Follow the Money Federal COVID-19 Funding and the Inevitable Wave of Government Enforcement, November2020 COBJ, Vol. 49, No. 10 Pg. 48

PositionVol. 49, 10 [Page 48]

49 Colo.Law. 48

Follow the Money Federal COVID-19 Funding and the Inevitable Wave of Government Enforcement

Vol. 49, No. 10 [Page 48]

Colorado Lawyer

November, 2020



This article explores potential civil liability for borrowers, grantees, and lenders of federal COVID-19 business assistance funding.

The federal government has distributed an unprecedented amount of business assistance funding to a wide variety of recipients in response to the COVID-19 pandemic. The funds have been distributed in the form of grants and loan programs that have been cobbled together in a short period of time relative to the amount of time it typically takes the federal government to implement new regulatory schemes. New guidance and regulations are issued almost weekly for some of these programs, and there has been considerable confusion regarding the applicable requirements for some of the largest grant and loan programs.

During previous crises that have resulted in rapid distributions of large amounts of federal funds, government audits, investigations, and enforcement actions followed. There are already myriad signs that this crisis will be no different. Moreover, given the widespread nature of the economic harm caused by the pandemic, federal funds are flowing to a large number of recipients that are likely to have little or no experience with federal grant and loan programs. Borrowers, grantees, and lenders of COVID-19-related federal funding should be aware of their potential civil liability1 and take proactive steps to minimize potential exposure.

Federal COVID-19 Business Assistance Programs

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into law on March 27, 2020.[2]Among other things, it authorized a variety of business assistance and relief programs. Each program has its own regulations and certification requirements that restrict the use of the funding and require participants to make statements and provide information concerning their eligibility for the funds. The largest and most popular business assistance programs are briefly described below.

Paycheck Protection Program

One of the CARES Act's central relief measures was the Paycheck Protection Program (PPP),3 a temporary loan product administered through the US Small Business Administration's (SBA) 7(a) Loan Program.[4] Within the first 14 days of the program, approximately $342 billion was distributed to more than 1.6 million recipients.5 At the time the program expired on August 8, 2020, approximately 5.2 million PPP loans had b een approved for a total of approximately $525 billion.6

PPP loans are fully guaranteed by the SBA, and the entirety of the loan is eligible for forgiveness if certain conditions are met.7Private lenders are responsible for processing and approving both initial loan applications and forgiveness applications.8 The applications have multiple certifications that a borrower must make concerning eligibility for the loan and use of the funds.[9] For example, a borrower must certify on the loan application that "[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant," and that "the information provided in this application and the information provided in all supporting documents and forms is true and accurate in all material respects."10 Although lenders may rely on the documentation submitted by a borrower, they must meet certain limited underwriting obligations and make certifications to the SBA concerning their compliance with those obligations.11

Additional Business Loan Programs

COVID -19 -related business assistance for small and medium-sized businesses is also available through the SBAs Economic Injury Disaster Loan Program12 and the Federal Reserve's Main Street Lending Program, among others.[13] Similar to the PPP, borrowers must make a variety of certifications concerning eligibility and use of the funds for both categories of loans.14 Because the Federal Reserve guarantees the loans issued through the Main Street Lending Program, lenders participating in that program must also submit certifications concerning a borrower's eligibility for the loan and the due diligence conducted in underwriting the loan.15

Provider Relief Fund

In addition to loan programs, the CARES Act also authorized the US Department of Health and Human Services (HHS) Provider Relief Fund (Provider Relief Fund). The Provider Relief Fund distributes several types of grants to hospitals and healthcare providers, and hundreds of billions of dollars have already been distributed through the fund.[16]The most widely distributed grant was a $50 billion "General Distribution," which was automatically transferred to healthcare providers shortly after passage of the CARES Act. Two formulas were used to calculate a provider's share of the distribution based on 2019 Medicare fee-for-service payments and/or most recent tax year annual gross receipts.[17] Although the funds were automatically transferred to recipients' bank accounts, HHS subsequently released terms and conditions requiring recipients to sign an agreement within a certain period of time to legally retain the funds.18 A provider's failure to sign the terms and conditions or return the funds is deemed an acceptance of the terms and conditions.19

The terms and conditions are 11 pages of restrictions and requirements regarding use of the funds. Among other things, providers must certify that after January 31,2020 they provided "diagnoses, testing, or care for individuals with possible or actual cases of CO\TD-19," and that the funding "will only be used to prevent, prepare for, and respond to coronavirus, and that the Payment shall reimburse the Recipient only for healthcare related expenses or lost revenues that are attributable to coronavirus."20 The funding cannot be used to reimburse the provider for expenses or losses that have been reimbursedby other sources or that other sources are obligated to reimburse.21 HHS has already announced that it will require recipients to submit future reports regarding use of the funding.22

Government Contracts

In addition to grant and loan programs, federal agencies have obligated approximately $17 billion in COVID-19- related contracts.23Government contracts are similarly subject to a variety of federal regulations and contract-specific requirements, and often require contractors to make certifications in connection with both the initial request for proposal and with respect to subsequent requests for payment as the contract is performed.

History of Post-Crisis Enforcement Actions

Historically, the federal government has targeted disaster funds and programs for audits, investigations, and civil enforcement actions to deter fraud and recoup misused taxpayer funds. For example, in the aftermath of Hurricane Katrina the US Attorney General formed the Hurricane Katrina Fraud Task Force.24 The task force sought to coordinate and ensure timely prosecution of fraud related to disaster relief funds, among other things.25 The task force successfully pursued civil claims under the framework of the False Claims Act, 31 USC §§ 3729 et seq. (FCA), among other statutes. Notably, it obtained a $4 million settlement with a company that accepted over $5 million for post-disaster work it did not complete on a contract with the US Department of Homeland Security.26

Another notable enforcement effort occurred in the wake of the Great Recession when the federal government coordinated a number of initiatives and task forces to investigate and prosecute fraud. President Obama established die Financial Fraud Enforcement Task Force to investigate and prosecute financial crimes related to the crisis and recovery efforts, including FCA violations.27The US Department of Housing and Urban Development (HUD) and the US Department of Justice (DOJ) worked together to investigate multiple large mortgage lenders to determine whether the lenders' conduct in underwriting and approving federally insured mortgage loans contributed to the financial downfall of the government fund that paid claims on the loans.28 The coordinated effort, sometimes referred to as the "Big Lender Initiative," resulted in settlements with 20 mortgage lenders totaling more titan $4.75 billion.[29]Congress also created die Special Inspector General for the Troubled Asset Relief Program (SIGTARP), which had die authority to audit, investigate, and conduct oversight over die distribution of Troubled Asset Relief Program (TARP) funds.30 In addition to numerous successful criminal prosecutions related to the funds, SIGTARP obtained large civil settlements from participants in federal programs.31

Oversight of Federal COVID-19 Funds

The federal government has already indicated that it will closely monitor and investigate potential misuse of COVID-19 relief funds. The CARES Act provides for die creation of a Special Inspector General for Pandemic Recovery (SIGPR), a Pandemic Response Accountability Committee (PRAC), and a Congressional Oversight Commission.32 The SIGPR "is directed to 'conduct, supervise, and coordinate audits and investigations' of die financial assistance programs for businesses included in Tide IV of the CARES Act. . . ."33 The PRAC currently comprises 20 inspectors general from various federal agencies, and its mission is to ensure '"that funds intended to support individuals, workers, healthcare professionals, businesses, and orders affected by die pandemic are used efficiency, effectively, and in accordance with die law."'34The Congressional Oversight Commission has five members and is tasked with overseeing actions undertaken by the Department of the Treasury and...

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