When it comes to COVID-19 criminal implications, prosecutors are casting a wide net

Federal and state prosecutors are casting a wide net for potentially fraudulent and illegal activity associated with the COVID-19 pandemic, which could catch businesses and industries, who are not accustomed to such scrutiny, off guard.

According to recent public pronouncements from federal and state officials, investigations into fraud, bribery, kickbacks, price-gouging, and supply-chain practices all will receive heightened attention in the coming weeks and months.

The nature and scale of the coronavirus outbreak means many industries not typically in the glare of federal prosecutors or state Attorneys General could be subject to criminal investigations. What many businesses may consider to be typical responses to supply and demand or ordinary commercial practices could suddenly be subject to a lengthy and costly legal fight.

A State of Emergency

Declarations of emergency – both at the state and national level – trigger a particular set of potential criminal investigations and increased scrutiny of business and commercial practices. Typically, these declarations follow natural disasters.

Hurricanes, tornados, and severe storms hit different regions of the country throughout the year. Businesses in construction, building repair, and insurance industries respond to these disasters regularly, and so are better prepared to implement anti-price-gouging, anti-bribery, and anti-fraud policies as part of their normal operations during disaster response. Because of the frequency of these events, protective policies are integrated into business plans for many within these industries, and lawyers advising these clients anticipate the need for these policies.

The COVID-19 pandemic, however, poses an entirely new challenge – declarations of emergency are in place in every state, and throughout the nation, and the nature of this particular emergency is unprecedented in the industries affected by the declaration.

The possibility of criminal prosecution faces industries that are ill-equipped to confront it, because this pandemic is far outside the norm of what these industries see in their businesses each year. The last such widespread health epidemic happened more than 100 years ago, long before prosecutions of business and disaster task forces became part of the norm of criminal practice.

The same criminal implications that follow businesses operating after natural disasters are now being focused, like a laser, on industries that are not typically in its glare. These industries may not have the protective policies and measures in place to guard against a criminal investigation into what they would view as ordinary commercial practices responding to traditional forces of supply and demand.

The signals from federal and state prosecutors are loud and clear, and the net will be wide. Elected leaders have laid the ground work for strong actions by prosecutors with executive orders, warning letters, and public statements..

On March 20, 2020, the United States Attorneys for the Western District of Virginia and the Eastern District of Virginia announced a joint federal and state task force, the “Virginia Coronavirus Fraud Task Force.”

Led by designated federal prosecutors in each district, teams of investigators from federal and state law enforcement agencies including the FBI and the Virginia State Police are taking and pursuing individual complaints of fraud, price-gouging, bribery, and supply chain issues throughout the state.

As part of the mission of this joint task force, the US Attorneys have focused specifically on three areas – those providing services to end-users during the pandemic, businesses in any part of the supply chain for 15 categories of “scarce resources,” and healthcare providers treating COVID-19 symptoms.

Separately, Virginia Attorney General Mark Herring has emphasized the commitment of his office to pursuing and investigating complaints of price-gouging under the Virginia Post-Disaster Anti-Price Gouging Act.

These actions are based, at least in part, on the warnings and actions of elected leaders – giving prosecutors broad cover for their aggressive position.

Governor Ralph Northam’s State of Emergency, issued on March 12, 2020, automatically triggered Virginia’s anti-price gouging laws. On March 23, 2020, the President issued an Executive Order targeting suspected price-gouging and hoarding of scarce supplies and medical resources, and charged the United States Department of Justice to prioritize investigations in these matters.

Virginia’s statute addressing price-gouging is broad, and proscribes “unconscionable prices” that “grossly exceeded” the price 10 days prior to the emergency declaration in the state. The Virginia Attorney General’s office is charged with investigations into consumer complaints, and the statute specifically provides that “actual sales” at the advertised price are not necessary to prove a violation of the statute. Such expansive language allows for a significant amount of leeway, and businesses and individuals falling under investigation will often face scrutiny under a standard of unconscionability that will be unique with the severity of this pandemic.

On March 25, 2020, the Virginia Health Commissioner issued a “warning” letter to healthcare providers regarding “off-label” prescribing of certain medications to treat COVID-19, describing those treatments as “life-saving” for several different medical conditions and cautioning against the “hoarding” of such medications.

Following Governor Northam’s declaration of emergency, the Attorney General swiftly encouraged consumers to report suspected price-gouging, and, on April 1, 2020, followed up with letters to 42 businesses seeking additional information related to investigations of price-gouging complaints.

As evidence of the commitment of the Virginia Coronavirus Fraud Task Force to prosecuting these cases, on April 10, 2020, the US Attorneys for EDVA and WDVA sent a letter to the CEO of every hospital system operating in Virginia, advising them of their commitment to investigations and prosecutions, alerting them to the “potentially fraudulent and illegal activity associated with the COVID-19 pandemic,” and outlining the “criminal consequences” of hoarding medical supplies identified as scarce in the March Executive Order from the President and the US Department of Health and Human Services.

In this letter, the US Attorney’s called upon the hospital administrators to act a “partners” in combatting these crimes, and encouraged them to “identify individuals or entities” the administrators believed had been hoarding supplies or inflating prices. The letter likened these practices to “extortion” – and businesses who come under the harsh light of criminal investigation in this climate can expect to be treated accordingly: not as businesses operating under ordinary commercial practices, but as common thugs holding “critical” supplies hostage and demanding “extortionate” payments of medical providers to access those supplies.

The Days Ahead

The current climate will favor aggressive prosecutions of fraud and price-gouging arising from the pandemic; prosecutors have been charged with prioritizing these cases and have already initiated investigations, while the end of the COVID-19 outbreak is still nowhere in sight.

While the focus here has been primarily on medical supplies and healthcare providers, businesses can expect a whole host of potential criminal scrutiny to arise from:

  • applications for federal and state relief funds for businesses, with an eye towards fraudulent statements made in applying for funds or fraudulent use of funds received;
  • community solicitations for donations for business relief, examining whether the business used the donations as advertised;
  • advertising to consumers about products or services to combat COVID-19, particularly where statements without the proper supporting information about efficacy, or the proper caveats; and
  • increased prices on goods that are not deemed scarce under the federal executive order, but that otherwise could come under the ambit of state law for price-gouging on “essential” supplies, where the ultimate question will be whether someone sought to profit off of the misfortune of others.

Businesses should ensure they keep abreast of the various state and federal regulations that have been triggered by these declarations of emergency and executive orders. Each state has its own set of anti-price gouging, supply hoarding, and disaster fraud laws, and businesses who operate in multiple states need to be apprised of the differences as they cross those borders. Businesses need to implement policies to guard against price-gouging, bribery, fraud, and supply hoarding, and to protect themselves from such practices within their supply chains.

The best defense is a good offense: the key to defending against any complaint of illegal activity or regulatory violation later is to act now to develop proactive policies and to document the decision-making of the business.

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These articles are provided for general informational purposes only and are marketing publications of Gentry Locke. They do not constitute legal advice or a legal opinion on any specific facts or circumstances. You are urged to consult your own lawyer concerning your situation and specific legal questions you may have.