On March 2, 2023, the White House announced that President Biden intends to ask Congress for $1.6 Billion to combat ongoing fraud related to COVID relief programs, referred to as “pandemic fraud.” This comes in the wake of “historic” levels of fraud that occurred during the COVID-19 pandemic, the full extent of which is still not fully known. In the White House’s announcement, it notes that the requested $1.6 Billion will be for President Biden’s three-part Pandemic Anti-Fraud proposal. These three parts aim at prosecuting those who committed pandemic fraud, investing in fraud prevention, and investing in procedures to protect individuals from identity theft. Thus, it is becoming evident that the federal government is beginning to seriously crackdown on pandemic fraud. Below, PilieroMazza summarizes how these developments can impact small business government contractors.
Pandemic Anti-Fraud Proposal
A critical aspect of President Biden’s proposal is a $600 Million investment to ensure the federal government has the resources to investigate and prosecute those engaged in systemic or major pandemic fraud. Indeed, the Biden Administration envisions using this money to add ten additional Department of Justice (DOJ) COVID-19 Strike Force Teams who work with other federal agencies to investigate and prosecute pandemic fraud. Also, after increasing the statute of limitations to prosecute fraud under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) to ten years, these funds will give prosecutors the necessary resources to commit to years-long investigations into fraudulent activity.
In addition, half of this $600 Million will go towards Pandemic Inspector General (IG) and Pandemic Response Accountability Committee (PRAC) investigative staff. Here, the Biden Administration wants to specifically invest in the Small Business Administration’s (SBA) IG staff, since it currently does not have the funding to adequately prosecute its known pandemic fraud caseload. Biden’s proposal envisions giving at least $100 Million to SBA IGs for the express purpose of hiring long-term investigative staff to pursue pandemic fraud and support the DOJ’s COVID-19 Strike Force Teams.
Impact on Government Contractors
This proposed major investment into investigation and prosecution indicates the federal government’s serious commitment to combatting pandemic fraud. Congress already extended the statute of limitations to prosecute PPP and EIDL fraud to ten years, and with this additional cash investment, SBA would have the resources to pursue pandemic fraud claims for the full ten-year period. This coincides with PilieroMazza’s previous prediction that SBA COVID relief program borrowers will face ongoing fraud allegations, as now the SBA will have the resources to fully investigate any loan it deems potentially fraudulent.
We have also begun to see a wave of PPP loan forgiveness applications get denied based on the borrower’s eligibility, rather than a simple miscalculation in their loan forgiveness. With these increased denials, there is a heightened risk for False Claims Act (FCA) violations as anyone who requests money from the federal government knowing they are ineligible for that payment can give rise to FCA liability. With that in mind, the SBA will now have the resources to fully investigate this wave of denials to determine whether these loan forgiveness claims were fraudulent. This can lead to an increase in investigations, audits, and even fraud allegations.
What’s more, DOJ and its Strike Force Teams intend to analyze forgiven PPP loans for any deficiencies and determine whether SBA properly approved the forgiveness. Thus, given the ten-year statute of limitations under the PPP, it will take well into the 2030s for a borrower to fully know whether their PPP loan has been forgiven without fear of having the money clawed back after an investigation. This is especially true for borrowers who received over $2 Million in loans, as those borrowers had to provide an adequate basis for making the required good faith certification of need.
We have also started to see agencies themselves, not DOJ or the Defense Contract Audit Agency (DCAA) or similar auditing bodies, seeking repayment from federal contractors. Agencies are starting to make the “double dipping” argument that was a discussion in the summer of 2020 despite the fact that, outside of certain cost-reimbursable contracts, there is no legitimate avenue to make such demands. Regardless, with budget crunches, a looming U.S. debt default, and increased scrutiny over the government’s handling of the CARES Act programs, these kinds of demands will likely increase in the coming months or years until cases are taken up on appeal by contractors who are forced to fight against these improper demands by federal agencies as they attempt to bully small and mid-sized contractors.
Unintended Consequences and Innocent Mistakes
Unfortunately, these efforts will no doubt cast a wide net and “catch” relatively innocent bystanders in the process. While we have all seen the cases of real fraud—fake companies, completely concocted payroll records without any actual employees, or those who got loans and immediately bought houses and expensive cars—PilieroMazza has seen evidence of companies looking to do the right thing being caught up in the sweep. We have seen companies who rushed as quickly as possible to try and secure a loan back in late March and early April of 2020 and who, in the process, were told to apply for loans with multiple banks to make sure they didn’t lose out. In some cases, multiple banks issued loans and when the borrower attempted to return the loans, the bank told them to keep the funds and simply follow the rules despite the borrower informing the bank they had already received one first-draw loan. After fighting to attempt to return the money and being refused the opportunity to do so by the second bank, the client in this example used the funds for payroll and other allowable expenses.
Last summer, however, DOJ came knocking and filed a False Claims Act case against the company alleging fraud with regard to the second first-draw loan. While there is no doubt that companies were prohibited from taking multiple first-draw loans, the facts as noted above do not support the prosecution of a false claim. Of course, as is the case many times, DOJ saw an opportunity to go after a very small business with a loan of $100,000. Knowing that a defense of a false claim could last years and cost many times the value of the loan. The small business had no choice but to settle the case without counsel. This created a number of issues for the company, and it should have never been put in that position. Meanwhile, banks were indemnified by the federal government and, as a result, some less scrupulous banks rushed to push out as many loans as possible while providing inaccurate legal advice to borrowers and causing serious issues.
We would submit that these types of cases are not cases of fraud but, instead, at worst, negligence on behalf of the borrowers and more the fault of the banks than the companies who feared for their livelihoods. Regardless, DOJ does not seem to agree, and it is gearing up to pursue claims small and large, including post-forgiveness investigations and claw-backs. Thus, it is crucial to maintain well-documented records related to any loans taken out related to COVID-19 relief programs for the full 10-year period from the date the loan was forgiven as the federal government continues to crackdown on alleged pandemic fraud and hold contractors responsible for even innocent mistakes.
If you have questions about pandemic-related expenditures in case an investigation arises, please contact Cy Alba and Dozier Gardner, the authors of this blog, or another member of PilieroMazza’s Government Contracts Group or the Firm’s COVID-19 Response Team.