Alert 04.09.20
Treasury and Fed launch $600 Billion Main Street Lending Program
Loans of $25 million to $150 million now available for mid- to large-sized businesses
Alert
04.28.20
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2 trillion stimulus package designed to address the widespread economic disruptions caused by the COVID-19 pandemic by establishing lending programs: (i) Paycheck Protection Program, (ii) an expanded version of the Economic Injury Disaster Loan Program, and (iii) the Main Street Lending Program (collectively, the “SBA and Treasury Loan Programs”). Businesses taking advantage of the financial relief being distributed should do so thoughtfully and set up systems to address the commitments being made and avoid unintended consequences.
Legal and compliance teams should be alert for the obligations organizations will assume through their acceptance of CARES Act relief, including documented proper use of loan proceeds in accordance with the applicable regulations. A chart outlining some of these obligations is included in this alert. Anticipating the heightened risk of fraud and abuse due to government funds being distributed quickly, the CARES Act established several oversight bodies including the Special Inspector General for Pandemic Recovery, the Pandemic Response Accountability Committee and a Congressional Oversight Commission. In addition, normal oversight bodies, including the U.S. Department of Justice and the Government Accountability Office, have indicated that they will prioritize investigation and oversight of federally backed loans.
The SBA and Treasury loans come with a variety of specific obligations and use restrictions outlined below for which existing compliance programs should be updated to address. Companies should assess their program and compliance controls in anticipation of questions and reporting obligations regarding their use of federal funds to document their compliance with these obligations as well as the company’s compliance with other legal and regulatory requirements. Borrowers should review their overall compliance programs to establish or confirm documented controls adequate to ensure overall good corporate stewardship to prevent fraud and abuse throughout the organization.
Following the 2008 financial crisis, government distributed stimulus funds under the Troubled Asset Relief Program (TARP) were subject to similar oversight overseen by Neil M. Barofsky, the Special Inspector General for TARP (SIGTARP), and Elizabeth Warren, Chair of the Congressional Oversight Program, both of whom conducted thorough investigations that were the subject of significant public attention. As will be true with respect to CARES relief, companies were subject to reporting, audit and numerous DOJ and Congressional Investigations. Corporate missteps for violating the terms and limitations of TARP or other transgressions were publicly reported and investigated. From its establishment in 2008 through September 2019, SIGTARP investigations for fraud and misconduct relating to TARP payments resulted in the government recovering $11 billion from recipients and bringing over 400 criminal charges against individuals. The investigations (and in many cases criminal convictions) have ranged widely from expected mortgage fraud cases, corruption investigations relating to the distribution of stimulus money and investigations into company’s executive compensation to money laundering investigations and securities violations and even investigations into decisions by General Motors and Chrysler to eliminate dealerships. These investigations have also been subject to numerous Congressional reports, hearings and investigations. Failure to have adequate controls may expose the company to investigations, public scrutiny, fines and penalties
Corporations can avoid missteps that will result in these types of pitfalls by taking steps now. All corporate actions and decision making could be subject to examination and scrutiny for companies that receive a public “bailout,” and businesses should implement internal compliance and fiscal controls to prevent fraud, abuse and improper activities. Companies must also take steps to understand and incorporate the limitations and obligations arising from the CARES Act stimulus into these controls.
A compliance program to establish these important controls should meet the standards established by the U.S. Department of Justice Criminal Division Evaluation of Corporate Compliance Programs. This would include:
Companies that have or are considering CARES Act funding should ask themselves a couple key questions:
Asking these questions can help to define the work you have ahead. Consider an assessment of your program and the current risks. Creation of an effective compliance program that addresses all legal and regulatory risks can help avoid some of the missteps that companies made after receiving TARP relief and help preserve your company legally and reputationally through this crisis and beyond, reducing the possibility of resulting liabilities.
For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.
Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.