First Comes Federal Money — Then Increased Enforcement

The $2 trillion federal stimulus under the CARES Act will invariably attract many first-time participants to the federal marketplace. Bracewell attorneys say newcomers and small businesses should proceed with caution and give tips on how to prepare for compliance now.

Many companies will naturally want a piece of the $2 trillion federal stimulus in the CARES Act aimed at combating the economic consequences of the coronavirus pandemic.

And, it is a near certainty that federal spending will increase in the short run as the government seeks to help the economy recover, presenting the federal government as an attractive customer.

But, proceed with caution. History teaches that whenever the government spends a lot of money in a short amount of time, increased government criminal and civil enforcement always follows.

First-Time Participants Attracted

Federal stimulus programs and increased federal spending invariably attract many first-time participants to the federal marketplace, most of whom are unprepared to address the additional regulatory requirements that come attached to federal dollars.

This creates a perfect storm. Past patterns show that while government enforcement actions are aimed at true bad actors, the government’s enforcement waves have also caught numerous unwary companies and individuals. Many firms have learned the hard way that certain practices that are acceptable in the commercial marketplace can be considered fraudulent in the government space.

Now is not the time to "shoot first and ask questions later." One of the primary beneficiaries of the current stimulus funds under the CARES Act are small businesses. However, the legislation presents a number of questions that do not necessarily lend themselves to straightforward answers, including who qualifies as a small business, what costs are properly considered "payroll costs," and what costs can loan proceeds be used to cover.

History shows that because of the need to quickly deploy federal funds, it is inevitable many businesses will receive funds they do not qualify for, which will result in later enforcement actions.

For example, in response to the "Great Recession," Congress injected about $787 billion in federal funds into the economy through the American Recovery and Reinvestment Act of 2009. The funds were deployed quickly in order to stimulate the economy prompting government enforcement agencies to ramp-up their efforts.

As a result, from 2009 to 2012, the Department of Justice more than doubled its recoveries under the False Claims Act. Also during that same period, the government tripled the number of companies it sought to debar from federal contracts and brought many civil and criminal cases stemming from government stimulus fraud.

New Oversight Under CARES Act

Unsurprisingly, the government has extraordinary remedies available to it. In addition to general criminal and civil fraud statutes, a number of statutes specifically aim at combating fraud against the government. Examples include the Major Fraud Act (18 U.S.C. § 1031), the False Statements Act (18 U.S.C. § 1001), and the Civil False Claims Act (31 U.S.C. §§ 3729 to 3733).

In addition to criminal and civil remedies, perhaps the most-feared sanction is the government’s ability to debar a person or company from participating in essentially any federally-funded program.

The CARES Act includes three new oversight bodies:

1. The Pandemic Response Accountability Committee — tasked with conducting, coordinating and supporting inspectors general in the oversight of CARES Act funds in order to "detect and prevent fraud, waste, abuse, and mismanagement; and mitigate major risks that cut across programs and agency boundaries";
2. The Special Inspector General for Pandemic Recovery — responsible for conducting, supervising and coordinating "audits and investigations of the making, purchase, management and sale of loans, loan guarantees and other investments" by the Secretary of the Treasury under the CARES Act; and
3. The Congressional Oversight Commission — consisting of five members from both the House and Senate to conduct oversight of the Treasury and Federal Reserve programs.

Start Preparing Now

If your company is not experienced in doing business with the federal government and is considering seeking federal funds under the CARES Act or other federal opportunities, start preparing now.

Ensure that your company has an appropriate ethics and compliance program in place. Among other requirements, companies have processes to avoid using federal funds to influence government officials and to prevent and detect potential civil and criminal violations in order to comply with mandatory disclosure obligations. (See 48 C.F.R. § 52.203-12, 2 C.F.R. § 200.113.)

In short, taking federal money comes with strings attached that include the need for enhanced internal ethics and compliance processes and government requirements and oversight.

As part of enhanced ethics and compliance, companies should pay particular attention to internal controls to prevent and detect fraud. An economic downturn often provides both incentive and opportunity for employees and vendors to commit fraud.

For instance, a reduction in staff combined with remote working can result in decreased segregation of duties for approving payments, providing the opportunity for improper payments to insiders. In addition, suppliers may be looking to take advantage of the influx of government funds by overcharging or falsifying invoices, which may slip through without proper controls. Anti-fraud internal controls are critical to ensuring federal funds are used as required.

Companies should also review their document retention policies. Because enforcement issues will necessarily lag, they may not be pursued until potentially years from now. Companies should contemporaneously document all actions taken when dealing with the government and ensure those documents are preserved if the government comes knocking later.

The pandemic is creating unprecedented economic hardship, which the government is trying to combat. While that economic stimulus provides much needed relief, the aid comes with requirements that many businesses are not prepared to address. It is critical that companies seeking government assistance understand and address the responsibilities that come with the government aid now before seeking those funds.

Originally published in Bloomberg Law Insights on April 20, 2020. Reproduced with permission from Copyright 2020 The Bureau of National Affairs, Inc. www.bloombergindustry.com.