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INSIGHT: CARES Act Creates New Treasury IG, Ups Enforcement Ante

April 8, 2020, 8:01 AM

On March 27, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, the largest economic stimulus bill in U.S. history, to provide more than $2 trillion in relief for those impacted by the coronavirus pandemic.

The Treasury Department will decide how to use these resources to prevent a severe recession. Congress wisely recognized that oversight is essential to mitigate the risk of fraud, waste and abuse by program recipients and created a special inspector general to protect against these dangers.

Many businesses not accustomed to working with the federal government will be applying for financial assistance and loans. It’s key for general counsel and business leaders to pay close attention to conditions attached to the receipt of funds and develop protocols to ensure compliance.

Below, we look at this new regulator and consider what types of investigations CARES Act recipients might face.

Powers, Responsibilities of the Special IG for Pandemic Recovery

Section 4018 of the CARES Act establishes within the Treasury Department a Special Inspector General for Pandemic Recovery (the SIGPR). The SIGPR will “conduct, supervise, and coordinate audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments made by the Secretary of the Treasury[.]” The SIGPR is required by law to have “integrity and demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public administration, or investigations.”

The SIGPR is endowed with the powers listed in Section 6 of the Inspector General Act of 1978, which include the power to issue subpoenas and to obtain information from federal agencies. The SIGPR’s powers and responsibilities mirror those entrusted to the Special Inspector General of the TARP (SIGTARP).

The SIGPR has two primary roles: (a) to function as a law enforcement agency that conducts investigations and makes referrals to prosecutors, and (b) to gather relevant information and provide quarterly reports to Congress. Such information includes a description of the loans, guarantees, and other investments made by the Treasury Secretary under the Act, along with an explanation of the reasons justifying the expenditures.

The SIGPR has a $25 million budget and is authorized to operate only for five years. By comparison, the SIGTARP still exists today—more than a decade after its creation—because that office will terminate only after all assets acquired by the Treasury Secretary have been sold or written off.

Possible Enforcement Efforts of the SIGPR

Given the similarity in statutory language, we assume that the SIGPR will follow the path laid out by the SIGTARP and investigate a wide array of conduct that is directly or indirectly connected to the disbursement and use of CARES Act funds, including:

  • fraud directed at individuals who are seeking to apply for funding;
  • wrongdoing committed by recipients of funds in connection with the misuse of program funds; and
  • false statements or other fraud in the course of applying for funding or in certifying compliance with the Act.

Like the SIGTARP, the SIGPR likely will hire case agents and auditors. Where criminal activity is detected, the SIGPR can make referrals to federal and state prosecutors for violations of law, including the False Claims Act and the mail and wire fraud statutes. Those investigations could result in stiff penalties, including fines for corporate entities, potential treble damages awards, and substantial jail time for individuals, as in many SIGTARP cases (such as the investigation into Colonial Bank and Taylor Bean & Whitaker).

One focus of future investigation and litigation may be compliance with the “good-faith certification[s]” that CARES Act recipients must make as a condition of receiving funds. See §§ 4003(b)(4) & (c)(3)(D)(i).

CARES Act recipients will need to make a lengthy and rigorous set of commitments that funds will be used for authorized purposes. For example, CARES Act funds must be used to maintain pre-crisis workforce and compensation levels through September 2020. Funds cannot be used to pay dividends or make stock purchases for as long as the federal loan remains outstanding. For the term of any loan plus an additional two years, recipients must honor collective bargaining agreements and refrain from offshoring jobs. CARES Act recipients also must abide by executive compensation restrictions.

We expect the SIGPR to audit CARES Act recipients for compliance with these provisions. The SIGPR may also rely on whistleblowers to identify fraud. Some investigations may not relate to fraud against the government, but concern other illegal activity by CARES Act recipients that is uncovered during the course of an investigation, raising the stakes for companies that apply for funding.

SIGPR investigations may even lead to prosecutions of entities and individuals who defraud recipients of CARES Act funds, as with the SIGTARP’s investigation of Jefferies LLC, for example.

Also, as in SIGTARP cases and in keeping with recent trends, federal prosecutors will likely pursue obstruction-of-justice charges against those who destroy or alter evidence.

How To Handle a SIGPR Investigation

Enforcement efforts depend on the willingness of the Trump administration to appoint a SIGPR who operates with the needed level of independence, which the Bush and Obama administrations afforded to the SIGTARP.

President Donald Trump’s CARES Act signing statement—in which he questioned the role of the SIGPR based on purported concerns that certain oversight might violate the “Take Care” clause of Article II of the Constitution—raises a question about whether this will occur.

While the TARP was aimed primarily at the financial services and auto industries, the CARES Act will impact a broader array of industries. Some recipients will not have sought government funding in the past and may be unfamiliar with the level of regulatory scrutiny to which defense contractors and health care providers have become accustomed.

At a minimum, careful record-keeping is essential. To the extent practicable, recipients of stimulus funds should segregate those funds from other operational funds, and ensure that CARES Act funds are spent for necessary expenses that withstand SIGPR scrutiny. Such measures will increase the likelihood that a business will comply with the conditions attached to stimulus funds and also will minimize a given company’s legal and reputational risk should there be a future SIGPR investigation.

In-house counsel at companies that apply for loans or other financial assistance should pay close attention to the conditions attached to the receipt of funds and should develop protocols and procedures to ensure compliance.

Those smaller businesses, start-ups, and non-profits that may lack well-developed compliance and legal programs should consider consulting outside counsel who regularly represent companies, individuals, and entities in connection with federal investigations or prosecutions.

Any recipient contacted by the SIGPR should act as though it were contacted by any other federal regulator or prosecutor and take the necessary precautions, including retaining counsel to assist in guiding the recipient in formulating a response and, if applicable, helping navigate any ensuing investigation process.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Harry Sandick is a partner in Patterson Belknap’s White Collar Defense and Investigations team; he formerly served as an Assistant U.S. Attorney for the Southern District of New York.

Clint Morrison is an associate in the firm’s Litigation department; he currently serves as the secretary of the Federal Bar Council’s Public Service Committee.