In response to the most significant public health crisis in a generation, the federal government has appropriated billions of dollars in new spending aimed at providing relief to individuals, businesses and governmental entities reeling from economic impact of this pandemic. With additional relief bills expected, the total amount of increased federal spending could ultimately exceed $3 trillion, more than one-half of the federal government’s annual budget. With such a dramatic increase in government spending will come a correspondingly significant increase in the federal government’s oversight of how this money is spent. We’ve already heard stories of the government calling on large entities that availed themselves of Paycheck Protection Program (PPP) loans to return funds, and recently released guidance from the Small Business Administration makes clear that borrowers must certify “in good faith” that their PPP loan request is necessary. Government scrutiny will undoubtedly escalate as it seeks to recover some of the money it has given out, and is sure to include robust efforts to uncover and, where appropriate, prosecute individuals and companies who obtained funds through fraud. On the frontlines of this effort will be the federal inspectors general, including one specifically empowered by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The Federal Inspectors General
With the Inspector General Act of 19781 (“the IG Act”), Congress created the first federal inspectors general (“IGs”) in 12 of the major federal government departments, charging them with rooting out corruption and making government more efficient, honest and accountable. Since that time, the IG Act has been amended to expand the number of IGs, bringing today’s total to more than 70 across the federal government. In addition, other “special” IGs (“SIGs”) have been created by Congress in response to specific contingencies. The newest such SIG was recently created by the CARES Act, intended to provide relief to individuals, small and large businesses, and state, local and tribal governments Specifically, Section 4018 of the CARES Act establishes within the Treasury Department a Special Inspector General for Pandemic Recovery (the “SIGPR”). The law empowers the SIGPR to “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,” and gives this new SIG all the powers listed in Section 6 of the IG Act, including the power to issue subpoenas and to obtain information from federal agencies. In addition to creating the new SIGPR, the CARES Act provides significant budget increases for certain existing offices of inspector general (“OIGs”) in relevant departments and agencies including the Department of Health and Human Services (“HHS”), which has already updated its “work plan” to account for COVID-19-related audits and other reviews.
The CARES Act also created the Pandemic Response Accountability Committee (“PRAC”) composed of several OIGs to “promote transparency and conduct and support oversight of covered funds.” The PRAC is a committee of the Council of the Inspectors General on Integrity and Efficiency (“CIGIE”), an independent entity established by the IG Act, and is presently composed of 20 IGs representing the departments and agencies involved in the CARES Act spending.
The IGs’ Authority and Scope of Activity
While the IG Act, as amended, provides that the IGs are to operate under the “general supervision” of the head of the department or agency in which they are embedded, the IGs also report directly to Congress. In practice, the IGs operate with a considerable amount of independence. Over the years, the IGs have evolved into significant players in the overall federal law enforcement effort, especially as it relates to investigating waste, fraud and abuse in government programs.
The work performed by the IGs typically includes audits, inspections and investigations. These first two categories are generally inward-looking, in that the “target” of the audit or evaluation is typically a program or activity that exists within the relevant department or agency itself, and are generally planned in advance with the cooperation of agency management. OIG investigations are very different from audits or inspections in that they often target persons and entities outside of the agency, including government contractors and others that do business with the government as well as recipients of government grants and other beneficiaries of government programs. OIG investigations are particularly serious in terms of potential legal exposure for individuals and businesses.
How OIG Investigations Work
Each federal OIG has an investigations division that includes a team of special agents that receive the same or similar training as their counterparts in the other, more well-known investigative agencies such as the FBI, Secret Service, ATF and DEA. These special agents carry badges and firearms and are considered to be full-fledged federal law enforcement officers. The number of special agents within a particular OIG corresponds roughly to the overall size of the office and of the parent agency. No matter the size of the OIG, the legal authority with which OIG agents conduct investigations is essentially the same. They are all federal law enforcement officers duly authorized to have full access to any records, reports or other materials necessary to investigate allegations of fraud or abuse concerning their respective agency’s programs and operations.
An OIG investigation typically begins with the receipt of a complaint or other information suggesting a possible violation of federal law, relevant regulations or other applicable rules. The number of anonymous complaints received by OIGs has increased in recent years in part because of regulatory changes that now require government contractors to develop a corporate ethics policy that compels the reporting of unethical conduct to the relevant OIG. Complaints about contractors made by competitors and inquiries initiated by Congress are also common sources of OIG investigative leads.
OIGs generally conduct three types of investigations: administrative, civil and criminal. Investigations often fall into more than one of these categories. Increasingly, the focus of OIG investigations is on persons or entities who are outside the agency, but have, by way of contracts or other connections, a relationship with the agency that brings them within the OIG’s jurisdiction. These investigative targets can include vendors who sell goods or services to the agency, entities that bill the agency for providing services to third-party beneficiaries, persons or entities who receive grant money from the agency, or others who receive benefits under programs administered by the agency.
Typically, upon the receipt of a complaint or other indication of wrongdoing, the OIG will open a file and develop an investigative plan. This is usually done in consultation with the OIG’s internal legal counsel, and sometimes in cooperation with attorneys from the U.S. Department of Justice (“DOJ”). The typical investigation then starts with witness interviews and document requests. At some point, if the OIG concludes that it has discovered evidence of criminal wrongdoing or a civil violation, it will refer the matter to DOJ and, specifically, to the U.S. Attorney’s Office in the federal district in which the investigation is taking place. If the DOJ declines a referral by an OIG, the OIG will then typically continue with an administrative investigation, which may lead to administrative or civil penalties, such as the termination of employment of an agency employee, debarment of a contractor, or demand for return of improper payments. With increasing frequency, however, the size and importance of the matters being investigated by the OIGs are such that DOJ is interested and is willing to accept them for prosecution. Indeed, in fiscal year 2017 alone, OIG investigations resulted in the filing of criminal charges in nearly 5,000 cases.2
Responding to an OIG Investigation
The first thing that anyone involved in an OIG investigation should do is retain experienced counsel to assist in navigating the process. And, the first thing that counsel should do is determine the client’s status in the eyes of the investigators. In other words, it is important for counsel to determine whether the government views the client as a witness, a subject, or a target of the investigation. While it is far more unusual for a client to become a subject or target of such an investigation, the client’s status should not be taken for granted. It is important, and entirely appropriate, for counsel to engage the investigators and/or prosecutors immediately in an effort to clearly determine the client’s status. A company’s (or company employee’s) status as a witness is not likely to cause a corporate entity to do more than ensure cooperation, pursuant to counsel’s advice, with the investigation. However, if the company or one or more of its employees is viewed as a subject or target by the investigators, the company may have additional obligations that flow from that fact, including disclosure of the matter to the board of directors, shareholders and/or the public; conducting an internal investigation; the creation of a special committee of the board; and the retention of separate counsel for employees implicated in the investigation. Whether any of these extraordinary steps needs to be taken as a result of the government investigation is something that should be the subject of close consultation between the company and counsel experienced in such matters.
Possible Enforcement Priorities for the PRAC and SIGPR
Once it is stood up, the new SIGPR is likely to follow the lead of the past special IGs created to oversee specific government initiatives. In this case, that means a focus on conduct related, directly or indirectly, to the disbursement and use of CARES Act funds. Likely examples of this type of conduct include: (1) false statements or other fraud in connection with applications for funding; (2) misuse of funds obtained as part of these new programs; and (3) fraud by third parties targeting those seeking to apply for funding under these new programs. Much of the investigative activity by the SIGPR is likely to be the product of robust auditing of these new spending programs done of auditors within SIGPR or at other federal agencies. One particular focus of auditing and investigative work will likely be the “good faith certifications[s]” required by many of these new programs, as the U.S. Treasury Secretary Steve Mnuchin has promised “severe consequences” for people who don’t properly attest to these certifications. Whistleblower complaints will also likely make up a significant portion of this new IG’s workload. As discussed above, any individual, business or other organization that finds itself on the receiving end of an SIGPR inquiry should take it seriously and react in the same way that it would upon hearing from any other federal regulator or law enforcement agency.
Conclusion
The federal OIGs are bigger and busier than ever, and with the creation of the PRAC and the new SIGPR, are poised to very aggressively purse waste, fraud and abuse related to the increased government spending occasioned by the current pandemic crisis. As OIGs continue to play a more active role in criminal investigations of all types, individuals and companies who are beneficiaries of government programs like those created or expanded by the CARES Act are likely to encounter an OIG investigation, and they and their counsel need to be ready. Developing sound policies and procedures, and ensuring that key employees are aware of their, and the company’s, rights and responsibilities when faced with an informal request, a subpoena or a search warrant from an OIG is essential to accomplishing the dual goals of adequately cooperating with the government and not waiving important rights that a company and its employees might have. This response should, first and foremost, include retaining counsel experienced in handling OIG investigations.
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1 See, generally, 5 U.S.C. App. 3.
2 See Council of the Inspectors General on Integrity and Efficiency 2018 Annual Report (www.ignet.gov).