Risks of Fraud Resulting from the COVID-19 Crisis

Any financial crisis exposes companies to an amplified risk for fraud. The coronavirus (COVID-19) pandemic will not be an exception. With $2.2 trillion made available for financial relief under the CARES Act plus billions of dollars available from other agencies with little or no due diligence this risk is extraordinary. The US Securities and Exchange Commission (“SEC”) and the US Department of Justice (“DOJ”) have indicated they will be actively investigating and prosecuting COVID-19-related frauds. It is essential companies maintain strong corporate controls and procedures.

As businesses are threatened with drastic declines, accounting and other disclosure fraud will undoubtedly increase. The SEC and DOJ focused on these matters after the financial crisis and all expectations are that they will center their attention on this again in the aftermath of the current crisis.

Accounting and Financial Statement Fraud 

March 4 and 25, 2020, the SEC extended financial reporting deadlines due to COVID-19. The SEC, DOJ, plaintiff law firms and shareholders will be analyzing company filings looking for anomalies and inconsistencies. They will be reviewing any public disclosures for misrepresentations. 

Insider Trading

Communication of Material None Public Information (“MNPI”) connected to these volatile swings in the stock market will be investigated. Correspondence between the C suite, analysts and significant shareholders will be scrutinized.

With the remote work environment this crisis has created it is possible that employees, attorneys, accountants and other consultants could have access to nonpublic information about a company’s financial condition or future prospects. With the pressures of today some insiders may be tempted to trade on this information in advance of the public. The SEC has indicated they will pursue any such conduct through enforcement actions.

Treasury Loan Fraud

The CARES Act provides for the creation of an Inspector General position to ensure that Government funds are being used properly, and we should expect that the SEC and the DOJ will again partner with the new Inspector General to prosecute fraud related to such funds. Any company that seeks relief under this program should institute corporate controls and processes to ensure that all communications with Government representatives are accurate, and that the company complies with the requirements of the relief program.

The Economic Injury Disaster Loan, however, indicates the SBA is relying upon a self-certification contained in the application to verify that the Applicant is an eligible entity to receive the advance. This self-certification while under penalty of perjury, is an invitation to commit fraud. 

The Need for Corporate Focus on Internal Controls

Corporate management teams are currently creating new, and adjusting old initiatives to stabilize and secure the future of their organizations. Accurate and timely reporting of financial performance will be challenging with daily news reports affecting supply chains, the customer base, costs and revenue. While maintaining operations are critical, management should not neglect corporate internal controls and compliance. If companies hope to mitigate the risk of fraud they need to stay focused on fraud related preventive measures.

According to the Government Accountability Office, during the first six months following Hurricane Katrina, FEMA provided between $600 million and $1.4 billion of improper and potentially fraudulent financial assistance. Fraudsters took advantage of available monies and lack of oversight. Fortunately, fraud mitigation improved dramatically after Hurricane Sandy as a result of additional oversight and lessons learned.

Katrina funding pales in comparison to what the government will ultimately disburse related to COVID -19. The complexity and magnitude of the stimulus requires focus on oversight. An oversight body with the ability to use data analytics will be essential to unearth anomalies. Unusual patterns, inconsistent information, questionable addresses and other outliers will lead to a lazar focus within a massive collection of data.

Past practices properly implemented should provide economic relief to millions of Americans while limiting our exposure to fraud. In times of great anxiety and financial pressure people will rationalize that fraud is okay. With perceived opportunity they will take the risk and carry out the fraud. Strong controls will keep many from taking the leap. If Congress does not act to institutionalize oversight into COVID-19 stimulus, money will be wasted and many who are in need will not get the assistance they truly require.