When it is all said and done however, oversight bodies created pursuant to recent legislation and those already in place will be scrutinizing funds distribution under the CARES Act and other related COVID-19 legislation. For this reason, we can safely predict that the False Claims Act (FCA) will be used aggressively in the years to come. In fact, the CARES Act specifically created three oversight organizations that are charged with monitoring the distribution of the stimulus funds: the Office of the Special Inspector General for Pandemic Recovery, Department of the Treasury; the Pandemic Response Accountability Committee; and the Congressional Oversight Commission. These organizations will no doubt be partnering with the Department of Justice and other federal, state, and local law enforcement agencies to ensure that where fraud has been found to occur, the individuals involved will be held accountable and prosecuted fully for their crimes.
FCA background
As trillions of dollars in government funds are distributed under the CARES Act, we expect a significant increase in enforcement activity by the U.S. Department of Justice and whistleblowers under the FCA. The False Claims Act, a Civil War era statute enacted to protect the government from fraud by suppliers of goods to the Union Army, has become one of the Department of Justice’s primary tools for protecting the government fisc from anyone receiving payments or reimbursements, or anyone who incurs payment obligations, including funds under CARES programs, to the federal government. Thus, for anyone who receives payments under a CARES Act program, the False Claims Act is in play.
Generally, the FCA imposes liability for any person who knowingly or recklessly (1) submits a false claim to the government or (2) makes a false record or statement to obtain payment from the government.1 The falsity must be material to the government’s decision to make a payment. The FCA also imposes liability for “reverse false claim,” for a person who knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay money to the government.2 Liability under the civil False Claims Act generally requires that a defendant “knowingly” make false representations to the government, but this standard does not require specific intent to defraud the government; instead, this scienter standard is defined to include not only actual knowledge that claims are false but also a “deliberate ignorance” or “reckless disregard” for whether representations are true or false. Under the “false certification” theory of FCA liability, a false representation of compliance with eligibility or other standards – whether such representation is express, or is implied by virtue of seeking funds when a person knows they do not satisfy the necessary criteria – can represent the false claim or statement necessary to trigger potential FCA liability.
Enforcement under the FCA can be punitive. The statute allows the government to recover treble damages – triple the government’s actual damages – as well as penalties, which range from $11,181 to $22,363 per false claim.3 The Department of Justice obtained more than $3 billion in settlements and judgments from civil cases involving fraud and false claims against the government in the fiscal year ending September 30, 2019. Following that influx of significant government funds to the private sector, we expect those recoveries to increase in the coming years.
The FCA also includes a qui tam provision that allows a “whistleblower” or “relator” to file an action on behalf of the government. Relators filing suit under the FCA have significant incentives to bring actions, potentially receiving 15 to 30 percent of any recovered damages or settlement proceeds. As of 2019, over 71 percent of all FCA actions were initiated by whistleblowers.
The FCA’s anticipated application to recipients of CARES Act funds
The specific programs created by the CARES Act will provide massive amounts of money to be made available through various means, and will also create avenues for fraud, waste, and abuse. Much has been in the news lately about the Small Business Administration (SBA) Loan programs that were expanded by the CARES Act and that will surely be applied to many. The CARES Act provided nearly $350 billion of additional funding for these loan programs during the covered period (February 15, 2020 to June 30, 2020). The CARES Act created the new Paycheck Protection Program (PPP), which provides (1) loans to eligible small businesses for payroll and other fixed obligations; (2) a mechanism for loan forgiveness where the small business can demonstrate that the loan proceeds were used for payroll and certain other costs; and, when forgiven, (3) the ability to not recognize the forgiven loan as revenue for tax purposes.4 Additionally, the CARES Act increased eligibility for the Economic Injury Disaster Loan (EIDL) program and made grants for up to $10,000 available to cover immediate operating costs of eligible businesses applying for EIDL assistance.
Importantly, and as related to this discussion, the applications for both the PPP loan and the EIDL require applicants to make certain certifications regarding their business. The loan applications and the required certifications can be found through the PPP Borrower Application Form and sba.gov/coronavirus. The SBA puts applicants on notice that it is relying upon applicant self-certifications to verify that the applicants are eligible entities to receive funding, and that applicants are providing self-certifications under penalty of perjury pursuant to 28 U.S.C. section 1746. Examples of the certifications that applicants must make include certifying that current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant, and certifying that the loan funds will be used to retain workers and maintain payroll or make mortgage interest payments, lease payments, and utility payments, as specified under the PPP rules. Applicants must also certify that they understand that if the funds are knowingly used for unauthorized purposes, then the federal government may hold the applicant legally liable, such as for charges of fraud.
Because PPP and EIDL applicants must certify their eligibility for loan funds to the government, it is the applicants’ responsibility to ensure eligibility before making these certifications. Misstatements and even errors in completing the applications and certifications may draw the scrutiny of government regulators and potential relators – and the corresponding costs of a government investigation – even if such errors were inadvertent and ultimately are insufficient to trigger FCA liability. As is standard for borrower application forms for federal programs of this nature, the certifications warn applicants of potential criminal exposure for knowingly making a false statement. For example, making a false statement to obtain a guaranteed loan from the SBA could result in criminal liability under 18 U.S.C. 1001, 15 U.S.C. 645, or 18 U.S.C. 1014 – and a conviction under any of these criminal statutes could expose the applicant to imprisonment or a fine or both.
Thus, we recommend that applicants scrutinize the requirements of the programs to which they apply, seek guidance from either counsel or the relevant agency regarding eligibility to ensure that they are not unintentionally misrepresenting their eligibility for these loan programs, review and consider agency guidance on completing the forms, and document efforts to obtain guidance on proper interpretation of the eligibility standards and criteria. These points will help to demonstrate an applicant’s good faith efforts to comply with the law and to reasonably interpret potentially ambiguous standards.
Conclusion and key takeaways
The FCA poses real enforcement risk for those receiving funds under the CARES Act and other federal aid programs, particularly given the incentives for potential relators – and the relators’ bar. The following takeaways may assist individuals and businesses in mitigating the risk of future False Claims Act suits and liability:
- Carefully review, analyze, and make sure you satisfy the eligibility criteria for government-funded programs, including programs under the CARES Act.
- If the criteria are ambiguous or unclear, consider consulting counsel to obtain a legal opinion about whether you satisfy the prerequisites to receive government funds.
- Document with as much specificity as possible your efforts to assess eligibility for government funds (including but not limited to reviewing agency guidance, whether formal or informal; communications with agency personnel regarding eligibility standards; communications with counsel; and all other factors informing your good-faith belief that you satisfy the relevant criteria);
- If you already maintain a training or compliance program, consider updating that program to ensure continuing compliance with applicable agency statutes, rules, and requirements – and if you do not already have a program designed to monitor and verify compliance with applicable standards, consider implementing one; and
- Provide appropriate attention to concerns raised by employees and others about potential compliance violations, and be sure to avoid any actions that could even arguably be perceived as retribution for raising such concerns, which will help to reduce the possibility of both compliance issues and whistleblower retaliation claims.
Reed Smith’s FCA team is fully equipped to address the needs of applicants for federal funds at each stage of the process. Our attorneys can assist individuals and companies with determining eligibility to participate in programs designed to lessen the impact of the COVID-19 pandemic, with documenting eligibility and the need for the stimulus funds as required, and with navigating the loan processes associated with the different loan programs. Additionally, in the event that a potential qui tam action arises, we have attorneys skilled in assisting in this area, as well as with any eventual demand from or investigation ultimately involving the Department of Justice.
Please contact our FCA team, or the Reed Smith lawyer with whom you frequently work, to ensure compliance with applicable laws in applying for and utilizing funds under federal programs to avoid enforcement in the future. Additionally, please reach out to the authors of this alert for more information.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com.
- 31 U.S.C. section3729(a)(1)(A)–(B).
- Id. section 3729(a)(1)(G).
- DOJ, Civil Monetary Penalties Inflation Adjustment, 83 Fed. Reg. 3944, 3945 (Jan. 29, 2018).
- As of the April 20, 2020 – the date we drafted this alert – the PPP had run out of money, but Treasury Secretary Steven Mnuchin has been quoted in the press as stating that lawmakers on Capitol Hill are expected to approve measures to expand the program by the end of the week.
Client Alert 2020-257
