To all Chief Financial Officers and financial executives: Please consider this a warning—we are now in Phase 2.0 of investigations related to COVID-19 stimulus programs. Federal law enforcement agencies, acting under clear authority, are digging deep into the intricate stimulus program system for fraud and abuse, and their targets are no longer limited to obvious cases of wrongdoing.

Therefore, CFOs and other financial executives involved in these programs must now, under the guidance of white-collar crime and regulatory defense attorneys, ensure their compliance systems can withstand scrutiny. As the saying goes, "an ounce of prevention is worth a pound of cure," and this principle applies equally in the legal arena.

Early intervention often allows issues to be identified and resolved before they escalate. For example, businesses that inadvertently received excess Paycheck Protection Program (PPP) loans should proactively correct this before submitting their forgiveness applications; similarly, choices regarding the Employee Retention Credit (ERC) often require amended tax filings, and during this process, the complex requirements of ERC eligibility criteria must be carefully navigated.

Looking Back: From Pandemic Emergency Response to Law Enforcement Action

Looking back to March 2020, as the COVID-19 pandemic threatened the U.S. economy, Congress, with rare speed and determination, rolled out a series of stimulus programs aimed at protecting the real economy from economic catastrophe. Just weeks after the outbreak of the most severe public health emergency in a century, the PPP began providing forgivable federal loans to small businesses to help them stay afloat amid measures like mandatory closures. Subsequently, more targeted programs were introduced in response to the widespread economic shock caused by the pandemic.

Within weeks of the initial disbursement of PPP loan funds, criminal enforcement actions had already begun, with the first fraud cases moving at a pace far exceeding the government's typically slow and steady white-collar crime investigations.

Matthew S. Adams Matthew S. Adams (Photo courtesy of Fox Rothschild LLP)

Initially, most PPP borrowers under investigation were suspected of obvious fraud: creating fictitious companies and falsifying payroll records, using loan proceeds for personal luxury purchases, entities ineligible for federal program participation attempting to obtain loans, and fraudsters charging fees to inexperienced borrowers while promising to "maximize loan amounts." These cases resulted in a staggering number of convictions for the federal government, with those responsible facing lengthy prison sentences.

Current State: Expanded Enforcement Scope and Enhanced Technology

In September 2020, a special congressional committee began publicly exposing widespread fraud and abuse within the stimulus programs. By March 2022, the Internal Revenue Service (IRS) publicly stated that its investigators alone had already identified over $1.8 billion in fraud related to COVID-19 stimulus funds.

In his first State of the Union address on March 1, 2022, President Biden promised that "regulators are back" and announced the appointment of a Chief Prosecutor for the COVID-19 Fraud Enforcement Task Force within the Department of Justice (DOJ). Concurrently, the DOJ requested a significant budget increase to hire additional prosecutors nationwide and expand its teams. Such specialized prosecutorial task forces have precedent, meaning borrowers, lenders, and any entity that has come into contact with stimulus funds must be prepared.

In terms of case nature, COVID-19-related cases have continued to evolve. The DOJ initially handled fraud cases that were easy for the government to identify; now the cases are increasingly complex. For example, PPP, which was already a high-enforcement area, has expanded to include EIDL, ERC, and approximately six other subsequent stimulus programs, as well as other initiatives targeting specific economic sectors hard hit by the pandemic.

EIDL was once viewed as relatively safe because, unlike PPP, most loans under this program had to be repaid (albeit at below-market interest rates). However, scrutiny of borrowers' use of funds has significantly intensified—initially narrow in scope, it was later broadened through amendments to the loan program. Similarly, the refundable ERC is causing difficulties for taxpayers facing revenue recognition issues. In short, the introduction of programs beyond PPP has provided the government with more enforcement entry points, and investigators are no longer limited to relatively simple misrepresentation cases but are delving into detailed examinations.

As the number of reviewable programs increases, so too do the prosecutors' tools. In early PPP enforcement, the government clearly prioritized easy cases to secure quick convictions, hoping that "showcase" arrests would have a deterrent effect. But easy cases eventually run out, and if the government wants to continue prosecuting, it must invest in deeper investigations—which is exactly what investigators are now doing.

Over the past few months, I have encountered in my practice a staggering number of PPP forgiveness applications flagged for review or audit. Initial forgiveness denials and requests for additional information conveyed by the Small Business Administration (SBA) through administering banks should be treated with the same seriousness as a tax audit. The government is employing advanced technologies, including artificial intelligence, to cross-reference discrepancies between loan and forgiveness applications and other statutory filings in search of fraud leads. What may seem like a harmless follow-up inquiry on a forgiveness application is actually one of the ways the government builds its cases—do not take it lightly.

Future Trends: Qui Tam Lawsuits and Financial Institution Risk

Furthermore, more than two years after the outbreak, Qui Tam (whistleblower) lawsuits under the False Claims Act related to the stimulus programs are about to surge, potentially leading to civil and criminal sanctions. Such cases are filed under seal by private relators, who are incentivized by receiving a share of recovered statutory damages and attorney's fees. The cases are disclosed only to the government, allowing it to fully investigate criminal misconduct. Armed with powerful statutory tools, both private litigants and the government can obtain civil recoveries; if the government uncovers evidence of criminal activity while reviewing sealed complaints, it can also bring criminal charges. Due to the unique nature of these cases, their development takes time. There is no doubt that a large backlog of Qui Tam cases has accumulated under seal and will be unsealed over time—a process that has noticeably accelerated in the first few months of 2022.

Financial institutions once assigned to manage PPP were thought to be insulated from government stimulus fraud investigations. This view stemmed from the limited bank-friendly provisions in the initial PPP legislation but has proven to be completely wrong. Criminal investigations targeting lenders are increasing, and as the primary custodians of stimulus-related records, the downstream risks faced by bank clients cannot be ignored.

While it is impossible to predict precisely the next moves in pandemic stimulus enforcement, there is no doubt that the government's level of activity in this area has intensified unprecedentedly.