Criminal charges related to COVID-relief fraud are nothing new, but the recent case out of E.D.N.Y. is significant because it marks the first time that officials at a major financial institution have been criminally charged in connection with such a fraud. The bank itself was not charged and is identified only as “Bank 1” in publicly-filed documents.
The PPP and EIDL relief programs were expressly implemented by Congress with the goal of expediency, and applications under the programs were subject to relatively few safeguards from fraud. Unsurprisingly, therefore, the programs quickly became the targets of fraud and exploitation. The Pandemic Response Accountability Committee, a group of 22 inspectors general created to monitor funds dispersed under the CARES Act, has estimated that these and other federal COVID-relief programs paid out as much as $100 billion in response to fraudulent claims. The sheer scale of this fraud is unprecedented.
The US Department of Justice (DOJ) has reported that, so far, it has charged over 500 individuals with defrauding federal COVID-relief programs. To date, however, most of these cases have focused on “low hanging fruit” prosecutions; unsophisticated fraudsters who barely concealed their fraudulent schemes. Many of these cases involve simple identity theft or sham companies that existed on paper solely for the purpose of receiving government funds. The reason for this early enforcement emphasis is simple: faced with limited resources and the urgent need to send a deterrence signal to the public, federal investigators and prosecutors have naturally focused on those cases they can investigate most quickly and prove most easily.
In this initial effort, federal law enforcement largely viewed banks as necessary allies in their investigations. Because the Small Business Administration (SBA) lacked the internal resources to review or vet applications made under the PPP and EIDL relief programs, almost all of this work was outsourced to the private banks and vendors who processed the applications and disbursed funds. As a result, the banks are the repositories of much of the evidence that investigators and prosecutors need to identify and prosecute the individual borrowers who defrauded federal programs. Law enforcement officials have, therefore, generally been loath to take investigative steps that would strain their relationships with banks during this first phase of COVID-relief fraud prosecutions.
Many (including the authors), however, had predicted that the cooperative relationship between banks and law enforcement would change as the government’s investigative focus gradually shifted from low-hanging fruit prosecutions of individual borrowers toward a more skeptical examination of the manner in which the banks, third-party vendors and their employees processed relief applications and disbursed funds. The new charges out of E.D.N.Y. suggest that this shift is beginning to occur.
As this new phase of enforcement begins, we would expect an increasing number of federal investigations and prosecutions of rogue bank employees who the government believes have either directly defrauded COVID-relief programs or knowingly aided others in doing so. We also expect that these investigations will increasingly generate examinations of internal compliance and diligence controls that banks have in place with regard to their employees’ conduct in administering federal relief programs.
Consequently, we recommend that financial institutions with banking components that disbursed COVID-relief programs take a careful look at their internal compliance and control measures to ensure that loans administered under federal relief programs have received the appropriate level of diligence commensurate with the risks inherent with these programs.
Much like the coronavirus itself, federal law enforcement attention with regard to COVID-relief fraud appears to be undergoing a series of mutations. And neither appears to be going away any time soon. For more information about DOJ’s ongoing investigation of COVID-relief fraud or the compliance implications for the administration of COVID-relief loan programs, please contact the authors.