COVID-19 Relief Enforcement Actions Highlight Ongoing Risk

The Department of Justice (DOJ) continues to demonstrate its sustained interest in COVID-19 relief fraud as an enforcement priority and we can expect to see persistent enforcement in this area.

We’ve previously covered how the Coronavirus Aid, Relief, and Economic Security (CARES) Act created a perfect storm for enforcement: the government quickly provided trillions of dollars of aid, imposed limited conditions before distributing funds, and offered changing guidance on how monies were to be used.

To date, pandemic-related fraud cases and investigations have generally involved allegations regarding an individual’s or a company’s eligibility (or ineligibility) for a Paycheck Protection Program (PPP) loan under the relevant framework or false certifications related to a company’s application. And, the government is continuing its efforts along those lines. For example, on March 30, the United States elected to intervene in a qui tam complaint filed in the Central District of California against home health agency Allstar Health Providers, Inc. and JMG Investments, Inc. The complaint alleges, among other things, that the defendants violated the False Claims Act (FCA) by twice applying for and receiving PPP funds, despite certifying to the contrary. Allstar Health allegedly received two loans each in the amount of $150,000-$350,000, and JMG allegedly received two loans each in the amount of $350,000-$1 million. Interestingly enough, the relator’s allegations are based on information available through federal and state websites, which demonstrates how whistleblowers are utilizing publicly available data and information to identify potential targets for qui tam complaints.

And, though the government will likely still pursue cases like Allstar Health, the government is beginning to focus its efforts on more sophisticated pandemic-related fraud schemes, evidenced by the recent DOJ-Kabbage, DOJ-ReNew Health, and DOJ-CityMD resolutions.

DOJ-Kabbage Settlement. On May 13, DOJ announced its resolution with now-bankrupt fintech, Kabbage Inc. related to allegations that it knowingly submitted thousands of false claims for loan forgiveness, loan guarantees, and processing fees to the U.S. Small Business Administration (SBA) in violation of the FCA. DOJ alleged that Kabbage systemically inflated tens of thousands of PPP loans, causing the SBA to guarantee and forgive loans in amounts that exceeded what borrowers were eligible to receive under the program rules. As part of the settlement, KServicing Wind Down Corp. admitted and acknowledged that Kabbage: (1) double-counted state and local taxes paid by employees in the calculation of gross wages; (2) failed to exclude annual compensation in excess of $100,000 per employee; and (3) improperly calculated payments made by employers for leave and severance. Allegedly, Kabbage was aware of these errors as early as April 2020, yet Kabbage failed to remedy all incorrect loans that had already been disbursed and continued to approve additional loans with miscalculations.

The government further alleged that Kabbage knowingly failed to implement appropriate fraud controls to comply with its PPP and BSA/AML obligations. In particular, the United States alleged that Kabbage removed underwriting steps from its pre-PPP procedures to process a greater number of PPP loan applications and maximize processing fees.

Given that most traditional financial institutions have established BSA/AML controls (at least at the minimum level required under the PPP guidance), fintechs or nontraditional financial institutions will likely be the focus of this more sophisticated PPP-related enforcement.

DOJ-ReNew Health Resolution. Similarly, in the healthcare context, on April 26, the United States and the State of California announced a $7 million settlement with nursing home chain ReNew Health and two corporate executives to resolve allegations that the defendants abused a Centers for Medicare & Medicaid Services (CMS) COVID-19 waiver in violation of the FCA. During the pandemic, CMS waived a requirement that patients have at least a three-day hospital admission before receiving skilled nursing care. The United States and the State of California alleged that the defendants knowingly misused this waiver by routinely submitting claims for nursing home residents – and receiving higher reimbursements – when they did not have COVID-19 or any other acute illness or injury, but merely had been near other people who had COVID-19. The ReNew Health resolution simply demonstrates how pandemic-related enforcement can take many forms—no industry is immune from this enforcement priority.

DOJ-CityMD Resolution. Finally, on June 7, DOJ announced a $12 million settlement with City Medical of the Upper East Side PLLC, Summit Medical Group, P.A., Summit Health Management, LLC, and Village Practice Management Company, LLC (altogether CityMD) to resolve allegations that they violated the FCA by submitting false claims for payment for COVID-19 testing to a Health Resource and Services Administration (HRSA) program for uninsured patients. The government alleged, among other things, that CityMD failed to adequately confirm whether individuals had health insurance before submitting their claims to the uninsured program. Notably, CityMD received credit in the settlement under DOJ’s guidelines for making a voluntary disclosure, cooperating, and remediating the conduct.

Takeaways

Organizations can draw a few key takeaways from these recent enforcement actions:

• The government will likely continue to pursue pandemic-related enforcement of more sophisticated pandemic-related fraud schemes. In particular, fintechs or nontraditional financial institutions that received thousands of third-party subpoenas should consider whether there were systemic issues involving the eligibility of their borrowers.
• Given this focus, an organization may consider engaging in a targeted review to confirm the eligibility of its borrowers and whether its BSA/AML controls were adequate, especially where the government has investigated a large volume of its borrowers.
• More importantly, across industries, companies defending these matters should consider whether DOJ has satisfied its materiality, falsity, and scienter requirements given that most of the alleged misconduct occurred in the midst of an uncertain regulatory landscape.
• Further, where the misconduct (or at least some misconduct) is clear, companies may consider disclosing, cooperating and remediating the conduct, as appropriate.

We have covered developments in enforcement related to COVID-19 relief in 2021, 2022 and 2023. For more information about these actions, subscribe to this blog or contact a member of the Bass, Berry & Sims Compliance & Government Investigations practice.