CARES Act Enforcement Risks

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), creating a US$2 trillion stimulus package to address the COVID-19 pandemic costs to businesses, universities, and certain groups of individuals. As Congress and the President reached agreement to enact the largest emergency assistance legislation in United States history, both branches of government made clear that targeting fraud among recipients of these funds is a top enforcement priority. This commitment is in line with Attorney General Barr’s recent statement that directed all US Attorneys to “prioritize the investigation and prosecution of Coronavirus-related fraud schemes.” As companies consider whether to avail themselves of the historical level of funding provided by the CARES Act and related legislation, they should also consider its certification requirements and broad mandates for oversight, investigation and enforcement, which are certain to spawn government investigations for years to come.

Areas of Enforcement Risk in the CARES Act

Many businesses will decide to apply for the critical financial assistance made available under the CARES Act, but they should do so only after giving careful consideration to the potential government investigations that can flow from the Act’s required certifications of compliance with all applicable laws, regulations, and requirements. One likely area of enforcement activity under the CARES Act relates to the broad certifications and representations required to receive government-backed loans or loan guarantees.

For example, Title IV of the CARES Act directs the US Treasury Secretary to make up to US$500 billion in loans, loan guarantees, and other investments in support of eligible businesses, States, and municipalities. The Act earmarks up to US$46 billion of these funds for loans or loan guarantees to the airline industry and businesses critical to maintaining national security. The remaining US$454 billion is available for loans, loan guarantees, and other investments in programs or facilities established by the Federal Reserve that support eligible businesses, states, or municipalities. The CARES Act imposes limitations on these loans and loan guarantees, including limitations on dividends and stock buybacks. In addition to the statutory limitations, these loans, loan guarantees, and other investments will also be subject to other requirements as determined by the Secretary. The Treasury Department is expected to issue further guidance on these requirements in the near future.

The CARES Act also establishes the Paycheck Protection Program (“PPP”) that expands the Small Business Administration’s (“SBA”) 7(a) loan guaranty program to help businesses retain workers during the COVID-19 crisis. If borrowers meet certain requirements, some portion of these PPP loans can be eligible for forgiveness. These loans are subject to requirements and self-certifications that could lead to investigations if the government suspects that misrepresentations occurred in the application process. In particular, 7(a) loans are subject to affiliation requirements that will likely make many venture capital and private equity-backed companies ineligible. In recent guidance, the SBA has placed the responsibility of determining borrower eligibility explicitly on the borrower and each owner of 20% or more of the borrower. These companies should ensure that they understand eligibility requirements before applying for and accepting these loans. For further information on SBA Funding for Venture-Backed Companies under the CARES Act, see O’Melveny’s March 29, 2020 Client Alert.

PPP loans also require an applicant to certify to broad statements that all of the information in its application is true and accurate and that the funds are necessary to support the ongoing operations of the borrower and will only be used for authorized purposes. On April 2, the Treasury Department released the rules for the PPP. These rules confirm that if PPP funds are used for unauthorized purposes, the borrower will be directed to repay the amounts and could be subject to fraud charges or other liability. The Treasury Department and the SBA also recently released guidance for lenders granting them “delegated authority” to issue PPP loans, clarifying that lenders have minimal requirements to independently verify applicants’ eligibility and indicating that loan applications will not be subjected to a separate thorough review by the SBA. Applicants who receive PPP loans they were not eligible for may be denied loan forgiveness or subject to civil or criminal financial penalties.

The Treasury Department, through the Financial Crimes Enforcement Network (FinCEN), recently warned banks and other financial institutions to remain alert for fraudulent transactions related to the COVID-19 crisis and report suspicious transactions, including potential benefits fraud, to FinCEN.

Lessons Learned from Other Federal Programs

Other federal programs that authorized the distribution of substantial relief funds teach us that the federal government will aggressively audit and investigate the distribution of CARES Act funds. In the past, Special Inspector General Offices have played an important role in these oversight, investigation, and enforcement efforts. A Special Inspector General can steer federal investigative resources towards its mandate to audit and investigate entities that receive federal funds, including resources from the US Department of Justice, US Attorneys’ Offices, and the Federal Bureau of Investigation.

For example, Congress established the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) in response to the 2008 economic crisis. SIGTARP has the power “to conduct, supervise and coordinate audits and investigations of any actions taken under the [TARP].” The TARP made US$700 billion available to assist struggling financial institutions and to stabilize the US economy. Since its creation, SIGTARP’s investigations have led to enforcement actions brought by the US Department of Justice, the Securities & Exchange Commission, and other regulators against 24 institutions, prison sentences for more than 300 defendants, and the recovery of US$11 billion. Its enforcement work continues a dozen years later.

The Special Inspector General for Iraq Reconstruction (SIGIR) and the Special Inspector General for Afghanistan Reconstruction (SIGAR) have played similar roles to SIGTARP in overseeing the billions of dollars allocated for projects to rebuild Iraq and Afghanistan. The SIGIR’s and SIGAR’s investigations have also led to dozens of enforcement actions against fund recipients. In its final report to Congress, SIGIR announced that, over its almost decade-long existence, its investigations led to 112 indictments, 90 convictions, and over US$192 million in financial benefits. SIGAR currently has 145 ongoing investigations.

It is important to note that many of these Special Inspector General investigations and the subsequent enforcement actions are initiated years after the recipient accepts funding. SIGTARP and SIGAR continue to open new investigations over a decade after Congress passed the laws establishing their offices. Special Inspector General Offices receive dedicated funding streams that allow them to continue to carry out their duties and responsibilities over many years.

Three New CARES Act Oversight Bodies

The CARES Act establishes three new oversight bodies to monitor the use of federal coronavirus relief funds.

The Special Inspector General for Pandemic Recovery

The CARES Act follows in the footsteps of other federal programs and creates the Special Inspector General for Pandemic Recovery (SIGPaRc) within the US Treasury Department. Given the widespread impact of other Special Inspector General Offices, businesses can expect that the SIGPaRc will also play a leading role in the oversight and investigation of recipients of certain CARES Act relief.

The SIGPaRc has independent investigative and audit authority over loans, loan guarantees, and other investments made by the Treasury Department under the CARES Act. SIGPaRc has an obligation to report its findings to Congress in the form of quarterly reports. Congress appropriated US$25 million to the Office and authorized the SIGPaRc to exercise broad subpoena powers, which will significantly aid the SIGPaRc’s ability to investigate a broad range of suspected conduct that involves CARES Act funds. Although the CARES Act directs the SIGPaRc office to terminate in five years, given the unprecedented size of the relief package and the SIGPaRc’s extensive oversight mission, Congress may extend the duration of the SIGPaRc’s authority through subsequent legislation.

Congressional Oversight Commission

The CARES Act also creates a Congressional Oversight Commission that will oversee stimulus spending by the Treasury Department and the Federal Reserve. The Commission can hold hearings, take testimony, and receive evidence. The Commission will submit reports to Congress every 30 days. It will be made up of five members appointed by various Congressional leaders, including the Speaker of the House. The Commission terminates on September 30, 2025.

Pandemic Response Accountability Committee

Finally, the CARES Act establishes a broad oversight mechanism called the Pandemic Response Accountability Committee, which will consist of Inspectors General from several different federal agencies with jurisdiction relevant to the relief measures. The Committee’s goals are to promote transparency and conduct oversight to prevent fraud, waste, abuse, and mismanagement of all federal coronavirus relief funds made available via the CARES Act and other legislation. The Committee can conduct audits and independent investigations and can issue subpoenas in support of those investigations. The Committee terminates on September 30, 2025. The creation of such a committee both reflects and enhances the significant role Inspectors General play in coordinating federal investigative and enforcement efforts to combat the misuse of federal funds.

Conclusion

The CARES Act offers a financial lifeline that may be essential to many businesses trying to survive the cataclysmic economic impact of the COVID-19 pandemic. Businesses, however, should be well-advised in assessing the unique obligations and potential risks that come with seeking financial support from the federal government in these circumstances.

For further updates on the CARES Act and for other legal issues arising out of the COVID-19 pandemic, see O’Melveny’s Coronavirus Resource Center.