigation efforts may need to be carefully outlined for the SBA. The narrative accompanying SBA Form 3509 may also need to describe how the loan application was completed in good faith and that the loan was necessary to support the company’s ongoing operations at the time, despite the ultimate financial stability of the borrower.

Such a fact-specific chronicle detailing the significant uncertainties that the company faced due to the expected operational disruptions caused by the COVID-19 pandemic may be necessary not only to ensure full forgiveness of the loan, but to demonstrate good faith and avoid potential civil and criminal liability.

The CARES Act

The CARES Act (Coronavirus Aid, Relief and Economic Security Act) enacted in March 2020, was designed to provide emergency financial assistance to those suffering economic losses related to COVID-19. It included $2.2 trillion in economic aid for individuals and businesses and provided access through the Small Business Administration (SBA) to forgivable loans to cover payroll and other specified expenses through the Paycheck Protection Program (PPP). It also provided government assistance through the Economic Injury Disaster Loan (EIDL) program and Unemployment Insurance (UI) program. However, the CARES Act has also provided an opportunity for fraudsters to take advantage of the government assistance.

COVID-19 Related Investigations, Prosecutions and Civil Penalties

Immediately after the CARES Act was passed in March 2020, the DOJ began efforts to investigate and prosecute pandemic-related fraud. By the end of March 2021, it had charged more than 470 defendants with criminal offenses based on fraudulent schemes connected to the COVID-19 pandemic.

The government also pursued and secured civil injunctions against defendants who sold products such as fake vitamin supplements and silver ointments, making false claims about the products’ abilities to prevent or treat COVID-19 infections. The government used other civil tools to address CARES Act-related fraud as well, like the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the False Claims Act (FCA). FIRREA allows prosecutors to seek civil penalties for violations of certain federal criminal statutes. The FCA permits the government and private citizens to seek monetary recovery for penalties related to false claims for federal funds.

The government made clear that its focus on CARES Act fraud would only intensify in the coming months and years.

The Task Force

On May 17, 2021, the government again enhanced its efforts to investigate and prosecute fraud. U.S. Attorney General Merrick B. Garland announced the establishment of the Task Force to marshal the resources of the DOJ in partnership with other agencies to enhance enforcement efforts against COVID-19 related fraud. He warned that the “Department of Justice will use every available federal tool – including criminal, civil, and administrative actions – to combat and prevent COVID-19 related fraud. We look forward to working with our federal government colleagues to bring to justice those who seek to profit unlawfully from the pandemic.”

In announcing the creation of the Task Force, DOJ said it had already been working together with its partner agencies to hold hundreds of bad actors accountable. The Task Force was created to incorporate the existing coordination mechanisms within DOJ and is expected to work closely with other government agencies to combat fraud. The Task Force includes several entities within the DOJ, including the Criminal and Civil Divisions, the Executive Office for United States Attorneys, and the FBI. Other government agencies have also been invited to be part of the Task Force, including the Department of Labor, the Department of the Treasury, the Department of Homeland Security, the SBA, the Special Inspector General for Pandemic Relief and the Pandemic Response Accountability Committee. The Task Force is expected to bolster efforts to investigate and prosecute the most culpable criminals and other bad actors.

The creation of the Task Force is consistent with the government’s focus on rapidly investigating and prosecuting COVID-19 related fraud, as discussed in our prior alerts – Justice Department Continues Historic Level of Enforcement Against COVID-19 Fraud and DOJ Announces First Criminal Prosecution for Misuse of COVID-19 Relief Funds Dedicated to Health Care Providers.

The government has continued to receive an outpouring of complaints related to suspected fraudulent activity from whistleblowers. Investigators also make reporting alleged fraud easy for the public by having a hotline dedicated to pandemic related fraud as well as an accessible online complaint form.

For up-to-date information on prosecutors’ efforts in combating COVID-19 related fraud, consult Fox Rothschild’s proprietary PPP Fraud Prosecution Tracker, an interactive tool that monitors new case filings and the disposition of cases involving alleged fraud and abuse in connection with PPP nationwide. For access, contact Matthew D. Lee at mlee@foxrothschild.com or Marissa Koblitz Kingman at mkingman@foxrothschild.com.

By Gabriel Herman and Marissa Koblitz Kingman

Paycheck Protection Program (PPP) loans were designed to help small businesses cover explicit allowable expenses during the COVID-19 pandemic. There are various eligibility requirements that businesses must satisfy before applying for PPP loans and subsequently upon seeking forgiveness. Because the loans were sought and made at rapid speed, many business owners unknowingly made errors in the application process or while spending the loan monies. Many lenders did not flag or even recognize such errors. After loans were distributed, the SBA issued guidance on eligibility requirements. Now, as businesses turn to the forgiveness process, seek an additional PPP loan or simply realize that they received loan proceeds in error, companies are left trying to navigate the complicated process of fixing errors. How businesses correct these mistakes is extremely important and can mean the difference between having to write a good faith error letter to a lender and fending off a criminal investigation.

Possible issues we’re seeing:

  • Including independent contractors in loan calculation
  • Incorrectly calculating full time employees
  • Making mistakes while computing payroll costs
  • Spending the loan money on impermissible uses
  • Improperly determining the covered period

Excess Loan Amount Errors

PPP borrowers have long feared the SBA will be inflexible when granting loan forgiveness to borrowers who made good faith errors in the application or forgiveness process. Loan forgiveness often hinges on whether a borrower was eligible to participate at the time of applying and whether the borrower is eligible for complete loan forgiveness based on the proceeds received. A loan is not eligible for forgiveness if the SBA determines that a “borrower was ineligible for the PPP loan based on the provisions of the CARES Act” See 85 Fed. Reg. 38306. Similarly, lenders will be instructed to deny the loan forgiveness application if the “SBA determines that the borrower [was] ineligible for the loan amount or loan forgiveness amount claimed by the borrower.” See 85 Fed. Reg. 33012.

SBA Procedural Notice 5000-20078 provides guidance to parties that have identified an “excess loan amount error” made by a borrower or lender when approving the PPP Borrower Application. Procedural Notice 5000-20078 addresses situations in which a borrower or lender made a good faith error that caused them to receive a PPP Loan in excess of the correct amount. Examples that may result in an “excess loan amount error” include:

  • Failing to subtract amounts paid to employees in excess of $100,000 (annualized and prorated) from reported payroll costs.
  • Including payments to independent contractors when calculating payroll costs in the PPP Borrower Application Form. As a result, the amount approved exceeded the correct maximum loan amount.

Borrowers who experience and identify a good-faith excess loan amount error are not precluded from seeking full loan forgiveness. Rather, borrowers are expected to repay the excess loan proceeds and then seek loan forgiveness on the properly obtained balance. Forgiveness will only be denied for the ineligible portion and the borrower must make payments on the remaining loan amount. Of note, Procedural Notice 5000-200078 does not require that borrowers immediately repay the entire amount of the excess loan proceeds Instead, borrowers will be required to make payments towards the excess amount in accordance with the terms of the note. Borrowers and lenders that identify an excess loan amount error are advised to notify the SBA even if a final determination of loan forgiveness has been made.

Borrowers should be aware that Procedural Notice 5000-20078 and its discussion of “excess loan amount error” does not apply to errors caused by people who make known misstatements or fraud.

PPP1 vs. PPP2

Generally, a borrower is eligible for a PPP2 loan if it previously received a First Draw PPP (PPP1) loan, will or has used the full amount of the loan only for authorized uses, has no more than 300 employees and can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020. However, there are some additional disqualifiers in PPP2 that were not contained in PPP1, including one that forces an examination of the borrower’s relationship with China.

Congress specifically targeted China in PPP2, making any businesses with substantial ties to the country ineligible. Companies should proceed with extreme caution when deciding whether to seek a PPP2 loan if it has any relationship with China.

PPP2 disqualifies companies:

  • That are created in or organized under the laws of China
  • That have significant operations in China
  • In which a Chinese company owns or holds, directly or indirectly, 20% or more of the economic interest of the business
  • That have a resident of China on its board of directors.

If your business has received a loan and has ties to China, the business should expect heightened governmental scrutiny and seek counsel to proactively evaluate potential civil and criminal liability.

If a Borrower Suspects a Mistake Was Made

The owner of any business that has already received a PPP loan and thinks an error may have been made in applying for the loan or spending the loan should consult with counsel before communicating with any government agency or lender. An attorney can help assess the full potential for civil and criminal exposure, interface with the lender and government and help mitigate potential damages.

 

For additional information about correcting PPP loan errors, please contact Gabriel Herman at gherman@foxrothschild.com or 215.444.7338 and Marissa Koblitz Kingman at mkingman@foxrothschild.com or 973.548.3316.

April 20, 2021 – Alerts

By Matthew D. Lee and Marissa Koblitz Kingman

The Justice Department continues to intensify its crackdown on COVID-19 relief program fraud, a clear indication that any individual or business that has benefited from the government aid should expect enhanced scrutiny from various government agencies in the coming months and possibly years. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, was intended to provide emergency financial assistance to those suffering economic losses related to COVID-19. The Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL) program and Unemployment Insurance (UI) programs, included in the Act, have undoubtedly helped millions of deserving people and businesses survive the pandemic. However, the CARES Act has also provided an opportunity for fraudsters to take advantage of government assistance.

The CARES Act

The CARES Act, which included $2.2. trillion in economic aid, was intended to provide financial assistance to Americans and their businesses struggling under the economic hardships caused by the COVID-19 pandemic. The law provided forgivable loans to small businesses to cover payroll and other specified expenses through the PPP loan program. It also provided government assistance through the EIDL program and UI programs.

Criminal Investigations and Prosecutions

Within weeks of the CARES Act’s passage, the Department of Justice immediately began efforts to investigate and prosecute related fraud. The Department focused initially on the most egregious instances of COVID-19 related wrongdoing, but it has since cast a wider net.

By the end of March 2021, the Department of Justice had charged over 470 defendants with criminal offenses based on fraud schemes connected to the COVID-19 pandemic. The Justice Department’s Criminal Division Fraud Section has prosecuted approximately 120 defendants charged with PPP fraud. The accused include those who lied about payroll costs, employees or even having a business. Individuals who misappropriated loan proceeds by using the money to purchase cars, boats and houses were also quickly prosecuted. The government has seized over $580 million from fraudsters who applied for EIDL advances and loans, and over 140 defendants have been charged and arrested for federal offenses related to UI fraud. The government has also prosecuted or secured civil injunctions against dozens of defendants who sold products such as fake vitamin supplements and silver ointments, making false claims about the products’ abilities to prevent or treat COVID-19 infections.

The Justice Department has made it clear that its focus on CARES Act investigations will only deepen in the coming months and years. Attorney General Merrick B. Garland recently stated that, “The Department of Justice has led an historic enforcement initiative to detect and disrupt COVID-19 related fraud schemes. The impact of the department’s work to date sends a clear and unmistakable message to those who would exploit a national emergency to steal taxpayer-funded resources from vulnerable individuals and small businesses. We are committed to protecting the American people and the integrity of the critical lifelines provided for them by Congress, and we will continue to respond to this challenge.” Acting Assistant Attorney General Nicholas L. McQuaid of the Justice Department’s Criminal Division similarly stated that, “To anyone thinking of using the global pandemic as an opportunity to scam and steal from hardworking Americans, my advice is simple – don’t. No matter where you are or who you are, we will find you and prosecute you to the fullest extent of the law.”

For the latest information on prosecutors’ efforts, consult Fox Rothschild’s proprietary PPP Fraud Prosecution Tracker, an interactive tool that monitors new case filings and the disposition of cases surrounding alleged fraud and abuse in connection with PPP nationwide. For access, contact White-Collar Criminal Defense & Regulatory Compliance Practice Co-Chairs Matthew Adams at madams@foxrothschild.com or Matthew Lee at mlee@foxrothschild.com.

Civil Enforcement

The government has also used civil tools to address CARES Act-related fraud. In the Eastern District of California, the Justice Department obtained a civil settlement for fraud involving the PPP, resolving civil claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and the False Claims Act (FCA) against an internet retail company, its president and its chief executive officer. The claims arose from false statements made to lenders to influence the banks to approve, and the SBA to guarantee, a PPP loan.

FIRREA allows the government to impose civil penalties for violations of enumerated federal criminal statutes, including those that affect federally insured financial institutions. The FCA is the government’s primary civil tool to redress false claims for federal funds and property involving a multitude of government operations and functions. The FCA also permits private citizens with knowledge of fraud against the government to bring lawsuits on behalf of the United States and to share in any recovery. Such whistleblower complaints have been on the rise since the enactment of the CARES Act, with whistleblowers assisting the government in prosecuting misuse and abuse of the government funds.

What’s Next?

While the government has focused tremendous resources on combatting CARES Act fraud, inspectors general have seized about $2.5 billion of the $84 billion in potential fraud. The CARES Act created the Pandemic Response Accountability Committee (PRAC), comprised of 22 inspectors general charged with ensuring the federal funds are spent properly. PRAC is currently working with the Office of Management and Budget and other government agencies to enhance technological tools to facilitate the detection of CARES Act-related fraud. The Biden administration has promised to ensure that CARES Act fraudsters will be investigated and prosecuted. President Biden also promised to investigate whether big banks provided concierge treatment to their larger, existing customers in applying for PPP loans, while small businesses struggled to obtain relief. It is expected that COVID-19 fraud investigations will continue over the next decade.

For more details on this alert, and federal white-collar and COVID-19 relief fraud enforcement trends, contact Matthew D. Lee, Co-Chair of the firm’s White-Collar Criminal Defense & Regulatory Compliance Practice Group at mlee@foxrothschild.com or 215.299.2765; or Marissa Koblitz Kingman, a member of the White-Collar Criminal Defense & Regulatory Compliance practice, at mkingman@foxrothschild.com or 973.548.3316.

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