When CARES Act Aid Triggers Criminal Liability – Criminal Law

Unprecedented in size and scope, the CARES Act makes available
over $2 trillion in economic aid. But the governmental nature of
CARES Act assistance could trigger liability under a number of
statutes.

Government officials have sent strong signals that they will
rigorously enforce requirements for receiving assistance under the
Coronavirus Aid, Relief and Economic Security Act. In late April,
Treasury Secretary Steven Mnuchin promised that any company seeking
forgiveness of over $2 million in loans would be audited by the
Small Business Administration, threatening criminal liability for
any company that improperly accepted the assistance. And in early
May, federal prosecutors in Rhode Island initiated the first fraud
prosecution for misconduct associated with the receipt of
government benefits under the CARES Act, charging two individuals
with seeking payroll assistance loans for employees that did not
exist. That prosecution is the first salvo of an enforcement effort
that will likely last many years.

Unprecedented in size and scope, the CARES Act makes available
over $2 trillion in economic stimulus, aid, loans and relief to
individuals, state and local governments, and businesses and
corporations, both big and small. That assistance, however, comes
with many strings— a complex web of requirements, conditions
and prerequisites that govern who can receive assistance and what
must be done with the money.

Because the CARES Act involves federal money, prosecutors
investigating misconduct have a broad array of statutory tools that
can be used to punish misconduct and fraud. Of course, the
frequently charged mail- and wire-fraud statutes may apply. But the
governmental nature of CARES Act assistance could trigger liability
under a number of other statutes as well.

False Statements and Concealment: A favorite of
prosecutors, 18 U.S.C. §1001 criminalizes knowing and willful
false statements of material fact, made in any matter within the
jurisdiction of the executive branch. Even concealment of a
material fact can trigger liability under the statute where there
is a legal duty to disclose the concealed information. A recipient
of CARES Act assistance thus might run afoul of §1001 where
statements made on their assistance application are untrue.

The Criminal False Claims Act: An individual or
business violates the criminal provisions of the False Claims Act
by making or presenting a claim against the United States,
“knowing such claim to be false, fictitious, or
fraudulent.” Significantly, a claim can be “false,
fictitious or fraudulent” when someone falsely certifies
compliance with regulatory requirements or prerequisites. The CARES
Act requires many such certifications. For example, small
businesses applying for loans under the Act must certify, among
other things, that the loans will be used to retain workers or make
certain overhead payments.

Bank Fraud: 18 U.S.C. § 1344 criminalizes
fraud on a financial institution. Because many of the loans made
available under the CARES Act are originated by a commercial
lender, and only guaranteed by government agencies like the SBA,
fraud in connection with those loan applications can lead to
prosecution under the bank fraud statute. While garden-variety mail
and wire fraud are punishable by 20 years in prison, a bank fraud
charge triggers a 30-year maximum prison sentence. And even when
bank fraud is not formally charged, the involvement of a financial
institution in the criminal activity can lead to sentencing
enhancements upon conviction of other crimes.

Emergency Benefit Fraud: On March 13, President
Donald Trump, by letter to the several Cabinet Departments,
declared a national emergency under the Robert T. Stafford Disaster
Relief and Emergency Assistance Act. The CARES Act created a
$45-billion disaster relief fund to provide assistance under that
declaration. These actions create the distinct possibility that
misconduct associated with those funds would be prosecuted under 18
U.S.C. §1040, which criminalizes fraud and false statements in
connection with major disaster benefits. Section 1040 makes it
illegal to falsify, conceal or cover up a material fact by means of
a trick, scheme or device. It also criminalizes materially false,
fictitious or fraudulent statements or representations. Unlike more
generally applicable false statement and fraud statutes, conviction
under §1040 requires that the fraudulent conduct or false
statement relate to a matter involving benefits paid in connection
with a national emergency declaration. Like bank fraud, a
conviction under §1040 carries a 30-year maximum prison term
and can trigger sentencing enhancements even when other crimes are
charged, but §1040 is not.

The CARES Act delivers much needed relief to American businesses
as they confront the economic challenges presented by the
coronavirus. With money available on an expedited basis and
distributed over a very short period of time, opportunities abound
for fraud, waste and abuse. And even well-meaning, well-intentioned
individuals can find themselves or their companies in the
crosshairs of a federal criminal investigation if they are not
careful.

For many businesses, the CARES Act may be the first time they
have accepted federal money. While the need for the assistance may
be pressing, businesses should fully understand the regulatory
regime that accompanies that assistance. Given the potentially
criminal consequences of false statements and
misrepresentations—under criminal fraud statutes, the False
Claims Act, and others—businesses and individuals should
carefully consider the representations and certifications in their
applications for federal aid and ensure that any certifications are
true and accurate. While unintentional errors typically do not
amount to a criminal violation, such mistakes may nonetheless draw
the unwanted attention of federal regulators and investigators.

Originally published by The National Law Journal, June
2020.

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guide to the subject matter. Specialist advice should be sought
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