Last June, we outlined how the government’s huge economic relief package in response to the COVID-19 Pandemic (“the Pandemic”) had predictably led to a surge in fraud and an uptick in federal law enforcement’s efforts to recoup stolen dollars.  Today, almost a year later, the statistics released by the U.S. Department of Justice (“DOJ”) continue to show that these anti-fraud efforts are expanding and will take many years to finish.

There are several things going on here.

Pandemic Relief Efforts by the Federal Government

For starters, as anyone who has studied the False Claims Act knows, the pattern of opportunism following national crises is almost as predictable as the ebb and flow of the tides.  The Pandemic is an example of the kind of national emergency that, ever since the New Deal, triggers a massive set of government programs.  The programs are designed to minimize human suffering and to keep the national economy from spiraling downward.  While politicians may debate how large these programs should be, there is largely a consensus that something should be done by the government in response to events such as the Pandemic.  The same sentiment was present in the 2007-08 financial crisis and the 9/11 terrorist attacks.

So it was perhaps a foregone conclusion that the Pandemic would cause the government to step up to the plate (imperfectly to be sure) to finance substantial relief efforts.

There is no shortage of happy outcomes from these efforts on the part of the government.  It is estimated that some 1.1 million American lives were saved and 10.3 million hospitalizations avoided because of the government’s vaccination efforts alone.  While many businesses have struggled or failed during the last two years, countless others have survived and rebounded due to programs like the Payroll Protection Program, which kept employers from slashing their payrolls and avoided spiking unemployment.  The Federal Reserve kept interest rates at historic lows, encouraging banking activity to continue, and stock markets rebounded quickly after an initial shock downward.  Had the government not taken these steadying measure, Americans’ suffering and the nation’s collective economic and psychic pain would have been far, far greater.

Pandemic Relief Fraud Abounds

But of course there is always another part of the story.  For any government program of this scale to be effective, it must be both large and fast.  Large enough to keep businesses afloat and people from joblessness, and fast enough to get to the destination in time – before layoffs and evictions begin.  It is impossible to put six trillion dollars into circulation immediately and have adequate accountability structures in place sufficient to prevent opportunists from testing the system.  Fool proofing such systems to prevent waste fraud and abuse would necessarily slow down the delivery of the funds in a way that would have made their arrival too late to achieve the desired result.  The government therefore does the best it can in a short time frame, then chases problems later.

The Scale of Pandemic Relief Fraud

The task of chasing the problems falls largely to the Department of Justice.  To give you an appreciation for the scale of this task, take an absurdly low rate of 1% as a plug number for waste fraud and abuse. In other words, assume a rosy 99% efficiency rate.  A 99% compliance rate is a pipe dream, but even under such a scenario, 1% of six trillion dollars is sixty billion dollars.  We can, therefore, assume that at least sixty billion dollars has leaked into the pockets of opportunists and fraudsters.

Just a Few Examples

The opportunities for gaming the systems have been too numerous to count.  A quick review of the DOJ website on Covid-19 prosecutions will give you a flavor.  There were loans for non-existent companies and phantom employees. Recipients spent relief funds on Lamborghinis, and on and on.  As of March 26, 2022, DOJ had charged 474 defendants with criminal offenses related to pandemic relief fraud schemes. The schemes involved attempts to obtain over $569 million from the government programs through fraudulent means.  While these efforts are surely commendable, $569 million is just a drop in the bucket given the numbers at issue.  Moreover, the government will likely not be able to recover all of the $569 million.  Much of it has been spent already and many defendants are “judgment proof.”

Recent press accounts show how other forms of corruption play into these opportunities for criminal mischief.  One example involves the $17 billion of pandemic relief designated for companies critical to national security.  A trucking company called YRC Worldwide (now, “Yellow”) applied for a $700 million loan.  This equals more than 4% of the entire $17 billion available. It dubiously claimed that it was critical to the delivery of meals and protective equipment for military bases.  The Defense Department refused to certify the company for eligibility for two reasons.  First, there were other trucking companies that could do the job. Second, the company had a poor track record.  It not only had a $100 million loss in 2019, but it had recently paid a $6.85 million settlement for having defrauded the Defense Department over a seven year period!  But political lobbying and ties to the White House paid off: the Treasury Department paid the money despite the Defense Department’s objections.  So even when one arm of the government behaves rationally and appropriately, funds can still flow to problematic entities.

DOJ, With the Help of Whistleblowers, Is Fighting Back

Anthony Fauci of the Center for Disease Control recently said that we are finally reaching the end of “the full-blown pandemic phase,” and COVID-19 will become more manageable over time.  This is welcome news.

For the Department of Justice, however, the work of chasing the fraudsters is nowhere near over the crisis phase.  The clean up will take years as the cases work through the system. And new cases will be discovered, investigated, and prosecuted.

As ever, whistleblowers will be key to DOJ’s efforts to combat pandemic relief fraud.  Without the eyes and ears of insiders willing to speak up, the government doesn’t have enough resources to chase every leak from a porous container.  Stay tuned.

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