Preparing for Fraud in the Wake of COVID-19

May 21, 2020

In a time of great uncertainty, one thing is guaranteed: COVID-19 will bring with it an unprecedented level of fraud. Defense attorneys should expect to be busy in the coming months, as robust COVID-19 anti-fraud task forces are assembled across the country and begin to crack down. In fact, enforcement efforts have already commenced, whereas traditionally, fraudulent schemes are not detected or prosecuted for many months, or even years, after they begin.

Several areas are ripe targets for COVID19-related criminal activity:

  1. Health Care - Currently, Medicare and many private health insurance companies are waiving preapproval requirements for procedures, testing and medical equipment, and eliminating the cap on service limits. Telemedicine is being encouraged and has become widespread overnight. As such, we will see a rise in unnecessary medical billing for both private insurance and government-covered benefits. The new rules temporarily remove the additional layers of due diligence built into the process to prevent fraud and abuse. Additionally, classic kickback and similar schemes will take place where patients are paid to undergo unnecessary testing for COVID-19 (and generally) in order to bill health insurance companies for medically unnecessary testing.
  2. Fake COVID-19 Vaccines - Sham companies and investment vehicles will emerge claiming they have, or are close to unveiling, a vaccine for COVID-19.
  3. Fake COVID-19 Testing Kits - There will be telemarketing and online campaigns aimed at selling fraudulent COVID-19 testing kits.
  4. Cybercrime - There will be an unprecedented amount of cybercrime: fake organizations purporting to raise money for charitable purposes, phishing schemes, and hacking of business platforms as most Americans are now working remotely and operating systems are more susceptible to vulnerabilities. On April 4, Interpol warned of a significant spike in ransomware attacks against key organizations engaged in the COVID-19 response.
  5. Hoarding of medical equipment and price gouging - We have seen and will continue to see hoarding of medical equipment, medical supplies and personal protective equipment (PPE), which creates the perfect environment for market manipulation. We will also continue to see price gouging related to COVID-19, though some states have enforced, or implemented, anti-price gouging laws while in a state of emergency.
  6. Economic impact payment-related – The IRS has announced to the public that it “is committed to helping you get your Economic Impact Payment as soon as possible.” This is music to the ears of criminal organizations who perpetrate Stolen Identity Refund Fraud (SIRF) schemes. SIRF crimes involve the theft of personal identifying information (PII), including Social Security Numbers, or the purchase of stolen PII, and using the stolen PII to file false income tax returns with the IRS. Criminal enterprises that engage in SIRF schemes often employ sophisticated technology that enables highly automated systems for storing PII, preparing and filing tax returns electronically, and generating tax refunds quickly. SIRF scheme operators also set up a complicated web of accounts at financial institutions where the refunds from the fraudulent tax returns are deposited and moved among accounts so that the participants can share in the illegal proceeds. The leaders and masterminds of SIRF schemes are often located outside the United States, which makes detection and enforcement more difficult. The same techniques employed in SIRF schemes can easily be applied to obtain Economic Income Payments by filing fraudulent qualifying returns for 2019, or by providing fraudulent qualifying non-filer information to the IRS.
  7. Securities - Many companies have known of disruptions in supply chains caused by COVID-19 and other issues for several months and have not amended their projections or made the appropriate disclosures to their shareholders and investors. We will also likely see inflated valuations of portfolios as funds attempt to avoid mass redemptions from investors.
  8. Insider trading - We will see an increase in insider trading activity. Attorneys, hedge fund and private equity employees, crisis management firms, government employees, and high-level executives of publicly traded companies in particular have, and will continue to receive, mass amounts of material nonpublic information as they guide their clients through this unprecedented time.
  9. Antitrust violations - We could see agreements by market participants across industries to hike or lower prices, lower wages, reduce the quality of goods and services, or reduce output.
  10. FDA-related crimes - Regulatory bodies including the Food and Drug Administration (FDA) have temporarily removed certain inspection requirements, including onsite audits, related to receipt of food items from foreign suppliers. The change, aimed at preventing disruptions in the food supply chain, creates vulnerabilities that could be exploited by exporters. Relatedly, we will likely see a rise in misbranding of food products as suppliers try to keep up with supply chain demands and exploit weaknesses in the system.
  11. Fraud in bankruptcy proceedings - As life returns to “normal” in the coming weeks and months, companies will try to determine how to survive. We will see bad faith use of the bankruptcy laws where companies try to avoid liabilities accrued because of COVID-19 by filing sham bankruptcy petitions.
  12. Money laundering - There will be an exploitation of overburdened resources within the banking system to launder money and execute other banned transactions such as those blocked by the Office of Foreign Assets Control (OFAC).
  13. Education  - In response to the financial challenges facing families in light of job losses, furloughs and salary reductions, the federal government has instituted numerous programs to provide funding to educational institutions and financial aid to students. These programs can be exploited by corrupt school administrators, outside vendors and criminal enterprises through fraudulent applications for loans and grants.
  14. CARES Act - The injection of $2 trillion into the U.S. economy through the CARES Act will, of course, bring its own set of schemes ranging from fraudulent applications for the various SBA loans and paycheck protection programs, to unemployment benefit applications, misconduct by large corporations, and corruption within state and local governments. 
  15. Ponzi schemes - When the 2008 financial crisis resulted in a catastrophic decline in the availability of credit, complex and longstanding financial frauds were exposed. The COVID-19 pandemic has wreaked havoc on corporate revenues, leaving companies with substantially diminished cash flow. In order to meet payroll and other expenses, corporations have drawn down on credit lines and resorted to other borrowing, and in many cases, have been unable to handle their debt burdens, further resulting in the scarcity of credit. Just as with the 2008 crisis, we can expect that the lack of liquidity in the market will result in Ponzi schemes imploding and the exposure of similar schemes.

Since the COVID-19 pandemic began, we have witnessed the emergence of heroes in the form of first responders and other essential workers. But as with any other historically transformative event, there are individuals hiding in the shadows, exploiting the herculean efforts of government, industry and ordinary citizens to address and overcome this crisis. As we transition from the destruction caused by the COVID-19 pandemic to recovery and rebuilding our communities, it remains to be seen whether law enforcement and prosecution resources will focus on COVID-19-related fraud to the exclusion of other crimes. 

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