Over the last several days, speakers from the Department of Justice (“DOJ”), Securities and Exchange Commission (“SEC”), and Federal Bureau of Investigation (“FBI”) participated in a number of virtual conferences to discuss the status and direction of current and future government enforcement and investigations. Their conversations included highlighting ongoing priorities and developments from the COVID-19 crisis, and to set expectations for individuals and companies who may find themselves under investigation. While the virtual setting was unusual, the takeaways from these and other government pronouncements were clear: criminal and SEC enforcement matters will continue – and likely increase – over the coming months.
Speakers included: the Chief and two Senior Deputy Chiefs of the Fraud Section in the DOJ’s Criminal Division; the Chief of the SEC’s FCPA Unit; and the Chief of the FBI’s International Corruption Unit.
The discussion provided insight into the Government’s investigatory approach and priorities. Speakers emphasized the following:
- With respect to the DOJ Fraud Section’s additional priorities in connection with COVID-19, Robert Zink, Chief of the Fraud Section, cited: prosecutions for fraud in connection with stimulus monies related to the Paycheck Protection Program (“PPP”); healthcare fraud in connection with the provision of services; and product and market-based conduct related to COVID-19. He noted that there have already been several fraud cases filed around the country related to PPP fraud.
- COVID-19 is expected to “drive” the Health Care Fraud Unit’s work over the coming months. Joe Beemsterboer, a Senior Deputy Chief of the Fraud Section, made clear that Health Care Fraud is a DOJ “priority.” He highlighted several emerging schemes, such as: offering free testing for beneficiary information then offering services that are not eligible for reimbursement; selling beneficiaries’ personally identifiable information obtained through the fraudulent offer of free testing; and providing beneficiary information in exchange for kickbacks and referrals. Beemsterboer indicated that healthcare companies are facing a new regulatory environment with the CARES Act, noting that HHS is dispersing billions to healthcare companies, hospitals, and providers to “mitigate” loss of revenue and lack of payments for uninsured patients. Beemsterboer emphasized that DOJ will be scrutinizing companies that received funds and cautioned that those companies should be aware of, and comply with, the certification and record-keeping requirements, and audit the use of all monies received.
- While the government may face challenges in FCPA investigations, such as obtaining documents stored overseas and conducting in-person interviews, a Senior Deputy Chief of the Fraud Section, Daniel Kahn, believes his unit is adapting to the new environment. Kahn stated that investigations are ongoing, and, despite the pandemic, new matters are being opened.He said that while the FCPA Unit takes a fact-specific approach, companies could not use the broad excuse of COVID-19 to avoid their compliance obligations. Kahn indicated that the unit was undertaking much of its work remotely. Kahn said that even COVID-impacted issues, such as charitable donations, would be viewed through the traditional lens of corruption risk.
- Further, the Chief of the SEC’s FCPA Unit, Charles Cain called the current environment “ripe” for “securities violations.” Echoing statements other officials in the SEC Enforcement branch made in the last few weeks, Cain said that areas of focus for the SEC would include microcap offering frauds; insider trading and market manipulation; and financial statement or disclosure fraud. Cain also noted that the SEC was navigating challenges, such as access to courts and in-person interviews, and that the Enforcement Division had formed a “Coronavirus” steering committee. Cain noted that the SEC is coordinating with state agencies and self-regulatory organizations.
- The FBI is still actively investigating frauds despite the pandemic, including conducting searches and executing search and arrest warrants. Leslie Backschies, Chief of the FBI’s International Corruption Unit, noted that the FBI, like the SEC, has set up an internal COVID-19 Task Force.
Just like companies and individuals across the globe, the DOJ, SEC and FBI are continuing to pursue their mission and enforcement initiatives while adapting to the recognized challenges posed by the COVID-19 environment. Business may not be proceeding as normal, but enforcement must proceed and will need to adapt.
Here are 6 things companies should be thinking about in the COVID-19 environment.
- Revisit your existing compliance controls.
According to DOJ Fraud Section Chief Zink, DOJ has used the unplanned slowdown in day-to-day activity caused by the COVID-19 pandemic to review its own internal controls. DOJ has conducted pressure tests, has assessed the need for new controls to maintain the effectiveness of their programs in a remote working environment, and has adjusted training. According to Zink, DOJ expects companies to do the same.
- Document your rationale for changes to normal procedures.
While COVID-19 is a major disruptor, the enforcement authorities are pressing forward with their missions and expect companies will do the same. Regularly-scheduled compliance audits may need to be shifted or retooled given travel restrictions.
If they are delayed, companies should document the rationale for the delay and identify a new deadline based on a current assessment of when the exigent circumstances forcing the delay will lift. If they are retooled (e.g., shifting supplier diligence from in person to virtual), companies should document plans to assess later whether the process needs to be supplemented when restrictions are eased.
- Identify and assess areas of risk for your company.
The direct and indirect impacts of the COVID-19 pandemic are creating new risks but are also applying new pressures on existing risk areas – e.g., how to achieve performance metrics when business is shuttered, onboarding suppliers when the urgency of the need outpaces typical diligence protocols, imposing blackout periods within the company for trading to align with anticipated economic distress and market reaction to any revised forecasting. It is important to review those risks – both old and new – to ensure that your reporting and compliance policies and procedures are sufficiently addressing, and minimizing, them.
- Keep teams aligned to deal with issues.
With the in-person meetings, office drop-bys and international visits on hold, organizations are forging new paths for keeping teams aligned. This sudden departure from routine is disruptive and can lead to issues being inadvertently overlooked.
DOJ, SEC and FBI officials have traded in-person industry conferences for virtual town halls to share their insights and reinforce their enforcement priorities. Teams should consider doing the same to reinforce their goals and to keep aligned on spotting and handling issues.
- Evaluate reporting and escalation processes, trends.
Just as the DOJ Fraud Health Care Unit will continue to study trends in health care billings and procedures as an essential component of deciding whether to open new investigations, companies should assess whether their internal case identification processes are being properly utilized.
While the near-term volume of internal reporting may decline due to suppressed business, companies should evaluate the inputs being received and remind employees of the reporting mechanisms and escalation processes for them to remain effective.
- Stay ahead of Board inquiries. Ensure management is prepared.
While some may be experiencing a slowdown in day-to-day activities due to COVID-related shutdowns, our experience is that the pandemic has only generated more critical projects and significant disruption for most.
This flood of new projects can overtake time-critical and sensitive efforts, including responding to inquiries from individual directors and board committees about normal topics and COVID-related responses. While boards may agree that some of these queries can be deferred, others remain essential and so preserving open lines of communication between management and board members about expectations and competing demands – particularly in this remote environment – is key.
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