Oversight of the CARES Act: Regulatory and Litigation Issues to Consider

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27 in order to address the economic crisis caused by the COVID-19 pandemic. At a price tag of $2 trillion, it provides the largest congressional stimulus package in U.S. history, including up to $349 billion in forgivable small business loans and up to $500 billion in loans, loan guarantees and other investments from the Treasury Department to states, municipalities and eligible businesses including airlines and national security companies. While the CARES Act will inject hundreds of billions of dollars into private businesses, it also imposes robust government oversight and enforcement mechanisms designed to police compliance with the CARES Act’s conditions. These measures are similar in many ways to those that Congress enacted as part of the stimulus initiatives following the 2008 financial crisis, including the Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program (TARP). TARP injected $700 billion into the U.S. economy to stabilize troubled banks and financial institutions.^[1] History teaches us that recipients of federal funding under the CARES Act will likely be subject to aggressive scrutiny reminiscent of the vigorous oversight of government aid under TARP.

Oversight under the CARES Act

The CARES Act establishes multiple layers of oversight in the form of three separate bodies: (1) the Pandemic Response Accountability Committee (the Committee); (2) the Office of the Special Inspector General for Pandemic Recovery within the Treasury Department (the Special Inspector General); and (3) the Congressional Oversight Commission.^[2]

The Committee has the broadest oversight and enforcement powers under the CARES Act, and will be established within the association of all federal inspectors general, the Council of Inspectors General on Integrity and Efficiency. It will be chaired by Glenn Fine, acting inspector general of the Department of Defense, who will oversee a board of fellow inspectors general, each responsible for monitoring his or her respective departments.^[3] The Committee is specifically tasked with “detect[ing] and prevent[ing] fraud, waste, abuse, and mismanagement; and mitigat[ing] major risks that cut across programs and agency boundaries.”^[4] It will have authority to conduct its own independent investigations and audits, including broad power to subpoena the testimony of individuals in or outside the government, and may refer matters to the Department of Justice (DOJ) for criminal or civil investigation. It is required to submit twice-yearly reports to Congress, which has dedicated $80 million to the Committee, and it will terminate on Sept. 30, 2025.

The Office of the Special Inspector General for the Pandemic Recovery is an independent oversight body established by the CARES Act, and will be appointed by the president with the consent of the Senate. The Special Inspector General 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” under the CARES Act.^[5] The CARES Act imposes specific conditions on such aid recipients, including limits on dividend payments, stock repurchases and executive compensation that the Special Inspector General will undoubtedly police. The Special Inspector General will also have subpoena power and the authority to refer matters to the DOJ or other agencies for prosecution, and is required to file quarterly reports with Congress regarding the nature of loans, as well as to report the refusal of government agencies to comply with requests for information. The office has a $25 million appropriation and will terminate five years after the CARES Act’s enactment.^[6]

The third enforcement body under the CARES Act, the Congressional Oversight Commission, will consist of five members selected by bipartisan leadership from both the House and the Senate. It is charged with oversight of the implementation of the CARES Act’s stimulus package by the Treasury Department and Federal Reserve Board, and with assessing its effectiveness. The Congressional Oversight Commission will have significant authority to hold hearings, take testimony and receive evidence from federal agencies. It is required to submit monthly reports to Congress on the impact of the CARES Act, and will also terminate on Sept. 30, 2025.^[7]

Enforcement lessons from 2008

The Special Inspector General’s office parallels the creation of the Office of the Special Inspector General of TARP (SIGTARP) following the 2008 financial crisis, a new federal law enforcement agency that was designed to target financial crime related to TARP.^[8] SIGTARP remains active to this day, and its investigations have resulted in 381 criminal convictions and the recovery of over $11 billion.^[9] For example, SIGTARP investigated TARP recipient General Motors for allegedly concealing an ignition switch defect for years from consumers and regulators; the investigation resulted in criminal charges and a $900 million penalty in 2015.^[10] Given SIGTARP’s enforcement activities over the past 12 years, it is foreseeable that the Special Inspector General will aggressively pursue any alleged wrongdoing related to the expenditure of CARES Act funds, and that civil enforcement will be heavily policed. Indeed, Attorney General William Barr has directed the DOJ to “prioritize the detection, investigation, and prosecution of illegal conduct related to the pandemic,” as the DOJ recently filed its first COVID-19 fraud enforcement action against the operators of website coronavirusmedicalkit.com for engaging in a wire fraud scheme involving the sale of fraudulent vaccine kits.^[11] Recipients of CARES Act funds might expect even greater investigation and prosecution of fraud and self-dealing than under TARP, especially given that TARP expenditures pale in comparison to the CARES Act’s record-breaking commitment of $2 trillion in federal assistance.

Companies should also expect an increased focus on false certification False Claims Act (FCA) cases under the CARES Act, reminiscent of the government’s vigorous pursuit of FCA claims targeting entities that benefited from government spending following the 2008 financial crisis. Similar to TARP, applicants for financial relief under the CARES Act will be required to make numerous certifications in order to be eligible for the federal aid. Depending on the applicant and the relief requested, eligible businesses must certify, for example, that a majority of their employees are based in the U.S., that they are not in bankruptcy, that they will retain at least 90 percent of their workforce at full compensation and benefits through Sept. 30, 2020, and that they will refrain from outsourcing or offshoring jobs for two years following the term of the loan, among other certifications.^[12] Such statements, if knowingly false, could expose a company to liability under the FCA pursuant to 31 U.S.C. § 3729(a), and criminal liability pursuant to 18 U.S.C. § 1001, and should be closely scrutinized before government submission. Additionally, outside of the CARES Act’s enumerated exceptions, small businesses seeking loans must still abide by Small Business Administration (SBA) requirements to aggregate their employee headcounts or revenues with those of their affiliates to determine whether they are eligible.^[13] Companies should therefore familiarize themselves with SBA affiliation rules and the CARES Act’s limited exceptions before seeking such loans. Indeed, DOJ has stated that it is “committed to pursuing … violations disclosed by whistleblowers under the False Claims Act, especially during this critical time as our nation responds to the outbreak of COVID-19.”^[14]

Finally, the Congressional Oversight Commission established by the CARES Act is likely to operate in a similar manner as the Congressional Oversight Panel, another previous oversight body established in 2008 to oversee TARP. The Congressional Oversight Panel, led by now-Senator Elizabeth Warren, was empowered to hold hearings, review official data and rigorously investigate the effectiveness of TARP funds on the economy.^[15] In its final report, the Congressional Oversight Panel wrote that TARP left behind a “troublesome legacy: continuing distortions in the market, public anger toward policymakers, and a lack of full transparency and accountability.”^[16] But the current COVID-19 crisis presents important differences from the 2008 financial crisis. The CARES Act most notably lacks the stigma associated with TARP, which, according to some, rescued financial institutions from the consequences of their own actions. But as nearly every American has been affected by the current healthcare crisis, companies should expect that greater transparency and accountability will be demanded to ensure that the CARES Act’s funds are not misused.

While enforcement mechanisms should not discourage companies from participating in CARES Act initiatives, businesses should be careful to ensure compliance with its complex conditions. In particular, companies should consider implementing compliance procedures and controls, including the designation of an internal compliance officer, as well as seek the guidance of outside counsel to evaluate protocols, assist with vetting documentation submitted to the federal government, and mitigate risk if problems arise.

^{[1] U.S. Department of the Treasury: About TARP, https://www.treasury.gov/initiatives/financial-stability/about-tarp/Pages/default.aspx.}

^{[2] Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), H.R. 748 §§ 4018, 4020, 15010, 2020.}

^{[3] Lauren Hirsch, CNBC, Department of Defense Watchdog Will Lead Inspector General Committee for $2 trillion Coronavirus Stimulus Package (March 31, 2020), https://www.cnbc.com/2020/03/30/coronavirus-update-dod-watchdog-glenn-fine-to-oversee-2-trillion-stimulus-package.html.}

^{[4] CARES Act § 15010(b).}

^{[5] Id. § 4018(c)(1).}

^{[6] President Trump wrote in a signing statement accompanying the CARES Act that he believes the Special Inspector General needs his permission to report the blocking of requests for information by government agencies to Congress. See The White House, Statements & Releases, Statement by the President Issued on March 27, 2020, available at https://www.whitehouse.gov/briefings-statements/statement-by-the-president-38/. The president also wrote that he will treat oversight provisions requiring consultation with Congress regarding selection of executive directors of the Pandemic Response Accountability Committee as “hortatory but not mandatory,” as they intrude upon executive branch powers. Id. The effects of the signing statement on the effectiveness of the CARES Act’s oversight mechanisms remain to be seen.}

^{[7] CARES Act § 4020.}

^{[8] SIGTARP, Office of the Special Inspector General for the Troubled Asset Relief Program: About Us, https://www.sigtarp.gov/Pages/aboutus.aspx.”.}

^{[9] Letter from the Special Inspector General, SIGTARP’s Quarterly Report (Q4 2019), available at https://www.sigtarp.gov/Quarterly%20Reports/SIGTARP_First_Quarter_Report_Letter.pdf.}

^{[10] SIGTARP Press Release, Investigative Efforts Lead to Criminal Charges Against General Motors and Deferred Prosecution Agreement with $900 Million Financial Penalty (Sept. 17, 2015), available at https://www.sigtarp.gov/Press%20Releases/GM_Criminally_Charged_and_Pays_900_Million.pdf.}

^{[11] DOJ Press Release, Justice Department Files Its First Enforcement Action Against COVID-19 Fraud (March 22, 2020), available at https://www.justice.gov/opa/pr/justice-department-files-its-first-enforcement-action-against-covid-19-fraud.}

^{[12] CARES Act § 4003(3).}

^{[13] Id. § 1102.}

^{[14] Lydia Wheeler, Bloomberg News, Coronavirus False Claims Task Force Urged at Justice Department (March 17, 2020), https://news.bloomberglaw.com/health-law-and-business/coronavirus-false-claims-task-force-urged-at-justice-department.}

^{[15] Congressional Oversight Panel: About Us, https://cybercemetery.unt.edu/archive/cop/20110401223216/http://cop.senate.gov/about/.}

^{[16] Congressional Oversight Panel Press Release, Congressional Oversight Panel Releases Final Report on the Troubled Asset Relief Program (March 16, 2011), available at https://cybercemetery.unt.edu/archive/cop/20110401223120/http://cop.senate.gov/press/releases/release-031611-final.cfm.}