By David Robbins

Law360 (May 1, 2020, 5:07 PM EDT) --

David Robbins

While the coronavirus lockdown and resulting government stimulus are as novel as the virus's name, substantial numbers of audits and investigations in the coming months are entirely predictable.

The same pattern has repeated itself time and again following natural disaster recovery efforts, massive economic stimulus, overseas contingency operations in disaster areas and warzones, and more. The initial heavy spend designed to address crises and provide necessary services eventually pivots to oversight measures and questions about why things were not done differently.

The pattern is repeating itself with the COVID-19 stimulus. Because future audit and investigation risk is very high, and the paths those reviews will take are known, government contractors are at an advantage. They can plan now for how to reduce risk as their businesses reopen.

In the current economic climate, it is natural for companies to focus on their immediate survival. How to get employees transitioned to work-from-home, how to handle classified work, how to keep revenue flowing during the stand-down period, and how to maintain operations in a ready state are pressing questions requiring attention now.

To its credit, the government worked very hard to push liquidity to contractors including through Coronavirus Aid, Relief, and Economic Security, or CARES, Act and its Section 3610 billing and Paycheck Protection Program provisions, and many other methods.

Government guidance is still catching up, helping industry interpret CARES Act language long after the submission of initial PPP applications and Section 3610 invoices. But this creates substantial risk for government contractors and recipients of federal funds: Contractors may have submitted initial applications and invoices with one interpretation of why they were compliant, but later guidance may cast doubt on the analysis.

Investigation and Audit Risk, by the Numbers

The CARES Act set forth a multilayered oversight approach with, among other things, existing congressional committees, special congressional committees, committees of inspectors general, a special inspector general, special audits, and the government's normal oversight, audit, and investigation apparatus.

This approach is not surprising given the size and scale of the economic stimulus. Indeed, the stimulus is 20 times larger than the spend to recover from Hurricanes Katrina and Rita, which spawned the following in just the first year after the storms according to various U.S. Government Accountability Office reports:

• 261 defendants charged in 218 cases across 24 judicial districts;
• 219 open investigations;
• 44 convictions;
• 465 government auditors reviewed 6,665 government contracts covering $10 billion in value.

Multiplying those numbers by 20 to scale up to the size of the initial CARES Act gives a sense of the staggering audit and investigation risk stimulus fund recipients face.

Enforcement Risk

A number of those audits and investigations are bound to ripen into full blown enforcement actions. Many of the government's frequently used enforcement tools will be evident in those cases.

For example, the civil False Claims Act as it is among the government's most used tools for recovering money for civil fraud committed against the government. The statute punishes the knowing submission of a request or demand for payment to the U.S. government when that claim is supported by a false statement or a failure to inform the government of the truth of a matter, and the false statement or omission is material to the government's decision-making.

False claims can be punished by trebling the amount at issue and adding a penalty that can reach higher than $20,000 per claim (e.g. per invoice).  

How Can Contractors Protect Themselves

The words "knowing" and "material" are present in many of the government's primary fraud enforcement statutes and will be critical for contractors in the coming months.

The "knowledge" element of the False Claims Act ranges from deliberate ignorance, to willful blindness, to actual. It is also judged in hindsight by government investigators with the benefit of 20/20 hindsight, long after the crisis period has passed. Well-meaning as they may be, these investigators will not have gone through the struggle of keeping a business running through the current crisis. They will not have felt the same pressures. And their job descriptions are to build cases when appropriate.

Given the history of similarly significant events, contractors face substantial risks and the government will investigate and bring thousands of enforcement cases. Contractors will not receive special treatment simply because of the special circumstances of the COVID-19 shutdown.

In this regard, proper documentation is vitally important. Recipients of federal funds should be able to document:

• Their process for determining eligibility;
• The veracity of all statements made in the application;
• The process used to determine whether the company could make any required certification; and
• Their efforts to monitor government guidance and interpretations and assess whether the company believes it continues to qualify for aid (e.g. is it an intended recipient, did it follow all procedural requirements, etc.)

If these documents were not created or gathered at the time of application or invoicing, then contractors should consider documenting their analysis as soon as possible, with the assistance of counsel. Depending on results, among other things, disclosure to the government may be warranted or helpful.

The "materiality" element of the False Claims Act comes into play when there has been a statement that the government may eventually argue was less than fully truthful. Materiality is a measure of how important the false statement was to the government.

Contractors may wish to discuss with counsel how materiality is impacted by disclosing mistakes made in applications for stimulus funds, or discussing the effect of changing government guidance regarding key stimulus provisions. These sorts of discussions carry risk, but if done completely and correctly, the results of the discussion may be probative of a lack of materiality.

Five Steps Every Contractor That Received Stimulus Funds Should Consider Taking, and When

1. Aggregate and maintain contemporaneous documentation that supports eligibility — as soon as possible.

2. Set aside resources to review (or re-review) eligibility for aid — shortly after business reopens, or before new applications are filed (whichever is sooner). Consider whether to conduct the review with the benefit of legal counsel and appropriate legal privilege.

3. Discuss with counsel whether any disclosure or supplemental explanation to the government is necessary or would be helpful — after conducting review discussed in immediately above.

4. Devote resources to monitor government guidance on an ongoing basis, and evaluate whether any new guidance may cause future audits or investigations to question eligibility — start soon. Discuss any changes with counsel.

5. Given the risk of future enforcement actions, consider using counsel to vet any future government reviews, audits, questions, etc., to avoid inadvertently escalating the matter — any time a question arises, or the company is required to issue a report to the government.

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David B. Robbins is a partner at Crowell & Moring LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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