Every time calamity strikes, there will be people seeking to profit from it by diverting relief funds from the needy to the greedy, for example, and by exploiting the climate of fear and uncertainty that a disaster always creates. Although the US Department of Justice (DOJ) is strongly committed to cracking down on this type of fraud, its enforcement efforts are sometimes hyper-aggressive and often target innocent people.
Types of Fraud the DOJ Is on the Alert for
The DOJ is proactive in working with state and local authorities to prevent, deter, and prosecute coronavirus-related fraud. The following are some of the most common types of fraud it uncovers:
Diversion of CARES Act relief funds
The $2 trillion CARES Act was designed to keep the economy running after it was put into lockdown during the dark days of March and April 2020. Dishonest operators stole or attempted to steal billions of dollars from the federal government, especially from the Paycheck Protection Plan (PPP) program, an emergency loan fund designed to encourage small businesses to stay afloat and retain employees while business operations were suspended during the lockdown.
Some of the most common fraudulent schemes included:
- Relief petitions filed on behalf of nonexistent businesses;
- Exaggeration of payroll expenses; and
- Misrepresentation of the necessity of the loan.
The foregoing deceptions were typically provided through the use of false statements submitted under penalty of perjury. As such, the person who made these statements can be held criminally liable for any intentional misrepresentations.
Bank Negligence and Collusion
Criminals apparently exploited the banking system loopholes to steal billions of dollars from the Paycheck Protection Plan. Although the banks themselves were not directly implicated in the vast majority of these wrongdoings, many banks will undoubtedly incur civil liability for negligence.
Financial institutions sometimes submit false statements made by clients to government agencies under circumstances where due diligence would have shown these statements to be false. In some cases, this type of negligence could result in treble damages being assessed. The DOJ is currently scrutinizing banks’ distribution and monitoring of CARES Act relief funds, especially PPP funds.
Anticompetitive conduct undertaken by cooperation, among business entities that are apparently in competition with each other, is generally considered an offense against consumers because it deprives them of the benefits of competition. Three types of anticompetitive conduct were apparent in coronavirus-related relief and recovery contracts:
- Bid rigging, in which firms secretly agree on the winning bid in advance and submit their own bids accordingly.
- Price fixing, in which sellers secretly agree among themselves what prices to charge consumers. The purpose of price-fixing is to prevent prices from falling below a certain level, regardless of market conditions.
- Market allocation, in which firms secretly agree to allocate customers among themselves based on certain criteria (such as geographic area), giving each firm a monopoly over the customers assigned to it.
Since these agreements are secret, the participants defraud customers by holding themselves out as competitors, despite their agreement not to compete. They harm consumers and taxpayers by causing them to pay more for products and services and
by depriving them of other positive byproducts of true competition.
Moreover, the coronavirus-related bankruptcy of so many small businesses is putting such a small number of big players in control of various industries (retail home delivery, for example) that anticompetitive practices are likely to become easier to get away with, even when the product in question is not obviously coronavirus-related
The following consumer scams have been uncovered and/or prosecuted by the DOJ and local law enforcement agencies during the 2020 COVID-19 crisis:
- “Phishing” emails from entities posing as the WHO or the CDC;
- Bogus offers for free COVID-19 tests that solicit Medicare beneficiary information, which is then used to submit fictitious medical claims;
- Ransomware apps that purport to share coronavirus-related information but actually lock the user’s devices until they pay a certain amount;
- Appeals for donations to nonexistent charities;
- Online sale of fake cures for COVID-19;
- Fraudulent medical billing using personal information that the customer has already divulged to a trusted healthcare provider (billing an insurance company for testing that never took place, for example);
- Robocalls making fraudulent offers to sell nonexistent respirators;
- Sale of bogus testing, “cures,” and protective equipment;
- Offers requiring the submission of medical claims for unnecessary treatments;
- Threats of violence against public officials; and
- Extortion attempts based on threats to intentionally infect other people with COVID-19.
Ways to Avoid or Minimize DOJ Scrutiny
If you are concerned that you might come under investigation by the Justice Department (which can be extremely burdensome, even if you are 100 percent innocent), here are some tips for avoiding or minimizing undue scrutiny:
- Avoid acts of bad faith: You might think, since the rules for government programs such as the Paycheck Protection Plan are rather vaguely worded, that it would be relatively easy to avoid prosecution. Such is not the case, however, at least at the federal level. Federal prosecutors routinely win business fraud cases by showing bad faith behavior on the part of the defendant.
An example of how bad faith can be used against a defendant charged with violating a vaguely-worded statute is where the defendant is charged with accepting PPP loan money that was not truly “necessary” as required by the statute.
Evidence that the defendant deliberately lied or made misleading statements can be used to show the defendant’s bad faith, and thereby overcome the defendant’s objection that the word “necessary” is too vague to support a prosecution.
Any evidence, even an internal email, asserting that the company does not really need the money it is seeking can be used to support a prosecution. Do not destroy these statements – refute them on the record. Destroying such statements could result in a charge of evidence tampering.
- Avoid related party transactions and other forms of self-dealing: Just about any prosecutor will pounce on evidence that you pay yourself a salary (as an owner-employee of a one-person LLC, for example), conducted a transaction between you and your relative or between a parent company and its subsidiary, or submitted a bid that “just so happens” to fit an expected pattern of bid-rigging.;Prosecutors love to characterize these transactions as evidence of bad faith, which they can then use to prove fraud. Make sure that all such transactions are “arm’s length” and that the terms of the deal reflect this. It is best to bend over backward to avoid even the appearance of impropriety.
- Become intimately familiar with the law and keep up with inevitable changes in its interpretation and enforcement: It is easy to accidentally run afoul of the law when its terms are complex and non-obvious to begin with, and when its interpretation keeps changing. Unfortunately, ignorance of the law is no excuse – even when it should be.
If possible, designate a particular employee to be responsible for compliance issues, and make sure that he or she is well-trained (by outside legal counsel, if necessary) and that training is frequently updated.
- Carefully document any business behavior that might draw the attention of a prosecutor. Sometimes leaving a clear paper trail is your best defense. There is a huge difference between making an honest mistake and engaging in fraud. Although even an honest mistake can result in expensive civil consequences, fraud can result in treble damages, company bankruptcy, and even prison time for senior company executives.
Don’t try to reconstruct a bogus paper trail after the fact – create one as you go along. Experienced prosecutors can smell an after-the-fact concoction. Once they do, they will assume your guilt, even if you are innocent and simply desperate to clear your name.
Collect supporting evidence that goes beyond merely a written account of the actions your company took and why they took them.
Don’t do anything without considering how you would defend yourself if the action were investigated by a prosecutor. Never forget: The protest that “we acted in good faith” is not likely to be good enough to satisfy a prosecutor, because everybody says that. A strong, well thought out paper trail, however, will distinguish you from run-of-the-mill defendants.
Now Is the Time to Act Quickly and Decisively
If you suspect that you or your company might have been targeted by the DOJ in a fraud investigation, or if you are treading on dangerous ground that you believe requires the creation of a clear paper trail, don’t wait until the glue of circumstance traps you in place. A grand jury could be considering the evidence against you at this very moment, and you might never have been informed or even have the legal right to know about it. It is best to start preparing in advance.
Where criminal charges may be involved, how quickly you move, and how thoroughly you prepare a defense while you still have time, could make the difference between freedom and incarceration. If you need assistance, please do not hesitate to contact our highly-experienced defense team:
Contact the trusted criminal defense legal team at E. Stewart Jones Hacker Murphy for a free initial consultation by filling out our online contact page or by calling one of our offices in Albany, Colonie, Schenectady, Saratoga, or Troy. We’re ready to fight for you!