Borrower Beware Series: Risks Associated with Accessing COVID-19 Relief Funds

For additional guidance, please refer to Steptoe's COVID-19 Resource Center.

PART I: Beware of CARES Act Oversight and Attendant Risks

COVID-19 has disrupted life around the globe and left many businesses in desperate need of capital infusions to cover payroll, rent, and other basic operating expenses. In response, Congress and the president recently enacted the "Coronavirus Aid, Relief, and Economic Security Act" (the CARES Act), which provides an estimated $2 trillion in financial assistance to all corners of the economy. 

The CARES Act financial assistance includes direct loans, loan guarantees, and investment programs intended to enhance liquidity in the financial system. For more information about small business financial assistance, please see Small Business Relief under the CARES Act. For more information about Treasury Department loan programs, please see How to Access Treasury Department Funding Under the CARES Act. 

Steptoe’s cross-disciplinary team of lawyers across the globe is helping companies navigate the countless legal and policy issues stemming from the COVID-19 crisis. As part of these representations, lawyers in practices ranging from government affairs, financial services, tax, and employment to criminal defense and commercial litigation have worked collaboratively to assist companies seeking financial assistance under the CARES Act. In the process, we have identified special considerations and potential risks associated with the available financial assistance.   

The "Borrower Beware" Series 

This alert is part of a "borrower beware" series – often drawing parallels to lessons learned from the 2008 financial crisis – to help businesses manage and limit these special considerations and potential risks. Future alerts in the series will provide an overview of the implementing regulations the Treasury Department is scheduled to release this week and highlight potential civil and criminal liability pitfalls for recipients of CARES Act financial assistance. 

Our "borrower beware" series will culminate on April 14 with a webinar focused on helping businesses grappling with CARES Act financial assistance challenges. Click here to register and submit questions in advance of the webinar.   

Overview of CARES Act Enforcement  

Businesses should expect significant oversight and enforcement activity involving CARES Act funds for years after the COVID-19 pandemic ends. There is no shortage of oversight and enforcement built into the CARES Act itself, which established the enforcement bodies highlighted below. To the extent funding for these newly created oversight bodies appears relatively modest – consisting of less than 5% of the total appropriations – we anticipate that many of the oversight and enforcement personnel will come from a pool of pre-pandemic hires with salaries tied to funding sources unrelated to the CARES Act. Moreover, the new oversight committees will partner with established law enforcement agencies including the Department of Justice (DOJ), FBI, and state attorneys general, who have also pledged to actively police potential fraud and abuse associated with COVID-19. 

Inspector General for Pandemic Recovery 

The CARES Act established an Office of the Special Inspector General for Pandemic Recovery, that will ultimately be led by a presidentially-appointed, Senate-confirmed Special Inspector General (SIG). The SIG will function for five years and has a $25 million budget. The SIG is tasked with conducting, supervising, and coordinating audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Treasury Secretary. The SIG has subpoena authority consistent with the Inspector General Act of 1978 (i.e., for documents only, with no right to compel witness testimony), may refer investigations to other law enforcement agencies, and must file quarterly reports with Congress that provide the details of all loans, loan guarantees, and other investments. 

Congressional Oversight Commission 

The CARES Act established a Congressional Oversight Commission to conduct oversight of the Treasury Department, Federal Reserve, and the various agencies' implementation of the CARES Act. Members of the commission include appointees selected by various members of the House and Senate leadership, and a chairperson appointed by the speaker of the House and the Senate majority leader after consultation with the Senate and House minority leaders. 

The Congressional Oversight Commission has the power to hold hearings under penalty of perjury, compel the production of documents and witness testimony, and is required to furnish four distinct reports, every 30 days, to Congress, addressing the impact and effectiveness the economic stimulus programs initiated in response to the COVID-19 crisis. The commission’s authority terminates on September 30, 2025. 

Pandemic Response Accountability Committee 

The Pandemic Response Accountability Committee (PRAC) has the broadest oversight and enforcement powers of the three oversight bodies established by the CARES Act and will be selected from existing inspectors general. PRAC is tasked with helping inspectors general safeguard 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."

PRAC's functions include "a comprehensive audit and review of charges" made to federal contracts under CARES Act authorities "to determine whether wasteful spending, poor contract or grant management, or other abuses are occurring" and referring matters as appropriate to the inspectors general as appropriate. 

PRAC has an $80 million budget and may refer investigations to the DOJ for criminal or civil investigation. Even without DOJ, PRAC may conduct independent investigations, hold public hearings, and issue subpoenas for both documents and testimony. 

Potential Risks Underlying CARES ACT Funding 

In the wake of the 2008 financial crisis, economic stimulus through the American Recovery and Reinvestment Act of 2009 (ARRA) and Troubled Asset Relief Program (TARP) helped stabilize the country's financial system. The historical and ongoing oversight activity of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) to deter fraud and abuse, as well as ongoing civil and criminal litigation involving ARRA and TARP beneficiaries, may help inform many of the potential risks associated with accessing financial assistance under the CARES Act. 

As discussed in more detail in later installments in this series, Treasury guidelines for small business loans already require recipients to submit a loan application with certifications – under penalty of perjury – in connection with applying for a qualifying loan from a private lender. Given the time-sensitive nature of the financial assistance, lending decisions are expected to be made quickly, and will initially rely heavily on recipient representations and certifications. 

These same representations could form the basis of potential civil and criminal exposure for statements that later prove to be materially false. For example, a borrower mistaken about information concerning its total number of employees, payroll expenses, or even the existence of legally "affiliated" entities may be subject to an investigation for a host of alleged issues ranging from false statements and loan application fraud to mail, wire, and bank fraud. Additionally, given aggressive corporate responsibility and vicarious liability arguments, companies may face serious criminal risks where rogue employees or officers pay inducements or kickbacks to lenders for more favorable terms or priority processing, engage in self-dealing, or misapply and divert funds to unapproved uses. 

Similarly, borrowers may face significant potential civil exposure as a result of obtaining or spending funds appropriated under the CARES Act. In addition to potential civil False Claims Act (FCA) exposure for direct loans from the Treasury, based on amendments to the FCA following the 2008 financial crisis, the statute is sufficiently broad to cover loans from private lenders and even payments to vendors assisting with COVID-relief efforts. Importantly, borrowers and the general public may also be the victim of deceptive or otherwise improper lending practices, and, in turn, lenders may face liability closely tracking exposure associated with ARRA and TARP.  

Practical Tips to Mitigate Risks 

Additional installments in this "borrower beware" series will delve deeper into the potential risks recipients of CARES Act financial assistance face. Companies contemplating accessing these funds would be well-advised to develop a working understanding of these risks, update compliance materials, reevaluate employee training, and consult with knowledgeable counsel with experience addressing these issues in the wake of the COVID-19 crisis.