Criminal and Civil Liability Under the CARES Act
When Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was signed into law on March 27, 2020, it was not legislating on a blank slate.
Lawmakers knew from past financial stimulus bills and disaster rescue measures that while substantial portions of the $2 trillion it appropriated to blunt the economic impact of the COVID-19 pandemic will be used to keep deserving businesses afloat during a dire crisis, some funds will be obtained fraudulently.
As a result, the CARES Act created three oversight bodies, one of which – the Office of the Special Inspector General for Pandemic Recovery (SIGPR) – is a federal law enforcement agency that can subpoena documents and whose criminal agents will work with federal prosecutors to investigate potential federal crimes, execute search warrants, and make arrests.
Honest businesses that wish to access the direct loans, loan guarantees, and investment programs that the CARES Act provides while avoiding pitfalls that might subject them to investigation by federal prosecutors and agents should recognize the wide variety of federal criminal laws that apply to the various stages of the CARES Act programs. It’s worth noting that all of the criminal statutes discussed below are felonies, all of them can be used against both individuals and corporations, and all of them can provide grounds for additional prosecutions for conspiracy (that is, an agreement to commit a crime, regardless of whether the crime is completed).
Falsifying Small Business Loan Applications
First, because applications for small business loans under the CARES Act are submitted to financial institutions, false statements in those applications that are made knowingly (intentionally, not by accident) and are material (capable of influencing the lender, even if they don’t) can be prosecuted under a variety of statutes.
They can be charged as bank fraud under section 1044 of the federal criminal code, which governs loan applications to the wide array of entities that are considered “financial institutions” under federal law; as mail or wire fraud under sections 1341 and 1343; and as false applications under an older statute, section 1014.
Additionally, because the loans are federally funded, false statements are “within the jurisdiction” of the executive branch and may potentially be prosecuted under section 1001. Notably, many of these statements authorize prosecution not merely for making a “materially false, fictitious, or fraudulent statement or representation,” but also for one who “falsifies, conceals, or covers up by any trick, scheme, or device a material fact,” or who “makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry.” Simply put, an application that is literally truthful but seriously misleading can be prosecuted if a really important fact is covered up or a bogus document is attached.
Bribery/Kickbacks
Second, businesses who have longstanding relationships with their bank need to take care that they don’t say “thank you” in a way that crosses the line into being a bribery or kickback. Section 215 of the criminal code punishes anyone who “corruptly gives, offers, or promises anything of value” to anyone with the “intent to influence or reward” a bank officer in connection with a bank transaction. Bribes and kickbacks can also be prosecuted as “honest services” mail and wire fraud under section 1341 and 1343.
Money Laundering
Third, potential criminal liability doesn’t end with the loan application itself. Downstream transactions with improperly obtained proceeds can be characterized as money laundering.
While one form of money laundering requires transactions that “conceal” or “promote” unlawful activity, another form simply requires knowingly engaging or attempting to engage in a “monetary transaction” (including simple deposits and withdrawals) “in criminally derived property of a a value greater than $10,000 and is derived from specified unlawful activity” – which includes all of the fraud statutes previously discussed. Money laundering, like the underlying fraud itself, can potentially lead to massive forfeiture and restitution orders.
Investigations Under the False Claims Act
Criminal liability, of course, requires conviction with proof beyond a reasonable doubt following indictment by a grand jury and trial by jury. But even without proof of a crime, borrowers who fudge facts can be face civil charges under the False Claims Act.
Since the 2008 financial crisis, the Department of Justice has used the False Claims Act to sue individuals and corporate entities that obtained funds under the Trouble Asset Relief Program (the so-called bank bailout) and the American Recovery and Reinvestment Act (the 2009 stimulus bill). These lawsuits have involved everything from misrepresentation of financial need in applying for federal funds to using funds in violation of loan terms.
Despite all the uncertainty surrounding the COVID-19 pandemic and the economic fallout, one thing is certain: investigations and prosecutions related to CARES Act funds will be going on for a long, long time. More than 11 years after the 2008 crisis, SIGTARP – the inspector general for the 2008/2009 rescue programs – is still going strong. It’s a safe bet that SIGPR will be investigating loan applications from the cruel April of 2020 for years to come.
From the application itself all the way through careful tracking that CARES Act funds are used properly, borrowers should dot their i’s and cross their t’s as if their company’s life is at stake. Because it is.
Stuart Berman served for 28 years with the Department of Justice as a line and supervisory Assistant United States Attorney and as a trial attorney with the Antitrust Division. He has assisted many of the firm’s business clients with presenting fraud cases to federal and state law enforcement authorities, leading to cases where defendants received lengthy prisons sentences and were ordered to repay victims. He can be reached at 301-657-0729 or [email protected].