House subcommittee singles out Fintech companies, government officials and PPP lenders for roles in covid-19-related fraud | Fox Rothschild LLP

House Select Subcommittee on the Coronavirus Crisis, chaired by Rep. James E. Clyburn, released the final report of his investigation into the use and distribution of $5 trillion in federal pandemic-related aid, concluding that there has been approx. $86 billion in potential fraud identified against the Economic Injury Disaster Loan (EIDL) program alone. In the 200-page report, released on December 9, 2022, the select committee blamed a number of actors for the alleged fraud, including financial technology (fintech) companies, government officials and Paycheck Protection Program lenders.

The Department of Justice has announced the first-ever settlement with a fraudulent claims lender to resolve allegations related to the processing of a Paycheck Protection Program loan on behalf of an ineligible customer. This settlement took place shortly after the Department of Justice announced the creation of three new Strike Force teams to strengthen its existing efforts to combat and prevent covid-19-related fraud. This landmark settlement and the DOJ’s decision to create additional task forces signal the government’s intent to intensify investigations into alleged covid-19-related fraud, including the roles played by lenders, government officials and fintech companies.

The CARES Act

The Aid, Relief and Economic Security (CARES) Act, passed in March 2020, provided emergency economic assistance through PPPs in the form of forgivable loans to businesses to cover salaries and other specified expenses. Lenders who originated OPS loans were entitled to receive a flat fee from the Small Business Administration (SBA).

From the beginning, the government promised to prevent recipients from abusing CARES Act programs. While initial investigations and prosecutions focused on individuals and companies that allegedly received fraudulent loans, the Select Subcommittee’s report apparently expands potential investigations to include lenders, government officials and fintech companies.

Select subcommittee

The Select Subcommittee on the Coronavirus Crisis was established on April 23, 2020, as authorized and directed in the 117th Congress by House Resolution 935.1, and was tasked with examining the effectiveness, efficiency, and fairness of the nation’s response to the COVID-19 pandemic. The select subcommittee released 37 investigative reports and other disclosures that examined various topics, including how financial technology companies facilitated COVID-19-related fraud and ways companies prioritized profits over the health of their workers. The select subcommittee held over 40 hearings and briefings, exploring a range of issues related to the coronavirus pandemic. It was modeled after the Truman Committee, which rooted out waste, fraud and abuse during World War II.

The report

The Select Subcommittee’s report reflected findings based on a body of evidence, including first-hand accounts, contemporaneous records and expert testimony. The report highlighted that in some cases fintech companies, which were supposed to help applicants complete applications and process requests for pandemic-related assistance, instead acted fraudulently and took advantage of those in need. The government relied on unregulated, under-regulated private sector fintech companies to implement the program. The fintech companies were given extraordinary responsibility for managing the country’s largest pandemic aid program, without the necessary oversight. SBA lenders delegated applicant screening to fintech companies that claimed to use fraud-control technology, but the fintech companies failed to stop obvious and prevent fraud. Several fintech companies took billions in fees from taxpayers while apparently helping to defraud government programs.

The report also highlighted facts related to the government’s poor implementation of state aid programs. The report estimated that significant fraud, potentially amounting to tens of billions of dollars, was committed against a number of pandemic relief programs. The report further stated that government officials failed to implement basic safeguards against fraud, leaving the programs vulnerable due to poor oversight.

The report identified approximately $86 billion in potential fraud involving the EIDL program. Financial institutions submitted more than 20,000 suspicious activity reports (SARs) related to COVID-19 EIDL transactions. The Select Subcommittee also found indications that significant PPP loans were approved despite warnings that they were likely to be fraudulent. Over 11,000 applications totaling nearly $3 billion were approved despite containing inconsistent identifying information provided by companies or information indicating that companies were ineligible.

What to expect next

Fintech companies, their owners, boards and even employees can expect to be in the crosshairs of government investigations, both civil and criminal. The report suggests the Justice Department may expand its investigative focus to include fintech companies, lenders and government officials. Companies that assisted applicants with OPS loans are not immune from scrutiny. Any company concerned about potential pandemic-related fraud exposure should consult an attorney now and not wait to be contacted by law enforcement. Companies that have already received a subpoena or request from a law enforcement agency should immediately consult with an attorney who can assess the full potential for civil and criminal exposure before responding. Any employee who believes they are merely a witness may expose themselves and their employers to civil financial or criminal penalties and should consult an attorney before disclosure.

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