During his State of the Union Address, President Biden vowed to bolster pandemic related fraud investigations, promising increased prosecutorial efforts specifically related to Paycheck Protection Program (“PPP”) fraud. Any business that has received a PPP loan, an Economic Injury Disaster Loan (“EIDL”), or any other form of pandemic relief, should consider and properly address any potential problems with their applications or usage of pandemic funds before a government investigation is initiated. Additionally, if a request for information has been received, it is important to understand the risks of a government investigation and the steps to protect your business.
President Biden’s State of the Union: Enhanced Enforcement Expected
During his State of the Union address, President Biden announced plans to bolster the Department of Justice’s COVID-19 Fraud Enforcement Task Force (“COVID-19 Task Force”) by adding a Chief Pandemic Prosecutor to lead teams of specialized prosecutors and agents in conducting pandemic related fraud investigations. The President’s announcement, which specifically called out Paycheck Protection Program (“PPP”) fraud, comes after members of the COVID-19 Task Force have already opened more than 1,000 criminal cases and 200 civil investigations involving billions of dollars in suspected fraud in less than a year. Although many of the government’s early cases prosecuted individuals and entities that engaged in egregious examples of fraud, such as creating fictitious companies or employees, the appointment of Associate Deputy Attorney General Kevin Chambers as Chief Pandemic Prosecutor signifies that we can expect the government’s enforcement efforts to both increase in volume and scope in the coming months.
The Government’s Identification and Investigation of Potential Fraud
The COVID-19 Task Force is led by Deputy Attorney General Lisa O. Monaco, and includes nearly thirty participating agencies, including the Department of Justice (“DOJ”), Small Business Administration (“SBA”), Department of Treasury, Department of Labor, and the Pandemic Response Accountability Committee. With all these agencies, the government has a wealth of data and tools at its disposal and to identify and vet pandemic related fraud. In addition to obtaining information directly from government databases and financial institutions, the government is leveraging data analytics tools and whistleblower tips in its investigations.
The investigative process typically begins with a request for information from the government. Even before the government requests information, it has plenty of electronic data in its possession. Both the PPP and EIDL applications were filed online and most correspondence with lenders was conducted through email. As a result, each application contains significant electronic evidence, such as IP addresses, date stamps, and electronic document metadata. The supporting documents provided during the PPP application and loan forgiveness process not only contain metadata which provide insight such as the document creation date, but also text which can be “read” by the government’s sophisticated data analytics tools. On top of that, throughout the PPP and EIDL process, borrowers were required to report specific financial information such as the number of employees, amount of payroll expense, and total annual revenues. This information is also reported on payroll and income tax returns filed with federal and state agencies and, accordingly, is included in pre-existing databases which can be cross-referenced by investigators.
With this vast amount of electronic data, the COVID-19 Task Force can use data analytics tools to (1) cross-reference data between applications and information available in other government databases, (2) identify multiple applications filed from the same IP address or the same email address, (3) detect applications with the same or similar personally identifiable information such as names or tax identification numbers, and (4) uncover identical supporting documentation utilized in multiple applications.
By analyzing this data, the government attempts to identify whether:
- The application contains false statements, including (i) the amount of reported payroll, (ii) the number of employees, (iii) the amount of reported revenues, (iv) and cost of goods sold;
- Any documents submitted with the application were fraudulently created or utilized to support more than one loan application;
- The borrower submitted multiple applications;
- The borrower was eligible for the relief funds, including whether the entity was in operation on the required date;
- Proceeds of the relief funds were utilized for permitted purposes and the borrower spent the relief funds in accordance with the relevant rules; and,
- Any forgiveness application reflects actual expended costs adjusted for any reductions in workforce.
Even in the absence of a request for information from the government, it is important that any business which received relief funds and has any concerns with its application or use of funds, immediately retain counsel. Furthermore, inadvertent errors or mistakes should be addressed before an investigation is launched.
What to do if you Receive a Request for Information from the Government
In addition to announcing a newly appointed Chief Prosecutor, President Biden indicated that the COVID-19 Task Force would be provided heightened resources to expand the number and scope of investigations and suggested increased penalties relative to pandemic fraud. Accordingly, it is important to understand what steps you should take if you have concerns of a potential investigation or receive a request for information from the government, including a request from the SBA.
Since any information provided under these requests is subject to further scrutiny, the first step is to contact legal counsel. In many instances, even in cases where no fraud has occurred, the first response paves the path for whether an investigation is halted, investigated by the civil division, or is considered for criminal prosecution. Accordingly, before responding to a government request, it is important for counsel to understand the documents provided, certifications made, and any risks inherent in those items. To properly assess the situation, counsel will consider engaging a forensic accountant under a Kovel agreement  to:
- Review the application along with the relevant documents and information submitted to the lender to assess if there are any risks relevant to the information provided;
- Recalculate the loan amount that the borrower applied for to determine if the borrower received more funds than otherwise eligible;
- Evaluate the financial and non-financial information that the borrower relied upon when making the decision to apply for the relief funds; and
- Trace and document the usage of relief funds.
The forensic accountant’s analysis allows counsel to understand the potential scope of the government’s investigation. Armed with this information, counsel can then prepare an appropriate strategy to respond to the government. An effective response to a government inquiry can be the difference between a promptly halted investigation or a lengthy and costly process potentially resulting in civil or criminal prosecution. If your business becomes the subject of an investigation or otherwise has concerns related to the application for or use of pandemic relief funds, you can reduce your risk by promptly seeking legal and forensic accounting advice.
Withum’s Forensics, Investigations, and White-Collar Criminal Defense Team
If your business received pandemic relief, and either has received a government request for information or has concerns which should be addressed prior to any government inquiry, our team is well positioned to help. At Withum, our Forensics, Investigations, and White-Collar Criminal Defense team has been actively involved in all facets of pandemic related fraud matters, with specialized experience including:
- Pre-investigative consulting to correct inadvertent errors prior to an investigation;
- Analyzing the application and usage of funds in advance of counsel’s response to a government request for information;
- Consulting with counsel throughout both civil, criminal, and parallel investigations; and,
- Providing testimony at trial and/or sentencing.
 Under a Kovel agreement, the forensic accountant acts at the direction of counsel as an “interpreter” of financial information to assist counsel in providing legal advice to the client. There is no accountant-client privilege, and accordingly, a Kovel arrangement is required to cloak the accountant’s work under the attorney-client privilege.
Contact a member of Withum’s Forensics, Investigations, and White-Collar Criminal Defense Team with any concerns.