United States: Charges Against Bank Workers in United States Could Represent New Frontier in COVID-19 Fraud Cases
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On September 24, 2021, federal prosecutors for the Eastern District of New York (EDNY) unsealed a criminal complaint and two criminal briefs charging three Brooklyn bank workers with conspiracy to commit bank and electronic fraud in connection with a scheme to defraud the protection of paychecks. (PPP) and the Economic Disaster Lending Program (EIDL). Both programs were created by Congress under the CARES (Coronavirus Aid, Relief, and Economic Security) law. The three employees are accused of helping to submit fraudulent PPP requests on behalf of bank customers in return for receiving “commissions” on the proceeds of fraudulently obtained loans.
Criminal charges related to COVID relief fraud are not new, but the recent EDNY case is significant because it is the first time that officials at a major financial institution have been criminally charged with such fraud. The bank itself has not been debited and is only identified as “Bank 1” in public documents.
The PPP and EIDL relief programs were expressly implemented by Congress for expediency, and claims under the programs were subject to relatively few safeguards against fraud. Unsurprisingly, therefore, programs quickly became the target of fraud and exploitation. The Pandemic Response Accountability Committee, a group of 22 inspectors general established to monitor funds dispersed under the CARES Act, has estimated that these and other federal COVID assistance programs have paid up to $ 100 billion in response to fraudulent claims. The scale of this fraud is unprecedented.
The US Department of Justice (DOJ) has reported that, so far, it has indicted more than 500 people for defrauding federal COVID relief programs. To date, however, most of these cases have focused on âclose at handâ prosecutions; uninformed fraudsters who barely concealed their fraudulent schemes. Many of these cases involve simple identity thefts or shell companies that existed on paper only for the purpose of receiving government funds. The reason for this emphasis on early enforcement is simple: Faced with limited resources and the urgent need to send a deterrent signal to the public, federal investigators and prosecutors have naturally focused on the cases they can investigate. the fastest and the easiest to prove.
In this initial effort, federal law enforcement largely viewed the banks as necessary allies in their investigations. Since the Small Business Administration (SBA) did not have the internal resources to review or monitor requests made under the PPP and EIDL relief programs, almost all of this work was outsourced to private banks. and to the suppliers who processed the requests and disbursed the funds. As a result, banks are the custodians of much of the evidence that investigators and prosecutors need to identify and prosecute individual borrowers who have defrauded federal programs. Law enforcement officials have therefore generally been reluctant to take investigative steps that would strain their relationships with banks during this first phase of COVID-related fraud prosecutions.
Many (including the authors), however, had predicted that the cooperative relationship between banks and law enforcement would change as the focus of government investigations gradually shifted from dead-end prosecutions against individual borrowers to one. more skeptical examination of how banks, third-party vendors and their employees handled requests for assistance and disbursed funds. The new EDNY charges suggest this change is starting to happen.
As this new phase of enforcement begins, we would expect a growing number of federal investigations and prosecutions against dishonest bank workers who the government says have either directly defrauded COVID relief programs or knowingly aided in ‘other people to do it. We also expect these investigations to generate more and more reviews of the internal compliance and due diligence controls that banks have in place over the conduct of their employees in administering assistance programs. federal.
Therefore, we recommend that financial institutions with banking components that have disbursed COVID assistance programs carefully review their internal compliance and control measures to ensure that loans administered under federal assistance programs have received the appropriate level of diligence commensurate with the risks inherent in these risks. programs.
Much like the coronavirus itself, federal law enforcement attention to COVID rescue fraud appears to be undergoing a series of mutations. And neither of them seems to be going away anytime soon. For more information on DOJ’s ongoing investigation into COVID relief fraud or the compliance implications for the administration of COVID relief loan programs, please contact the authors.
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