This is part 1 of a five-part series with Tom Fox and the FCPA Compliance Report on what to expect concerning regulatory and enforcement issues with the incoming Biden administration.
When assessing the regulatory landscape resulting from the pandemic, the first question that comes to mind concerns the economic stimulus around the pandemic and relief funding. What might happen to entities who accepted or even processed these funds? When such a large amount of money—$500 billion—is distributed in a very short timeframe, chances are very high that you will have programs tainted by fraud. To counteract this, the government has embarked on a pursuit of fraudulent acts related to the distribution of relief funds and is likely to continue to do so, perhaps even more aggressively. To date the government has been focused on three key categories:
- Entities that received relief funds for legitimate purposes, but instead used the loans to purchase splashy luxury items for themselves
- Coordinated criminal groups that stole large sums of money from the programs
- The gatekeepers for the stimulus funds: the banks that were asked to facilitate the distribution
To prepare for such scrutiny, businesses that have received relief funding should be sure to carefully document their compliance with all regulations. Begin with an internal audit to verify how loan proceeds or other benefits were used, detailing compliance with the accompanying regulations for each of those loans.
What if the audit reveals that Cares Act funds were used in an unauthorized manner? Several steps should be taken. First, it is critical to self-report the improper use of program benefits. Second, all misapplied funds should be disgorged and benefits repaid before the company is potentially notified of an investigation by the authorities. Last, the entity should identify and remediate the failings in internal controls or processes that led to this inappropriate usage.
The pandemic has created a very volatile environment that in turn has created a lot of opportunities for fraud. In addition to simple fraud such as the wrongful use or theft of funds, the government is investigating potential cases of valuation fraud, financial statement and accounting fraud, and insider trading, as well as cyber fraud. Experts predict we’ll see a spike in anti-fraud enforcement similar to those observed after the dot.com bubble of 2001 and the 2008 financial and housing crisis when there was an uptick in the prosecution of corruption cases.
Companies should also be on the lookout for increased scrutiny by the Securities and Exchange Commission (SEC) concerning the dissemination of material nonpublic information and insider trading violations. The SEC will also be focusing on the accuracy of environment, social, and governance (ESG) disclosures and compliance policies. In all likelihood, this will become a fairly prominent subject of enforcement investigation under the new administration. In addition, it is very likely that there will be an increased number of investigations under the Foreign Corrupt Practices Act (FCPA).
The SEC is also expected to continue to leverage its whistleblower program as a source for new investigations and to strengthen its enforcement efforts. This program has continued to flourish in the decade since it was established, and has become a key program for the SEC. In 2020 alone the SEC awarded more than $175 million to 39 individuals. Hopefully that will encourage other agencies to adopt similar whistleblowing programs.
To listen to the next episode in this series, please click here.
