DoJ issued a press release, on March 26, 2021, announcing that it had criminally charged 474 individuals for alleged fraudulent efforts to obtain $569 million in pandemic relief funds. “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,” U.S. Attorney General Merrick Garland said in a statement Friday. “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.”
As I have reported throughout the last year most of the investigations and prosecutions of pandemic fund fraud have involved “low-hanging fruit.” By this, I mean fraud involving classic false pretenses, using funds for the purchase of personal luxury items, and/or pretending to have employees where there are none. Now that DoJ has had over a year to prove itself on easier cases, we can expect that DoJ will begin to pursue more complex, grey-area cases against individuals and companies.
For more on the where DoJ will draw the line between civil and criminal enforcement Read my previous blog here.
There are several factors that may increase the risk that individuals and companies will become the subject of an government investigation.
1. the lender
Banks from which you received your PPP (Paycheck Protection Program) loans have the best view of what you are doing day to day in your business and consequently, with your PPP loan money. Your interactions with your bank are watched closely and if you set off suspicions, the bank will file a suspicious activity report. My speculation is that with large banks these are done routinely and more frequently than with small hometown banks. Banks are in a prime position to assist investigators at the grass roots level and to monitor the conduct of your small business.
For example, if you are a small business in receipt of a PPP loan and are doing your personal banking at the same place, they are able to monitor how much if any of that money is going into a personal account and how that money is being spent. If your business accounts are mixed with your personal accounts, even if no illegal conduct is occurring, you may send a red flag and draw an investigation.
2. EMPLOYEES AND/OR INFORMATION HOLDERS
Call them Whistleblowers, unhappy employees, disgruntled vendors or former customers, these are the information holders who could call the SBA hotline and report allegedly suspicious activity. An investigation can be triggered by a simple phone call to the SBA. The SBA, in its semi annual report to Congress covering activity between April 1, 2020 and September 30, 2012, reported a staggering increase in hotline calls. During this reporting period, the hotline received 104,913 complaints. That is 100 times more than the total of 742 complaints received in all of 2019 . Of course, not all of these complaints are valid. It is commonly understood that some embittered information holders may stir the pot and bring the watchful eye of the government to your business. For tips on how to avoid these types of pitfalls, see below.
3. Cooperation among federal agencies
In the recent press release, DoJ touted its coordination efforts across other government agencies. “Through the department’s International Computer Hacking and Intellectual Property (ICHIP) program, ICHIP advisors have provided assistance and case-based mentoring to foreign counterparts around the globe to help detect, investigate and prosecute fraud related to the pandemic.” DoJ says that ICHIPs have helped counterparts combat cyber-enabled crime (e.g., online fraud) and intellectual property crime, including fraudulent and mislabeled COVID-19 treatments and sales of counterfeit pharmaceuticals. Reportedly, this coordination has resulted in the take down of multiple online COVID-19 scams and significant seizures of counterfeit medicines and medical supplies such as masks, gloves, hand sanitizers and other illicit goods.
4. audits of companies that borrowed $2M or more under the paycheck protection program
The government has said it will automatically audit all PPP loan recipients who received $2 million or more when evaluating whether to forgive the loans. If you fall into this category you must have your ducks in a row long before the audit begins.
There is something you can do to protect yourself and/or your business.
1. Keep records, records and more records.
As you can divine from the SBA-OIG report, there are thousands of ongoing investigations of potential fraud, both civil and criminal, and that number is growing. With this kind of volume, allegations in connection with fraud may not crop up for years. It is critical that detailed records be prepared (ideally with the advice of counsel). Advice from an expert on what these records should contain and how to update them could save you down the road after memories have faded.
2. Educate your officers and staff.
Make certain that you have delivered the compliance message clearly so that everyone knows what documents need to be preserved and cataloged. An email blast is a good start but a meeting with an agenda could make it even more clear. Your stakeholders must make records relating to any activities associated with the application, receipt and use of pandemic-related funds. Identify the person who is in charge of educating folks and hold them accountable. If you are a very small business owner, that person is you!
3. Maintain organized, complete and accurate documents.
Don’t throw that out!!! The atmosphere surrounding pandemic relief funds is red hot. You must centralize and organize all documents related to your initial application, supporting documents, minutes, emails and memos about your application. This means everything, even those little notes jotted down by hand. Do you have high turnover or is someone important to your application leaving the company? Make certain to give special focus on collecting and retaining information before that person disappears.
4. Know your reasoning and how you arrived there.
There has been a lot of pandemic loan guidance (ever-evolving guidance) published by the government. There are more questions than answers to many FAQs and both the SBA and the Treasury Department have indicated that reliance on published guidance will not be challenged (the same way) if individuals relied on guidance that was later enhanced or amended. I would also suggest that you document your rationale for taking certain actions and make note of what you were relying on. Your rationale could be based upon government guidance or some other (seemingly) knowledgeable source such as accountants, bookkeepers, colleagues, etc.
5. Get ahead of the curve
What is the first thing you are going to do if you are contacted by an investigator, receive a subpoena or you identify a potential whistleblower? You need to have a response blueprint ready and waiting. The more formal the plan, the more reliable it will be. Independent, experienced counsel can help you develop a plan to ensure there are no missteps in handling potential witnesses, whistleblowers or employees. You need to identify the person in charge should these events arise and name those who will be privy to information sharing under these circumstances. The plan needs to include specific steps to ensure that steps one through five are followed. Finally, share the plan with those who have been identified as privy and make sure there is no confusion among decision-makers.
Be proactive and take steps now.