CARES fraud investigations just gearing up, compliance experts say

30 April 2024 2 min. read
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Fraud investigations pertaining to Coronavirus Aid, Relief, and Economic Security (CARES) Act funds are just beginning to ramp up, according to Tom Reynolds, a partner at consulting firm HKA, and Britt Biles, a partner at law firm Womble Bond Dickinson.

The risk and compliance experts say they are seeing a jump in criminal and False Claims Act (FCA) investigations related to loans issued under the Paycheck Protection Program (PPP) and other CARES Act stimulus programs.

In the rush to distribute pandemic stimulus and prop up the economy during an unprecedented disruption, loan processing was often expedited – leading to a high rate of fraud such as false certifications, misappropriation of funds, and submission of false information. For context, the US Small Business Administration executed more than 14 years of lending in 14 days during the height of the Covid-19 pandemic.

Now the US government is going through the gargantuan process of checking which loans were legitimate and which ones were fraudulent. According to the SBA, roughly 17% of the $1.2 trillion in pandemic loans it doled out were given to potentially fraudulent actors.

The DOJ in May 2021 launched its Fraud Enforcement Strike Force teams, which have since then charged over 3,000 defendants and recovered over $1.4 billion in relief funds. The DOJ in August 2023 launched two additional pandemic fraud enforcement strike forces.

CARES fraud investigations just gearing up, compliance experts say

Though the government has focused on criminal investigations, Reynolds and Biles expect a significant increase in civil FCA cases in the coming years.

Investigations will focus on funding recipients as well as financial institutions – which were allowed to receive lender fees in connection with the PPP program. Reynolds and Biles say they are seeing enforcement agencies increasingly target lending institutions for not performing a reasonable evaluation of the accuracy of PPP loan applicants’ self-certifications.

For example, the Federal Reserve Board in January 2023 fined Popular Bank $2.3 million for not reporting potential fraud in a timely manner in connection with six loans. In September 2022, the DOJ and Prosperity Bank settled for $18,674 to resolve an allegation that the bank improperly processed a PPP loan on behalf of an ineligible applicant.

The above indicates investigations are not focused on large-dollar recoveries and may not be connected to intentional misconduct, but to a lack of proper internal controls.

Responding to DOJ investigations may prove a major challenge for many banks and businesses. Doing so will mean providing documentation that proves banks followed established policies for evaluating PPP loan applications, while businesses will need documentation showing they were eligible to receive loans and that they were used in line with CARES Act requirements.