How to Know the Government Is Investigating You or Your Company in Connection with COVID Relief Funds

By Merle M. DeLancey Jr.Craig Stetson*, and Jennifer A. Short

In our previous blogs, we discussed the multiple government enforcers and regulators charged with authority to oversee the application, eligibility, and use of COVID relief funds. Here, we address how to know whether you or your company is under investigation or review or being considered for same. Sometimes it is obvious—for example, when the Federal Bureau of Investigation (“FBI”) along with other agencies raid your offices. Other times, the signs are subtle. 

The federal government has an arsenal of tools it uses to gather information for investigations and audits. These tools are not new and are not specific to COVID relief funds. However, some of the “new” entities created by COVID relief legislation (e.g., the Special Inspector General for Pandemic Recovery (“SIGPR”)), as well as the coordination of agency inspectors general on the Pandemic Response Accountability Committee (“PRAC”)), can use those same old tools to hone in on recipients of COVID-related funding.

Below are some practical tips to understand whether you are being investigated based upon investigative tools used by the government. 

Continue reading “How to Know the Government Is Investigating You or Your Company in Connection with COVID Relief Funds”

Paycheck Protection Program Audits Are Upon Us—Borrowers Prepare!

Merle M. DeLancey Jr., Craig Stetson*, and Jennifer A. Short

In our last post on this topic, we touched on how the acceptance, use, and forgiveness of Paycheck Protection Program (“PPP”) loans can be viewed in the context of a Defense Contract Audit Agency (“DCAA”) audit. This post focuses on audits and investigations involving PPP loans. Close scrutiny of PPP loans is not a prediction; it is reality. The Small Business Administration (“SBA”) has announced it will audit all PPP loans in excess of two million dollars following a lender’s submission of a borrower’s loan forgiveness application, and it reserves the right to “spot check” any PPP loan of a lesser amount at its discretion. The Department of Justice has already charged multiple individuals with PPP fraud. And this is just the beginning of what many think will be a tidal wave of enforcement activity involving PPP loans.

Overview of the PPP

The PPP is the largest relief measure for small businesses under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The government has made available nearly one trillion dollars in PPP relief funds through four separate funding measures ($349 billion via the CARES Act; $310 billion via the PPP and Health Care Enhancement Act; $284 billion via the Consolidated Appropriations Act of 2021; and $7.25 billion via American Rescue Plan Act of 2021).

The PPP makes available guaranteed SBA loans to small business that meet certain eligibility requirements. In addition, PPP loans can be forgiven fully if used properly to cover specified business expenses such as payroll, rent, utilities, mortgage interest, and other limited uses. As of April 11, 2021, the SBA had approved more than 9.5 million loans totaling more than $755 billion using more than 5,400 lenders.

Continue reading “Paycheck Protection Program Audits Are Upon Us—Borrowers Prepare!”

COVID-Related Audits and the DCAA’s New Audit Direction

Merle M. DeLancey Jr. and Craig Stetson*

This is the third in a series of posts regarding what we believe will be an onslaught of government investigations and audits of COVID relief funds and contracting. Previously, we identified likely categories of programs, contracts, and companies the government might investigate or audit. Below, we discuss the Defense Contract Audit Agency’s (“DCAA”) current direction, interests, and initiatives related to contractors’ receipt of COVID relief funds and the impact an uncertain business environment may have on government contract pricing and costing forecasts.

COVID Relief Funds

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) funding opportunities come with unique government contract compliance requirements and financial reporting obligations. The funding is not “free” and may result in financial consequences to unwary contractors. DCAA knows this and will be conducting audits to test contractors’ compliance with unique relief fund requirements. Contractors unaware of these accounting and reporting requirements risk DCAA questioning or denying costs.

In January 2021, DCAA issued an audit alert to its regional offices pertaining to COVID relief legislation and regulation.[1] The audit alert includes frequently asked questions and answers (“FAQs”) concerning contractors’ request or receipt of COVID relief funding. Originally released last summer, the FAQs have been revised and expanded several times. The FAQs telegraph DCAA’s position on various instances where COVID relief funding intersects with or impacts government contract cost accounting and compliance.

Continue reading “COVID-Related Audits and the DCAA’s New Audit Direction”

The Likely Targets of COVID-Related Audits and Investigations

Merle M. DeLancey Jr. and Craig Stetson*

This is the second in a series of posts regarding what we believe will be an onslaught of government investigations and audits of COVID relief funds and contracting. Previously, we identified the government offices that will be conducting the investigations and performing the audits. Below, we identify three categories of programs, contracts, and companies we believe are more likely to be investigated or audited.

Programs/Contracts

The first group of companies ripe for audits are those accepting COVID relief funding and contractors performing large COVID-specific contracts, as well as contractors performing traditional government contracts that entail certain COVID-related twists impacting performance.

Companies accepting COVID relief funds are likely at the top of auditors’ lists for several reasons. First, because of the magnitude of funds at issue. Second, due to the complex and ambiguous eligibility, use, and reporting requirements. For example, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and supplemental legislation appropriated funds to reimburse eligible healthcare providers for healthcare-related expenses or lost revenues attributable to COVID. Receipt of funds was easy. Most recipients’ funds were automatically deposited into their bank accounts. But healthcare provider recipients have not yet been required to file reports attesting to the proper utilization of the relief funds. Relief funds recipients in other non-healthcare industries may also be affected. Certain monies received under the CARES Act also involve ongoing and downstream reporting requirements by companies regarding statutory limitations on compensation paid to certain employees and the receipt of a variety of potential tax credits. Thus, recipients’ use of funds has not been tested, and it is unlikely that all usage has been in compliance with the ambiguous requirements and multiple rounds of agency guidance and interpretations.

Continue reading “The Likely Targets of COVID-Related Audits and Investigations”

COVID Audits and Investigations: The Enforcers

Merle M. DeLancey Jr. and Craig Stetson*

This is the first in a series of blog posts concerning the audits and investigations related to the contracts and grants awarded, and relief funds provided, in response to the COVID-19 pandemic. As of February 2021, pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which created the Paycheck Protection Program (“PPP”) and supplemental funding such as the Families First Coronavirus Response Act, the United States government has made available an estimated four trillion dollars in relief funds to businesses and individuals, and the Biden administration is proposing roughly two trillion dollars more.

In addition to the relief funds, the Government has easily awarded more than billions in pandemic-related contracts for everything from vaccines to PPE to hand sanitizers. These levels of funding and spending are unprecedented and have been made at breakneck speed (for the government). Based on these factors and lessons from the past, audits of relief recipients and contractors to confirm appropriate use of government funds are inevitable. And the government has said as much. Of course, if an audit reveals potential wrongdoing or malfeasance, relief recipients and contractors should expect follow-on investigations and enforcement activity.

This first post identifies the myriad of entities that are or will be reviewing—and potentially investigating—relief recipient and contractor representations made to obtain, and subsequent use of, government funds.

Continue reading “COVID Audits and Investigations: The Enforcers”

GAO Report Suggests DOE Should Identify More Instances of Contractor Fraud

Luke W. Meier and Robyn N. Burrows

Last week, the Government Accountability Office (“GAO”) issued a report on Department of Energy (“DOE”) contracting, Improvements Needed to Ensure DOE Assesses Its Full Range of Contracting Fraud Risks. The thrust of the report is that DOE should do more to prevent and detect fraud, particularly in less-examined areas such as bid-rigging, misrepresentation of eligibility, kickbacks and gratuities, and conflicts of interest.

DOE relies on contractors to carry out its missions at laboratories and other facilities, spending approximately 80 percent of its $41 billion in total obligations on contracts. In March 2017, GAO reviewed DOE’s approach to managing its risk of fraud and found DOE did not use leading practices, resulting in missed opportunities to mitigate the likelihood and impact of fraud.

Continue reading “GAO Report Suggests DOE Should Identify More Instances of Contractor Fraud”

What Qualifies as a “False” Claim? Supreme Court May Clarify

Luke W. Meier and Carolyn R. Cody-Jones

Until recently, it was well-accepted that a violation of the False Claims Act (“FCA”) occurs only when there is a misrepresentation that is objectively false. Four circuits—the Fourth, Seventh, Tenth and Eleventh—had adopted this “objective falsity” standard. In March 2020, however, the Third and Ninth Circuits issued decisions departing from this view, holding that objective falsity is not required and “legal falsity” can suffice. These decisions created a stark circuit split with profound implications for government contractors, and there is now a pending petition to the Supreme Court to address and clarify the matter.

First, a refresher: The FCA does not define “false or fraudulent,” leaving courts to look to common law to interpret what constitutes a “false” claim. Many circuits had found that a representation must be objectively false to qualify as a false claim, meaning that a false claim cannot arise where there is a genuine dispute and a claim is alleged to be false based on a subjective assessment. The Third Circuit was among those endorsing this view, holding that under the FCA “a statement is ‘false’ when it is objectively untrue,” United States ex rel. Thomas v. Siemens AG, 593 F. App’x 139, 143 (3d Cir. 2014), and that “expressions of opinion, scientific judgments or statements as to conclusions which reasonable minds may differ cannot be false.” United States ex rel. Hill v. Univ. of Med. & Dentistry of N.J., 448 F. App’x 314, 316 (3d Cir. 2011). Continue reading “What Qualifies as a “False” Claim? Supreme Court May Clarify”

Seventh Circuit Weighs in on Government Dismissal Authority under the FCA

Sara N. Gerber

The Seventh Circuit’s recent decision in U.S. ex rel. CIMZNHCA, LLC v. UCB, Inc. widens the Circuit split on the standard of review applicable when the government seeks to dismiss a qui tam case under the False Claims Act (“FCA”). The FCA, 31 U.S.C. § 3730(c)(2)(A), provides that the government may dismiss a qui tam case without the relator’s consent if the relator is given notice and an opportunity to be heard. Although the Department of Justice (“DOJ”) has increasingly exercised its dismissal authority since issuance of the “Granston Memo” in January 2018—which encouraged DOJ attorneys to consider seeking dismissal if in the best interests of the government—as the Seventh Circuit noted, the FCA does not indicate “how, if at all,” courts are “to review the government’s decision to dismiss.” Circuit Courts have taken divergent views in answering that question.

Circuit Court Decisions

The D.C. Circuit, in Swift v. United States, 318 F.3d 250 (D.C. Cir. 2003), decided that the government has an “unfettered right” to dismiss based on the Executive branch’s “historical prerogative” to decline to prosecute a case. The Ninth Circuit, in U.S. ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), and the Tenth Circuit in Ridenour v. KaiserHill Co., LLC, 397 F.3d 925 (10th Cir. 2005), imposed a rational-relation test: the government must establish a rational relation between dismissal and the accomplishment of a valid government purpose. If the government satisfies this test, the burden shifts to relator to show that dismissal is fraudulent, arbitrary and capricious, or illegal. So far, the Supreme Court has declined to step in, denying certiorari in April 2020 in United States ex rel. Schneider v. JP Morgan Chase Bank on the question of whether the government’s dismissal decisions constitute an “unreviewable exercise of prosecutorial authority.” Now, however, the Seventh Circuit has articulated a new standard, relying on Federal Rule of Civil Procedure 41(a) governing voluntary dismissals by plaintiffs. Continue reading “Seventh Circuit Weighs in on Government Dismissal Authority under the FCA”

New DoD Cybersecurity Regulations Are Coming—Is Your Company Ready?

Michael Joseph Montalbano

In January, the Department of Defense (“DoD”) released more information on its much-anticipated Cybersecurity Maturity Model Certification (“CMMC”) framework. While a final rule is not expected until the fall, contractors need to begin preparing now so they do not miss out on DoD contract opportunities.

What Is the CMMC?

The CMMC is a certification system that all DoD prime and subcontractors must comply with to be eligible to compete for and perform future DoD contracts. Under the new CMMC requirements, an accreditation body tapped by DoD will begin training third-party assessors in the spring of 2020, who will in turn certify defense contractors under the CMMC. There will be five CMMC certification levels, of ascending sophistication:

    • Level 1 – Basic Cyber Hygiene
    • Level 2 – Intermediate Cyber Hygiene
    • Level 3 – Good Cyber Hygiene
    • Level 4 – Proactive
    • Level 5 – Advanced / Progressive

The contractor must comply with a combination of the following cybersecurity safeguards, depending on the certification level a contractor wants to achieve: (1) FAR 52.204 (Basic Safeguarding of Covered Contractor Information Systems); (2) NIST Special Publication 800-171 Revision 1 (“NIST Requirements”); (3) select subsets of a supplement to the NIST Requirements called NIST SP 800-171B; and (4) up to 171 “practices” identified in the CMMC. Though this may sound like a lot for contractors to process, DoD has released helpful appendices that put many of the requirements in easy-to-understand terms. Continue reading “New DoD Cybersecurity Regulations Are Coming—Is Your Company Ready?”

After Acetris Decision, Trade Agreements Act Compliance Questions Abound: Contractors Need Guidance

Merle M. DeLancey Jr., Jay P. Lessler, and James R. Staiger

The Federal Circuit’s recent decision in Acetris has left many contractors scratching their heads and asking questions. To recap, on February 10, 2020, the Federal Circuit held that, under the Federal Acquisition Regulation (“FAR”), to qualify as a “U.S.-made end product” under the Trade Agreements Act (“TAA”), a drug must be either “manufactured” in the United States or “substantially transformed” in the United States. (See Federal Circuit Holds Generic Drugs Manufactured in the U.S. from API Produced in India Qualify for Sale to U.S. under Trade Agreements Act (Acetris Decision).) This is a stark change from the Government’s long-held position that manufacturing and substantial transformation were one in the same.

As a result of the Acetris decision, federal contractors seeking to comply with or maintain compliance with the TAA are facing many questions. Some of the more prominent questions are below. Continue reading “After Acetris Decision, Trade Agreements Act Compliance Questions Abound: Contractors Need Guidance”