Paycheck Protection Program Fraud: How will DoJ draw the line between civil and criminal enforcement?

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By:  Andrea Moseley

Your company applied for money under the terms of the CARES Act: Are you at risk of facing scrutiny from DoJ because of your application? 

To understand the answer to this question, you must be aware of DoJ’s fleet-footed approach to snuffing out Paycheck Protection Program fraud (PPP).  As I recently noted here, trends have begun to emerge in the investigation and prosecution of PPP fraud.  Staying on top of these patterns is critical to your company in evaluating risk and avoiding government scrutiny.

The PPP was set to expire on June 30, 2020, under the terms of the CARES Act.  However, the program was extended through August 8 because more than $134 billion appropriated for the program had not been committed as of June 30.  DoJ’s commitment to eradicating PPP fraud has followed this mass distribution of resources.

Recall the subprime mortgage crisis that led to the collapse of the United States housing bubble between 2007 and 2009?  In the years following this recession, my practice swelled with clients who needed legal assistance as a result of government probes relating to mortgage applications and other mortgage related subjects.  Also, don’t forget the government’s efforts to mitigate foreclosures with the Troubled Asset Relief Program (TARP) and the concomitant investigations and prosecutions that followed the distribution of those funds.  Here we are again. The CARES Act is offering wide access to large-scale government funding and there is a DoJ campaign to suppress fraud relating to the same.

What do a doctor, a Reality TV personality, a software engineer, a retail project manager and a Hollywood producer have in common?

These are just a handful of individuals among the nearly one-dozen people charged with PPP-related fraud over the past two months since the program began.

From May to the present, DoJ’s criminal prosecutions have mainly involved allegations that the accused submitted applications containing fictitious payroll expenses, false employee information and/or false business ownership information.  In addition, some of the accused are alleged to have used the funds they received for personal, non-business-related expenses, such as payments for credit cards, car loans, child support and jewelry.

This type of conduct has been addressed swiftly with DoJ’s criminal enforcement tools.

Where is the line before criminal prosecution is necessary in DoJ’s opinion?  What if I just made a mistake on my application?

In a speech, delivered in late June, DOJ Civil Division Principal Deputy Assistant Attorney General Ethan Davis outlined the Civil Division’s enforcement priorities.  Unsurprisingly, he reaffirmed that combating illegal activity relating to COVID-19 is a top priority of DoJ.  However, he also stated that the federal government is not setting out to target businesses operating in good faith.

In sending this message he emphasized:

“. . . we will be careful not to discourage businesses, health care providers, and other companies from accessing in good faith the important resources that Congress made available in the CARES Act.  While companies have an obligation to comply with federal law in submitting claims for payment, the Supreme Court has held that the “False Claims Act is not ‘an all-purpose antifraud statute,’” nor is it “a vehicle for punishing garden-variety breaches of contract or regulatory violations.”   Rather, the Act applies only to knowing violations of federal law that are material to the government’s payment decisions.  Complying with thousands of rules, terms and conditions, and complicated guidance can be a dizzying task under normal circumstances; it is significantly more difficult in times like today. 
With that point in mind, you can rest assured that the Civil Division will not pursue companies that made immaterial or inadvertent technical mistakes in processing paperwork, or that simply and honestly misunderstood the rules, terms and conditions, or certification requirements.  Consistent with the purposes of the False Claims Act and longstanding practice, the Civil Division will pursue cases only where the borrower knowingly failed to comply with material legal obligations and certifications.”

According to Mr. Davis, the DOJ does not intend to pursue enforcement actions against businesses that make “immaterial or inadvertent technical mistakes” or that “honestly misunderstood” government requirements.  DoJ’s stated intention to bypass using its enforcement power to hold companies accountable for good faith mistakes, misconstructions, etc. is comforting.  On the other hand, definitions of “knowing,” “material,” and “good faith” errors can be ambiguous and are subject to interpretation.

There are several steps individuals and companies can take to avoid potential liability if their PPP application and use of funds comes under DoJ’s microscope.  First, if you have concerns, trust your gut and get legal advice.  Next, the company should have a documented and demonstrable understanding of the rules that govern PPP.  Company decision makers should know what their reasonable understanding of the rules is/was at the time of application and be able to trace the analysis they engaged in to understand the application of the rules to their company.  Companies should also develop a systematic way to follow recent developments in PPP rules or authoritative guidance giving rise to changes in interpretations of PPP rules.  Also, preserve all communications with the government (for any reason directly related or unrelated to PPP) that implicate evidence of the company’s reasonable understanding of PPP.  And, if there is communication with the government be sure to memorialize any guidance that the company receives in return.

Businesses who are participating in the CARES Act stimulus program should not have to live in fear of adverse legal consequences.  DoJ has stated that it does not intend to discourage businesses from accessing “in good faith the important resources that Congress made available in the CARES Act.”  Nonetheless, an ounce of prevention is still worth a pound of cure, especially in areas that DoJ has deemed one of its top enforcement priorities.  We are here to consult with you about your PPP program questions and concerns.

 

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