CARES Act Fraud: The Next Wave of White Collar Investigations and Prosecutions?

For many of us following the news, the recent enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress’ historic $2.2 trillion aid package, evokes memories of the bailouts and relief packages put through a decade ago in response to the financial meltdown fueled by the subprime mortgage crisis. The first piece of stimulus legislation came in the fall of 2008 when Congress, in an effort to restore confidence in the financial system and reestablish lending activity, passed the Emergency Economic Stabilization Act (EESA). Among other things, the EESA established the Troubled Asset Relief Program (TARP), which authorized a $700 billion buy back of toxic assets and equity from banks and other financial institutions. In early 2009, Congress followed up the EESA with the American Recovery and Reinvestment Act (ARRA), which pumped over $800 billion into the U.S. economy via stimulus checks and tax rebates for families; tax credits, tax deductions, and loan guarantees for small businesses; and large-scale investments in infrastructure, healthcare, education, and scientific research, among others, through contract projects awarded to federal, state, and local programs. In total, the 2008 bailout and 2009 stimulus package came with a hefty price tag of just over $1.4 trillion.

Not surprisingly, these stimulus measures had the unintended consequence of creating ample opportunities for fraud, thus creating the need for robust systems of oversight and control. To this end, the EESA established the Special Inspector General for TARP (SIGTARP), a separate federal law enforcement agency with broad authority to investigate fraud by TARP fund recipients, while the ARRA established a Recovery Accountability and Transparency Board and earmarked tens of millions of dollars to the GAO and agency inspectors general to investigate fraud, waste, and abuse. Such oversight mechanisms were largely successful and led to significant enforcement action. By the close of FY 2019, SIGTARP investigations had resulted in criminal charges against 430 individuals. Of those, 373 were convicted and 291 sentenced to prison. Defendants in TARP prosecutions have included homeowner scammers, borrowers, and bank executives, while charges have included bank fraud, accounting fraud, securities fraud, insider trading, mortgage fraud, public corruption, false statements, obstruction of justice, theft of trade secrets, money laundering, and bankruptcy fraud. And, in the years following passage of the ARRA, the Justice Department opened thousands of investigations into alleged grant fraud and pursued charges against individuals and businesses involving false statements, false claims, bid rigging, corruption, and bribery.

While the CARES Act is similar in several respects to its forebearers, it involves nearly twice as much money, making it the most expensive economic stimulus legislation in the country’s history. Among other things, the Act allocates roughly $600 billion to individuals and families; $377 billion to small businesses; $340 billion to state and local governments; $180 billion to public services; and a staggering $500 billion to large businesses.

Given the sheer amount of money at stake, the Act established three oversight bodies with separate but sometimes overlapping responsibilities.

  • The Office of the Special Inspector General for Pandemic Recovery (SIGPR), modeled after SIGTARP, is responsible for overseeing Treasury’s distribution of the $500 billion corporate-relief aid, including conducting audits and investigations of Treasury loans and other investments. In carrying out its mandate, SIGPR has broad authority to issue subpoenas, take testimony, and seek, obtain, and execute arrest and search warrants.
  • The Pandemic Response Accountability Committee (PRAC) is comprised of IGs from relevant federal agencies and is charged with preventing and detecting fraud, waste, abuse, and mismanagement. The PRAC also has authority to conduct investigations and to obtain testimony from non-government witnesses by subpoena.
  • The Congressional Oversight Commission is a five-member commission tasked with overseeing implementation of the Act by Treasury and the Federal Reserve and evaluating the effectiveness of the pandemic-related relief programs. Its authority includes holding hearings, taking testimony, receiving evidence, and issuing reports.

Notwithstanding these oversight provisions, the enormous breadth of the CARES Act and the accelerated pace at which it is being implemented means not only that fraud, but fraud on a massive, likely unprecedented, scale is a virtual inevitability. As has always been the case, those who do business with the government or who seek government funds, for example through contract bids or loan or grant applications, may have exposure to criminal and civil liability if statements, representations, or certifications made in those submissions turn out to be materially false. Potential exposure could range from civil liability under the False Claims Act to criminal liability under the federal mail, wire, and bank fraud statutes, among others.

These regulatory and legal risks will become more pronounced in a post-CARES Act climate due to the pace at which federal dollars will be doled out, especially to individuals and entities who have never applied for federal funds and who may not be familiar with the rules of the road or appreciate the significant strings that are attached to these financial relationships. And while the need to get money into the economy and into the hands of qualifying individuals and businesses is more urgent than ever, that urgency does not diminish the importance of ensuring that applications for aid and statements or information contained therein are accurate and truthful. In short, anyone who receives federal funds or seeks to participate in federal relief programs must expect and be prepared for close government scrutiny. If you or your company become the subject of such scrutiny, we are ready to help.

Although much remains uncertain, the inevitability of fraud and self-dealing as a byproduct of such expansive and wide-reaching federal programs under the CARES Act means that increased federal enforcement activity is also inevitable. If TARP and ARRA investigations and prosecutions are any indication, we can expect to see aggressive enforcement of federal white-collar criminal laws, including a significant uptick in federal investigations and prosecutions involving stimulus-related fraud, for many years to come.



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