On March 20, 2020, the Attorney General ordered the Department of Justice (“DOJ”) to prioritize oversight, investigation, and prosecution of misuse of federal funds distributed in response to the COVID-19 pandemic. Now, almost six months later, the DOJ continues to examine instances of “COVID-19 Fraud” for possible civil or criminal prosecution. The DOJ’s prioritization of such investigations is of significant concern to any business or entity that received federal funds from any COVID-19 federal assistance program.
In a recent round-table discussion, a federal prosecutor discussed two federal loan programs, the Paycheck Protection Program (“PPP”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Provider Relief Fund and explained how the DOJ is investigating potential frauds arising out of the receipt of funds from those programs. The prosecutor’s discussion provides valuable insight as to how the government will prosecute fraud in connection with these programs. Since many businesses have received government loans to keep operating, it is important to understand the red flags the DOJ will be looking for to determine if fraud has occurred. Ensuring that these loans were properly documented was made more challenging for companies because guidance from the government was revised multiple times at the same time it was encouraging them to participate in these programs.
Stimulus Program Fraud: Well-Known Pitfalls for Companies in Fraud Prosecutions
Enacted as part of the CARES Act, the PPP is one of the largest loan programs intended to stimulate the economy. The PPP presents various potential pitfalls for businesses seeking such a loan, any one of which could put the business on the DOJ’s short list of investigation targets. Entities should be wary of making a false certification in any of the following categories:
- Whether the individual or entity is a convicted felon;
- Whether the entity has already received a PPP loan;
- Reporting fictitious or inflated numbers of employees;
- Using a fictitious business name to acquire PPP loans;
- Using fraudulent or forged documents in connection with acquiring a PPP loan;
- Creating a business after February of 2020 to acquire a PPP loan;
- Purchasing unauthorized goods or services with PPP loan funds;
- Funneling PPP loans to other organizations or entities; and
- Perpetuating pre-existing fraud schemes.
Additionally, the PPP prohibits certain affiliations with private equity firms during the application process.
In addition to the PPP, the CARES Act Provider Relief Fund, administered through the Department of Health and Human Services (“HHS”), is a separate fund which has paid $110 billion as of August 14, 2020 to healthcare providers who have been hit hardest by the COVID-19 pandemic. Any healthcare provider who, after January 21, 2020, diagnosed or provided testing or care to individuals with possible or actual cases of COVID-19 are eligible for certain payments for expenses or lost revenues attributable to the coronavirus. The funds cannot be used to reimburse expenses or losses reimbursed from other sources.
Pitfalls also exist with respect to the CARES Act Provider Relief Fund. Prosecutors are placing a special focus on provider participation in telehealth kickback schemes. A telehealth kickback scheme is one in which a lab company pays a telemedicine company to forward completed coronavirus test kits to it, and the telemedicine company forwards a portion of that payment to the physician or patient broker call center who initially provided the patient to the telemedicine company. Government healthcare programs like Medicare and Medicaid pay for the testing of the kits at the lab company but require that funds not be directed to the referring physician or patient broker in exchange for referring patients to the telehealth provider. These funds are intended solely to be used for coronavirus testing and treatment and cannot be used to reimburse referrals.
Other health care fraud schemes originate from two main sources: “upcoding” and asserting factually false claims. First, “upcoding” occurs when the patient’s symptoms are coded as more severe or differently from how the patient presents. For example, coding a common cold as coronavirus to obtain federal funds is inappropriate. Second, claiming federal funds under factually false pretenses, such as by using a fictitious patient identity or documenting a “telehealth” appointment which did not occur, is, of course, unlawful. Healthcare providers should be aware that reimbursement for telemedicine services requires both an audio and visual encounter, so a simple call with a healthcare professional is not a telehealth encounter; coding it as such is inappropriate. Care must continue to be taken to ensure proper coding and documentation of telehealth appointments.
While telehealth fraud involving the coronavirus is a primary focus, the DOJ is also interested in identifying areas of telehealth fraud in combination with non-telehealth issues not involving the coronavirus. For example, another of the DOJ’s current areas of focus is the opioid epidemic. The DOJ will investigate and potentially prosecute telehealth kickback schemes that are being used as a cover to over-prescribe controlled substances.
The DOJ Will Prosecute Applicants Despite Challenges in the Application Process
The DOJ rarely opines on whether certain scenarios will provoke government regulatory scrutiny or prosecution with certainty. However, at a recent virtual round-table discussion hosted nationwide, the DOJ identified various scenarios as potentially problematic and ripe for government investigation or prosecution under the PPP and the CARES Act Provider Relief Fund.
The DOJ identified the following scenarios:
- A company applies for a PPP loan and includes independent contractors in the workforce calculation;
- A parent company counts employees employed by its subsidiaries as its own in its PPP loan application, and the subsidiary later applies for a PPP loan using the same employees;
- A private equity firm requires a portfolio entity to apply for a PPP loan;
- A company applies for multiple loans via different business entities at different banks;
- A company applies for loans despite having capital reserves or high net worth in ownership;
- A pre-pandemic insolvent company applies for a PPP loan;
- A company uses PPP loans for executive compensation where the executives did not previously draw compensation or bonuses;
- A company invents or modifies descriptions of channels of funds to spend PPP money to qualify for loan forgiveness; or
- A bank prepares or substantially participates in the preparation of PPP loan applications, especially if the bank knowingly falsely certifies loan documents.
These are far from cut-and-dried examples, and every case will depend on its unique facts and circumstances and on the documentation submitted in support of the loan application. But recent examples show that businesses can expect the DOJ will be aggressively seeking cases to bring for mishandled federal loans.
DOJ Will Use the False Claims Act and Anti-Fraud Injunction Statute
Any business or individual who receives a federal loan or payment should be aware of the arsenal of statutes the DOJ is using to prosecute fraudulent activity. Recent DOJ prosecutions demonstrate that it is scrutinizing the very scenarios discussed at the round table discussion. Newly-filed criminal complaints and indictments describe conduct that involves fraudulently misrepresenting the number of employees on a payroll in an application, misrepresenting whether the applicant has pending criminal charges or has been convicted, misrepresenting whether the applicant had already received PPP funds, and using PPP funds for personal, rather than business purposes. The DOJ has charged loan applicants in a number of districts with wire fraud, mail fraud, bank fraud, major fraud against the United States, identity theft, and making false statements.
The DOJ has also expressed its intent in the roundtable discussion to use the False Claims Act (“FCA”). The FCA generally prohibits defrauding government programs. A person or company is liable under the FCA if they knowingly submit or cause another to submit a false claim to the government, or knowingly make a false claim or statement to obtain government funds. In addition to authorizing suits directly by the federal government, the FCA permits citizens to step in on behalf of the government in a qui tam action while giving the government an opportunity to intervene. Without doubt, the FCA is the DOJ’s primary tool for combatting fraudulent statements made in furtherance of a claim on federal funds.
The second statute discussed at the round-table event was the Anti-Fraud Injunction Statute (“AFIS”). The DOJ has acknowledged using AFIS more frequently during the COVID-19 pandemic because it permits the DOJ to step in quickly and request a court to issue a preliminary order requiring a company to cease certain allegedly fraudulent activities immediately. The AFIS requires an underlying predicate criminal act to be the triggering event and, by statute, that underlying criminal act may include “Federal health care offenses.” While grand juries in some jurisdictions remain on hold, federal prosecutors may use the AFIS to move quickly to prevent fraudulent activity and freeze fraudulently acquired proceeds.
The government has already used AFIS with preliminary success. For example, on June 1, 2020, the DOJ successfully enjoined Fort Davis, Texas resident Marc “White Eagle” Travalino from alleged fraudulent activity related to phony COVID-19 cures. Travalino’s cures allegedly “are proven to work and destroy” the coronavirus. However, no such cure for the coronavirus exists. Travalino was caught when he sold his alleged “cures” to an undercover federal agent. Instead of initially prosecuting Travalino criminally, the DOJ opted to use the AFIS to obtain a preliminary injunction, halting the activity quickly. Based on the DOJ’s allegations against Travalino in the injunctive action, criminal charges are likely forthcoming. The criminal investigation is ongoing while Travalino’s business is shuttered under the restraining order.
The Small Business Administration has allocated $660 billion of federal funds to businesses during the coronavirus pandemic, and the CARES Act Provider Relief Fund, distributed to hospitals and healthcare providers by HHS, has allocated an additional $175 billion to healthcare providers. Businesses and health care providers who have taken these federal funds should have documented what the funds are being used for, and when and how the funds are being used. If loan documentation is missing, incomplete or incorrect, a company could be subject to a government investigation long after the loan was received. Attempting to document what happened possibly years later will be difficult, so if the loan file is incomplete, companies should make an effort to remediate now. Recipients of pandemic-related funding should also be reviewing the DOJ’s enforcement efforts regularly to determine whether they are vulnerable to an investigation and consult counsel to formulate a strategy if and when the government comes knocking at the door.
 Attorney General Barr’s memorandum may be found here: https://www.justice.gov/ag/page/file/1258676/download
 See U.S. v. Sheng-Wen Cheng, No. 20 MAG 8698 (S.D.N.Y., 2020); U.S. v. Ameet Goyal, No. 19-cr-844 (S.D.N.Y., 2020); U.S. v. F. Shah, No. 4:20-CR-156 (E.D. Tex., 2020); U.S. v. Bostic et al., 0:20-mh-06317 (S.D. Fla., 2020); U.S. v. R. Shah, No. 20-CR-293 (E.D. Ill., 2020).
 See 31 U.S.C. §§ 3729-3733.
 See 18 U.S.C. § 1345.
 See 18 U.S.C. § 1345(a)(1)(C) (“[C]ommitting or about to commit a Federal health care offense” is a predicate offense to AFIS).