For the last several months, Arnold & Porter has been tracking the Department of Justice’s announcements of fraud cases involving the alleged misappropriation of funds provided by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). So far, DOJ has launched more than 50 such criminal prosecutions for fraudulently seeking or obtaining Paycheck Protection Program (PPP) loans and other funds that Congress appropriated to help Americans cope with the pandemic and related economic challenges. Arnold & Porter’s fraud tracker collects these cases in one place and enables users to see how and where DOJ has been pursuing CARES Act fraud.

The prosecutions vary in scope, but in many instances the defendants are borrowers who allegedly lied to lenders about their eligibility, payroll needs or the ultimate use of the funds. In some cases, borrowers allegedly applied for loans to support shell companies with no employees whatsoever. And in other cases, borrowers allegedly used the money to purchase personal luxury items. The vast majority of those charged sought or obtained hundreds of thousands—if not millions—of dollars.

We expect to be busy updating this tracker for quite some time, as there is no prospect that DOJ’s enforcement activity in this space will slow down soon. In fact, all signs point to the contrary.

On September 1, 2020, Congress’s Select Subcommittee on the Coronavirus Crisis issued a report calling for more oversight and accountability in the administration of certain COVID-19 relief funds. Specifically, the House Subcommittee reviewed the PPP and concluded that inadequate oversight may have allowed billions of dollars to be “diverted to fraud, waste, and abuse, rather than reaching small businesses truly in need.”

The PPP is administered by the Small Business Administration (SBA) and incentivizes small businesses to keep workers on their payroll. Loans issued in connection with the program may later be forgiven provided businesses meet certain criteria, such as putting the money toward payroll costs. Through the CARES Act, Congress authorized up to $349 billion for this purpose, and later added $321 billion in additional PPP funding. As of August 8, 2020, the date on which the PPP stopped accepting new applications, lenders had provided 5.2 million loans and disbursed more than $525 billion.

The Subcommittee’s investigation uncovered numerous problems. For instance, the report described that more than $1 billion in funding went to businesses that received multiple loans, in clear violation of the PPP’s rules, which allow only one loan per company. Millions more was reportedly provided to businesses that were not eligible to receive PPP loans in the first place. And analysis of certain loan information revealed that many loans were provided to businesses exhibiting certain “red flags”—such as having provided inconsistent identifying information—or to businesses that failed to provide key information in their applications altogether.

The Subcommittee recommended that the SBA and Treasury Department improve their oversight of the PPP in three ways—each of which may lead to increased enforcement, whether by DOJ or other agencies:

• Increase internal controls when reviewing loan forgiveness applications, including by implementing fraud detection protocols;
• Expand the SBA’s audit plan for PPP borrowers beyond the initial scope, which the SBA announced would include loans in amounts of $2 million or more, by developing a risk-based approach that takes into account known areas of concern or statistically random sampling; and
• Cooperate with oversight from Congress, inspectors general, and other watchdogs, including the Pandemic Response Accountability Committee (PRAC), which brings together multiple inspectors general to conduct oversight of critical pandemic-related programs.

This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm’s memorandum, “Tracking Fraud, Waste and Abuse of COVID-19 Relief Funds,” dated September 14, 2020, and available here on the firm’s blog, Enforcement Edge.