The Chase of $2,200,000,000,000 Begins (The First CARES Act Fraud Case), 0920 SCBJ, SC Lawyer, September 2020, #50

• Author: By William C. Lewis and Brendan J. Green
• Position: Vol. 32 Issue 2 Pg. 50

The Chase of $2,200,000,000,000 Begins (The First CARES Act Fraud Case)

Vol. 32 Issue 2 Pg. 50

South Carolina BAR Journal

September, 2020

By William C. Lewis and Brendan J. Green

While likely unfamiliar to those who have not dealt with massive government expenditures and the agencies tasked with overseeing them, “pay and chase” refers to a commonly used fraud control method for federal agencies. The concept is simple. The government must get too much money out too fast to adequately control fraud on the front end, so it is willing to “pay” invalid claims knowing it will “chase” the money through aggressive civil and criminal enforcement actions.

The largest “pay” in our nation’s history has occurred by way of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, consisting of $2.2 trillion in federal disbursements, including among other disbursements, $659 billion in Paycheck Protection Program (“PPP”) funds.¹ Of these funds, at least $5,650,936,213² went directly to South Carolina businesses. These forgivable PPP loans are administered by the Small Business Administration (“SBA”) through participating PPP lenders.

Government officials believe a significant portion of the $2.2 trillion was obtained through fraud and are acting accordingly. As Assistant Attorney General Brian Benczkowski recently stated: “[w]henever there’s a trillion dollars out on the street that quickly, the fraudsters are going to come out of the woodwork in an attempt to get access to that money.”³ In line with this statement, the Department of Justice (“DOJ”) is gearing up for enforcement actions with Attorney General William Barr directing every United States Attorney’s Office to focus on detecting, investigating and prosecuting all criminal activity related to the COVID-19 pandemic.⁴ As to South Carolina, United States Attorney Peter McCoy announced a task-force focusing strictly on this type of fraud stating, “[i]n these unprecedented times, the U.S. Attorney’s Office and its federal, state, and local partners remain vigilant, and we will prosecute those who take advantage of Americans during this pandemic.”⁵ Adding to the already existing fraud enforcement apparatus, the CARES Act created a new Special Inspector General for Pandemic Recovery, solely tasked with conducting, supervising and coordinating audits and investigations of CARES Act distributions.^[6]

While the federal government chasing fraud is nothing new, never has the chase involved so much money, paid out to so many, over such a short period of time. Traditionally, large government programs involve highly regulated industries, such as healthcare (Medicare⁷ and Medicaid⁸ ) and the financial industry (Troubled Asset Releif Program⁹ ), with fewer claimants making large claims (volume and/or size).

The opposite is true for the CARES Act. To qualify for the PPP program, a business only needs to have less than 500 employees, been in operation since February 15, 2020, and not have any criminal or regulatory issues.¹⁰

In South Carolina, at least 59,891 PPP claims have been made for $5,650,936,213.¹¹ While data regarding individual claimants is unavailable, national trends show that these claims have likely come from businesses unaccustomed to dealing with federal payment programs and the scrutiny that comes with them. For example, a significant portion of these dollars went to Professional, Scientific, and Technical Services (12.79 percent); Construction (12.47 percent); Manufacturing (10.51 percent); and Accommodation and Food Services (8.04) percent.¹²

Based on this limited data, the following are safe assumptions: there are currently a significant amount of businesses, wholly unaccustomed to dealing with the government, who have received government payments, in a difficult compliance environment,¹³ with a government indicating a significant appetite for enforcement actions. Consequently, many businesses and their legal counsel, who never concerned themselves with government fraud controls, may want to take a harder look at how the government will approach enforcement actions involving CARES Act funds.

While no one can predict the exact contours of upcoming enforcement actions, a worthwhile place to look is the frst PPP criminal prosecution. Although strictly criminal and dealing with alleged blatant fraud, the factual scenario and resulting charging decisions shed light on the statutory and regulatory frame work at issue and provide insight not only for criminal attorneys, but anyone concerned with liability which may arise from the PPP program and the government’s aggressiveness in addressing it.

The frst prosecution: United States v. Staveley et.

al

Staveley involves two Rhode Island businessmen who allegedly fled four fraudulent PPP loan applications for four different businesses in the amount of $185,750; $144,050; $108,777.50; and $105,381.50 for a total of $543,959.00.^[14] Of the four different businesses, the pair had no ownership interest in one, another had been closed since November 2018, another had closed in March 2020, and the final business, which they claimed had seven employees, actually had none.^[15] Importantly, despite the defendants’ alleged effort, the processing lender suspected fraud and no actual funds were dispersed.¹⁶

Based on these facts, the government charged the following statutory violations: ¹⁷

• Conspiracy to make False Statement to Influence the SBA, in violation of 18 U.S.C. § 371 and 15 U.S.C. § 645(a);¹⁸

• Conspiracy to Commit Bank Fraud, in violation of 18 U.S.C. § 1349;¹⁹

• Substantive Bank Fraud, in violation 18 U.S.C. § 1344;²⁰ and

• Aggravated Identity Theft, in violation of 18 U.S.C. § 1028(A)²¹ .

So what can we learn from these charging decisions?

1. There is a complex statutory and regulatory framework directly applicable to SBA Fraud.

The Staveley prosecutors charged conspiracy to violate 15 U.S.C. § 645(a). This provision makes it a specific criminal violation for knowingly submitting false claims for the purpose of influencing the SBA. With the SBA administering PPP, anyone knowingly submitting a PPP application with a false statement may be exposed to criminal liability under 15 U.S.C. §645(a), subjecting them to up to two years imprisonment and a fine of $5,000.

Interestingly, while §645(a) applies specifically to SBA false claims, other statutes such as 18 U.S.C. § 1001 (False Statement) and/ or 18 U.S.C. § 1014 (False Statement to a Financial Institution), may apply to a false PPP application, and both contain significantly harsher penalties of up to five years imprisonment and up to 30 years imprisonment, respectively²² Consequently, where the government encounters a knowingly submitted...