APG Fraud Hotline and False Claims Acts

Date: May 12, 2010

The FBI announced last month the establishment of a hotline for the reporting of fraud in connection with the awarding of approximately $2 billion in BRAC-related construction contracts at Aberdeen Proving Ground, exposing the unwary or unscrupulous contractor to a variety of sanctions.

The most typical form of fraud associated with these contracts is submission by a contractor of a false claim for payment from the Government, which is prohibited under both the Civil and Criminal False Claims Act ("FCA") statutes. Under the Civil FCA, lawsuits may be brought against contractors by either the U.S. Department of Justice or by a whistleblower, usually a competitor or a disgruntled employee of the contractor being sued, who stands to recover up to 30% of any money recovered from a contractor under the Civil FCA.

The Civil FCA broadly defines "claim" to include "any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States Government provides any portion of the money or property which is requested or demanded, or if the Government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded." While the most obvious examples of a "false or fraudulent claim" include a contractor's presentment of an invoice to the Government for work it never performed, or for supplies never delivered, in recent years, the U.S. Department of Justice and some federal courts have significantly broadened the definition of what constitutes a false claim for purposes of Civil FCA liability to include a number of situations far more subtle than flagrant mischarging and fraudulent invoicing. For example, the Government may elect to impose civil penalties against a contractor if the work for which the contractor seeks payment does not conform to the contract specifications. In addition, some courts have interpreted the Civil FCA to also prohibit a contractor from making false statements or records in order to avoid an existing obligation to the Government. Liability can also arise under the Civil FCA if a contractor fails to comply with the various laws and regulations incorporated into most federal contracts - including wage and hour laws, equal employment opportunity laws, OSHA regulations, environmental laws, and the like. In theory, if a contractor is required to comply with such laws and regulations in the performance of its contract, and the Government's payment under the contract is contingent upon a contractor's compliance with these laws and regulations, a contractor that violates any such regulation but still gets paid may be liable under the Civil FCA for submitting a false claim. Moreover, since Government contractors must certify compliance with these and other federal laws and regulations to first, obtain a Government contract and second, remain eligible to perform it, any false certification of compliance with applicable laws and regulations may also constitute a violation of the Civil FCA. Thus, for example, if a contractor falsely certifies that it pays applicable prevailing wages in accordance with the federal Davis-Bacon Act, when in fact it does not, such a false certification could form the basis for a Civil FCA violation against that contractor.

Civil penalties for FCA violations can be stiff. Under the Civil FCA, the Government can recover an amount equal to three times the actual damages sustained, plus penalties of between $5,000 and $11,000 per violation. Such penalties can multiply rapidly since each false claim, invoice, or material misstatement is counted as a separate violation. Significantly, a contractor does not escape liability under the Civil FCA even if the Government ultimately does not pay on the claim, which means that a contractor may be liable for civil monetary penalties under the Civil FCA even if the Government has suffered no damage.

Note that with the passage last year of the Fraud Enforcement and Recovery Act of 2009 ("FERA"), the scope of potential FCA liability now includes not just fraud against the Government but also fraud against Government contractors (e.g., a subcontractor submitting a false claim for payment to a prime contractor). Further, FERA has lowered the threshold for a FCA claim. Formerly, a contractor had to make a false claim or submit a false invoice with the intent to fraudulently obtain money from the Government; under FERA, a contractor need only knowingly make a false statement or submit a false claim, without the intent to fraudulently obtain monies from the Government.