Among the many important themes in his March 1, 2022, State of the Union address, President Joe Biden declared that “the watchdogs are back,” when he announced that the Department of Justice (DOJ) would appoint a Chief Prosecutor for pandemic fraud.
That day, the Biden Administration published a fact sheet detailing three steps that the Administration will undertake “to prevent, deter, and punish identity theft and other forms of pandemic fraud by serious criminal syndicates.”1 First, President Biden announced the appointment of a DOJ COVID-19 Fraud Enforcement Task Force Chief Prosecutor, who will focus on criminal cases against perpetrators of major pandemic fraud, including in the Paycheck Protection Program (PPP). Second, the President called on Congress both to commit greater resources to the DOJ Task Force and to increase the penalties for those who commit pandemic fraud. Third, the President will soon issue a new executive order targeting identity theft in public benefit programs and providing additional support to the victims of identity theft.
Although all three steps outlined in the fact sheet demonstrate the Administration’s prioritization of anti-fraud measures, the appointment of a Chief Prosecutor is especially notable and strongly signals that DOJ and law enforcement agencies will train an intense focus on investigating and prosecuting fraud in connection with COVID-19 relief programs. Furthermore, the announcement is bolstered by the DOJ’s recent budget request seeking $36.5 million to hire an additional 120 attorneys nationwide to handle pandemic-related fraud cases.2
Clients, in particular financial institutions and other lender entities that funded PPP loans, should view the Chief Prosecutor as a key enforcement player, both as potential third-party witnesses to investigations into perpetrators of fraud and as potential targets of broader investigations into their own conduct.
Similarities Between Chief Prosecutor and SIGTARP
The Chief Prosecutor will likely play a role similar to that of the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). SIGTARP is a federal law enforcement office still operating within the Treasury Department that was created to investigate and audit the 2008 Emergency Economic Stabilization Act’s long-term economic stability programs.3 SIGTARP’s investigations have led to criminal charges against 463 individuals—including scammers, bank borrowers, and bankers themselves—of whom 400 have been convicted, as well as enforcement actions against 25 entities, such as financial institutions and professional services firms.4 As a result of SIGTARP’s investigations, the government has recovered $11 billion.5
Although SIGTARP was created in 2008, its work continues today—a full 14 years later. Furthermore, Congress initially authorized $700 billion for the Troubled Assets Relief Program (TARP) that SIGTARP protects, which was ultimately reduced to $475 billion.6 Similarly, Congress authorized up to $800 billion for PPP alone7 and, all told, over $2 trillion in Coronavirus Aid, Relief, and Economic Security (CARES) Act relief funds.8
Other Federal Efforts to Combat Pandemic Fraud
While the role’s purview has yet to be clearly defined publicly, it is safe to conclude that the Chief Prosecutor will assume the mantle of directing and supporting the expansive investigative and enforcement efforts of other federal bodies investigating pandemic-related fraud. The DOJ, for example, already has the COVID-19 Fraud Enforcement Task Force, which has charged over 1,000 criminal cases and opened over 200 civil investigations to date.9 As noted in the fact sheet, however, the appointment of a Chief Prosecutor will “expand [the Task Force’s] already robust efforts.”10 Indeed, we expect the appointment of a Chief Prosecutor to supercharge these efforts.
In addition, the CARES Act provided for the creation of a Special Inspector General for Pandemic Recovery (SIGPR) within the Treasury Department. The SIGPR is responsible for overseeing Treasury loans and investments, along with tracking and investigating disbursements made under the CARES Act. To date, SIGPR has managed 23 full investigations and four preliminary inquiries, referred 100 hotline complaints to agencies, and completed an investigation that resulted in an indictment.11
The CARES Act also created a new Pandemic Response Accountability Committee (PRAC) within the Council of Inspectors General on Integrity and Efficiency, which is responsible for overseeing loans and protecting taxpayer dollars.12 While the PRAC cannot bring civil or criminal cases, it is authorized to hold public hearings, issue subpoenas, compel testimony from private parties, and make criminal referrals of potential violations of federal law. The Office of the Inspector General within the Small Business Administration (SBA) has also been tasked with overseeing the SBA’s pandemic-related programs and operations.13
The appointment of the Chief Prosecutor may indicate that, while other bodies such as the SIGPR and PRAC are investigating COVID-19-related fraud, the scale of the problem requires more coordinated efforts from a prosecutor with a mandate and the authority to fully investigate and prosecute criminal cases, as well as to pursue civil forfeiture actions to recover misappropriated taxpayer dollars. Given this mandate and robust authority, we expect that the Chief Prosecutor will be aggressive and relentless in pursuing all possible avenues of criminal investigation and prosecution, including against institutions as well as individuals. We expect that the Chief Prosecutor will rely heavily on DOJ’s now matured and case-tested data analytics capabilities to connect dots among the financial records that they have been analyzing since the inception of the DOJ Task Force. Attorney General Merrick Garland recently called data analytics a “force-multiplier.”14
Potential Areas of Risk
We anticipate that the Chief Prosecutor will focus their efforts on certain key issues that may pose risk to companies, particularly the financial institutions and other lenders that funded PPP loans.
First, a key area of focus will likely be insider abuse, such as employee complicity or penetration of the loan approval process by criminal networks.
Second, we expect the Chief Prosecutor to canvass filed Suspicious Activity Reports (SARs) to identify potential cases and potentially aggregate SARs to identify fraud typologies, connections between disparate lenders, and efforts to launder the proceeds of fraud. We also expect the Chief Prosecutor, in conjunction with the federal banking regulators, to consider whether institutions failed to detect and report suspicious activity—both the fraud itself and efforts to launder fraud proceeds—in connection with pandemic fraud.
Third, the Chief Prosecutor may investigate potential violations of the False Claims Act, for example in cases where lenders funded, and sought the lender fee for, loans that they knew or should have known were fraudulent.
Finally, we expect the Chief Prosecutor to focus on whether lenders performed appropriate diligence on borrowers, both in connection with PPP eligibility requirements and existing core anti-money laundering/Know Your Customer obligations. For example, the Chief Prosecutor may analyze records for potential inconsistencies among first draw applications, second draw applications, and loan forgiveness applications.
WilmerHale regularly assists clients in responding to inquiries by the Justice Department, its law enforcement partners and financial regulatory authorities, and we continue to monitor developments around coronavirus-related issues closely. We have deep experience with handling inquiries by a wide array of regulators in connection with the PPP. We also counsel compliance and risk officers. Our experienced team of lawyers and policy professionals are available to help clients navigate this challenging and evolving enforcement climate.