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Editor's Note: This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.
Contributed by Jaime L.M. Jones, Sidley Austin LLP
Companies in health care and life sciences, defense, transportation, entertainment, and other industries are tapping the $500 billion in corporate relief and $377 billion in small business relief that Congress included in the $2 trillion Covid-19 stimulus law. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, Pub. L. No. 116-136) earmarks $100 billion for hospitals and health-care providers and another $27 billion for vaccines and other therapies and personal protective equipment.
While some in these industries are accustomed to living under the lens of the government's enforcement microscope, others are less prepared to minimize the risk of being swept up in an inevitable wave of criminal and civil actions that will be brought against companies and individuals that seek and receive stimulus funding.
To protect this investment of taxpayer money, Congress included a tripartite oversight structure, comprised of:
• A bipartisan Congressional Oversight Commission, charged with monitoring the CARES Act implementation and the effectiveness of the stimulus efforts overall.
• A Pandemic Response Accountability Committee, comprised of the Inspectors General of nine federal agencies, including the Department of Health and Human Services and Department of Justice. The individual committee members were in flux. The committee has an $80 million budget and a five-year mandate to conduct investigations regarding the use of CARES Act funds.
• A Special Inspector General for Pandemic Recovery, nominated by the president with the advice and consent of the Senate. The SIGPR is invested with sweeping investigational authority and the charge to do what is necessary to root out fraud in connection with obtaining or using CARES Act funds, including subpoena power and the authority, independent of DOJ, to issue search warrants.
• Although the legislation requires the SIGPR to report quarterly to Congress on loans issued by the various federal agencies under the CARES Act, including any information of an agency refusing timely to provide such information, President Donald Trump, in his March 27, 2020 signing statement, announced that the SIGPR is expected to report in the first instance to the executive branch.
The CARES Act further invests in the government's enforcement arsenal by directing $139 million in funds to the existing inspectors general of 14 federal agencies, including the HHS Office of Inspector General and others that already have experienced teams of lawyers, agents, and investigators trained to seek out and pursue fraud on federal programs.
Meanwhile, the legislation vests with the relevant agencies the responsibility to determine the particular eligibility requirements and restrictions that will apply to the use of funds in programs that are part of the stimulus package. While the particulars are still evolving, companies should expect that accessing funds through any specific program will involve various certifications and attestations.
For example, the Small Business Administration has begun processing paycheck protection applications from what it estimates could be up to 30 million small businesses. These applications include certifications that are wide-ranging and include, among others, certifications that the applicant is eligible to receive the loan, meets the regulatory definition of a small business, will purchase only American-made equipment and products “to the extent feasible,” and “is not engaged in any activity that is illegal under federal, state, or local law.” Such attestations can later be leveraged as the basis of a criminal fraud charge or False Claims Act action if they are less than complete or materially misleading.
The tripartite oversight and enforcement structure adopted by the CARES Act is modeled after the oversight and enforcement mechanisms built to oversee the approximately $700 billion in funding under the Troubled Asset Relief Program (TARP) component of the Emergency Economic Stabilization Act of 2008.
That Program established an Office of the Special Inspector General for TARP that to this day continues to monitor the TARP program for fraud and abuse. According to the SIGTARP's publicly available database, 380 defendants have been convicted or received fines for violations of a broad swath of laws ranging from bank and securities fraud to money laundering and conspiracy as a result of investigations commenced by that Office. SIGTARP's efforts have resulted in not just prison time for individuals but also the recovery of over $11 billion for the federal government.
In addition, to date, 24 enforcement actions have been brought by DOJ, the SEC and other regulators against banks, financial services organizations, and individuals as a result of referrals from SIGTARP. Of note, ten of those actions have been brought by DOJ under the False Claims Act – which has long been the primary enforcement tool leveraged by the government in its efforts to combat fraud, waste and abuse in the health-care and defense industries, among others.
Used as an enforcement mechanism to pursue fraud by banks and other firms identified by SIGTARP, these actions have resulted in over $27 billion in recoveries to date. Companies and individuals who seek CARES Act funds will similarly become subject to actions under the False Claims Act, with its treble damages and statutory penalties, if they make false statements or certifications to obtain those funds.
Another relevant recent example of enforcement activity directed at stimulus funding is the enforcement following the 2009 American Recovery and Reinvestment Act (Pub. L. 111-5), which injected another $800 billion into the economy to combat the Great Recession. Like the CARES Act, ARRA funding was targeted to a broad range of industries, including health care and life sciences, defense, energy, and transportation, among others. Like the CARES Act's Pandemic Response Accountability Committee, ARRA provided funding for a watchdog board comprised of the inspectors general of the relevant federal agencies.
Without a special inspector general, enforcement activity to recover ARRA funds procured through alleged fraud or later misused was directed by the board's component inspectors general. ARRA-focused actions by those offices resulted in over 1,600 convictions, pleas and judgments in addition to recoveries and penalties. More importantly, alleged fraud in the access and use of ARRA funding was a key contributor to the rise in thousands whistleblower-filed qui tam suits in the years that followed.
President Trump nominated Brian Miller to serve as SIGPR associate White House counsel, formerly the Government Services Administration's IG and previously a federal prosecutor and DOJ Special Counsel on Healthcare Fraud. As such, and if confirmed, Miller will bring his past experience not just to audit for and investigate possible fraud on the government, but specifically his experience in leveraging the False Claims Act to extract hundreds of millions of dollars in settlements from healthcare providers, life sciences companies, and government contractors.
With or without Miller in charge, DOJ will not sit passively on the sidelines waiting for the SIGPR and Pandemic Response Accountability Committee to refer potential matters to it. The U.S. Attorney General already has announced that the detection and prosecution of fraud related to the Covid-19 pandemic—including, but not limited to the misappropriation or misuse of CARES Act funding—has jumped to the top of the Department's priority list.
In this connection, he has directed each of the 94 U.S. Attorney's offices to appoint a Coronavirus Fraud Coordinator. We can expect that, as we have seen with similar Department efforts focused on combatting health-care fraud and the opioid crisis, some U.S. Attorney's offices will emerge as lead offices in these efforts, perhaps focusing on different industries.
And with millions of employees expected to be laid off as a result of the economic downturn, the whistleblower risks to companies—as they proved to be in the wake of the Great Recession—will remain extremely high.
Understand Funding Restrictions Before Applying
The myriad qualifications to access certain buckets of CARES Act stimulus funding and restrictions on the use of those funds and even on the operation of a business that receives funding—notably restrictions on stock buybacks and certain executive compensation—are complex, nuanced, and can raise questions to which there are not yet clear answers.
As one example of this complexity, Small Business Administration-regulated funds may use capital guaranteed by the SBA to make certain investments in qualified small businesses subject to an exception to SBA rules regarding corporate affiliation and control while, on the other hand, portfolio companies of certain of those same SBA-regulated funds are precluded from participating in the SBA's payroll protection program due to the application of the SBA affiliation rules. Similarly, questions regarding whether funding through the Federal Reserve's Primary Market Corporate Credit Facility program will come from CARES Act appropriations, and thus whether loans under this Program will become subject to CARES Act eligibility criteria and restrictions or analogous criteria and restrictions later to be adopted remain open.
Applicants must leverage their internal and external legal and regulatory colleagues across disciplines before attempting to access funds to ensure that they understand the qualifications and restrictions on use and that they are positioned to comply with these requirements. Those that do not run substantial enforcement risk.
Adopt Monitoring Systems and Personnel
Like the science of identifying and treating Covid-19, the rules and guidance applicable to CARES Act funding is developing minute by minute. The guidelines and requirements that apply to funding at the time a company applies may well not be the final word. Relevant agencies are expected to issue regulations and otherwise update their expectations on who qualifies for funding and how those funds must be used.
Companies that seek to participate in the stimulus program must ensure they are monitoring for developments and nimbly move to comply with changed expectations. At the same time, some agencies—like HHS-OIG and the Centers for Medicare and Medicaid Services—have been issuing waivers and policy statements designed to remove certain regulatory restrictions and the threat of enforcement action from providers so that they can adapt to the unfolding crisis.
Shore Up Compliance Programs
Companies that are experienced at government contracting or that participate in normal-course federal lending and other programs may have robust compliance programs and staff experienced in navigating the landmines that can be buried within program qualifications, contract terms, and application certifications. Those that do not have this experience would be wise to invest in these capabilities before seeking CARES stimulus funding.
In particular, companies should pay close attention to building out monitoring and auditing mechanisms designed to ensure that certifications made to the government are true at the time they are made and commitments to comply with laws or aid requirements are carried through.
Companies must also ensure that internal reporting systems are functioning and that employees know where to report any concerns about non-compliance. And, when whistleblower complaints alleging misuse of CARES Act funding are received, companies must ensure that they are investigated swiftly and thoroughly and that remediation, if necessary, is implemented.
Document, Track, and Repeat
Companies should ensure they have real-time documentation available to substantiate any representations and certifications that are made in the context of applying for stimulus funding. Not only will doing so force the careful examination of the truth and accuracy of the representations being made to the government, but they will help to establish the company's appropriate intent if questions later are raised.
Similarly, systems must be built to segregate, track, and trace funding received to ensure that it is applied in the manner intended and that the appropriate use of the funding later can be documented if an audit or inquiry is launched. And employees charged with submitting applications or otherwise dealing with the government must be trained to document all representations made in real time as well as the factual support for each representation.
In particular, where applicants or government representatives discuss or agree on modifications to published program requirements or regulations it is critical that companies confirm in writing the new expectation. Companies that are later faced with enforcement scrutiny will regret a decision to rely on an undocumented “meeting of the minds” when it comes to accommodations to applicable rules or requirements.
The temptation to tap into millions of dollars of potential funding, particularly with the promise that a loan may later be forgiven, is powerful. Even companies that are assured that they qualify for a particular source of funding should consider whether the restrictions and enforcement risk that comes with accepting the funds is worth the potential upside. In particular, those companies that are not convinced they will need to spend the funds may be advised to pass on the opportunity and avoid enforcement scrutiny later about whether their acceptance of the money was in good faith.