Government Procurement Fraud and the False Claims Act
By: Joel M. Androphyi
Contracts with the Government can encompass a variety of agencies and departments. Many of the reported cases involve contracts with the Department of Defense (“DOD”), the Department of Veterans Affairs (“DVA”), the Department of Housing and Urban Development (“HUD”), the National Aeronautics and Space Administration (“NASA”), and the General Services Administration (“GSA”), among other procuring agencies.
During the bidding, negotiation, and performance of a contract with the Government, a contractor will be required to submit certificates and affidavits that may later provide the foundation for a false claims case. The four most commonly charged government contract fraud cases are those alleging (1) progress payment fraud, (2) fraud regarding nonconforming materials, (3) cost mischarging, and (4) defective pricing:
- Progress payment fraud occurs when a contractor applies for payment during the course of a contract and fraudulently certifies that he has incurred costs that are eligible for reimbursement or fraudulently certifies that no encumbrances exist to payment.1
- Fraud involving nonconforming materials occurs when government contractors falsify documentation that all materials meet the contract specifications.2
- Cost mischarging occurs when the Government is charged for costs not allowable under the contract, when the government is charged for costs relating to a separate contract, or when the Government is simply overcharged.3
- Defective pricing occurs when there is a falsification or inaccurate submission of information by the contractor or its agent regarding costs or prices.4
In addition to incurring civil liability under the FCA, many contractors become the subject of criminal investigations based on violations of numerous criminal statutes.5 There are also many collateral consequences, of which suspension and debarment from doing business with the Government are the most onerous.6
False claim actions involving defense contracts usually fall into two categories: (1) those claiming that the defense contractor provided false information regarding product specifications, such as testing records, in violation of a statute, regulation or the contract terms and (2) those alleging that the defense contractor mischarged the Government for the cost of the supplies or services rendered.
Federal Acquisition Regulation
As of December 12, 2008, Federal Acquisition Regulation (“FAR”) amendments require a government contractor to self-disclose its own or its employees’ violations of criminal conduct, relating to fraud, conflict of interest, bribery or gratuities, or the FCA. The offenses must have occurred “in connection with the award, performance, or closeout” of the contract or subcontract.7 False statements are the most commonly charged offense in procurement fraud cases, and are used to penalize common forms of fraudulent procurement activity.8
FAR requires a contractor to timely disclose when it has credible evidence to believe a triggering violation has occurred.9 The disclosure typically should occur before a complete and thorough investigation is completed. Disclosure should be made within thirty days in order to take advantage of the provision in the FCA that rewards timely self-disclosures with a limit of doublerather than treble damages.10
The disclosure should specifically state that is being made in accordance with the mandatory disclosure provisions of FAR Section 52.203-13, and that the contractor has credible evidence that an offense has occurred subject to the mandatory disclosure provisions.11 This includes when a contractor learns that the government “has overpaid on a contract financing or invoice payment.”12 The disclosure should describe and identify the offense and provide general, preliminary factual information and a description of the damages.13
The FAR does not require a waiver of attorney client or work product privileges, but waiver may occur when information is disclosed to a third party.14 A 2008 amendment to the Federal Rules of Evidence limits subject matter waivers of privileged information following certain intentional disclosures to the federal government.15 This waiver, however, extends only to the information disclosed to the government, and does not extend to third parties absent a court order.16
Although contractors must comply with FAR mandatory disclosure requirements, they still retain the right to defend an investigation and not become deputies of the government, and the right to assert and preserve attorney-client privilege and work product Protection.17
These new regulations essentially shift the focus from management to law enforcement. In addition, it is feared that the requirements under the new regulations regarding “potential” civil FCA violations “will have a chilling effect on the discretionary decision making” of those involved because the new regulations effectively shift de facto management of the federal acquisition system to the Department of Justice.18 Increasingly, contract performance will be determined to be successful based on a contractor’s effective compliance programs.19
- Progress payments are made pursuant to Federal Acquisition Regulation (“FAR”), 48 C.F.R. § 52.232-16. In January 2006, four firms that performed work for the Government settled claims for over $25 million alleging that they submitted false claims for travel reimbursement. “Bearingpoint, Inc.; Booz Allen Hamilton, Inc.; Ernst & Young, LLP; and KPMG, LLP Pay Millions to Settle Overbilling Prosecution,” available at http://www.lawfuel.com/index.php?page=press_releases&handler=focus&pressreleaseid=5116&return=blur-article (last visited April 12, 2006). These firms allegedly submitted claims for reimbursement to the Government for travel costs without disclosing rebates they received. Id. See also, “Corporate Express Pays United States $5.02 Million to Resolve False Claims Act Allegations,” available at http://releases.usnewswire.com/GetRelease.asp?id=60829 (last visited April 12, 2006) (Defendant company resolved allegations that it submitted false claims by selling office supply products manufactured in counties that do not have a reciprocal trade agreement with the United States to government agencies.).
- FAR, 48 C.F.R. § 46.101. See also the discussion of United States ex rel. Barajas v. Northrop, 258 F.3d 1004 (9th Cir. 2001), at § 6.02[c][i] infra. For an example of fraud in this area, see Weaver, “S. Korean Company Will Pay $1.2M to Settle Fire-Safety Equipment Suit,” available at http://www.estripes.com/article.asp?section=104&article=33926&archive=true (last visited April 12, 2006) (Defendant agreed to pay $1.2 million to resolve allegations that it failed to inspect, test, maintain, and repair fire safety systems at United States military bases in South Korea as required under its contract.). See also: Graves and Goo, “Boeing Parts and Rules Bent, Whistle-Blowers Say,” Washington Post, at A1 (April 17, 2006) (Whistleblowers alleged that Boeing knew that thousands of airplane parts used in more than two dozen jets sent to the United States military did not meet specifications.); DOJ Press Release, “Avon Company, Phoenix Fabricators and Erectors Settles for $1.75 Million,” available at http://www.taf.org/phoenixfabricators.pdf (last visited Oct. 18, 2006). According to the Government allegations, Phoenix did not utilize proper welds, but rather used a less expensive welding technique in fabricating elevated water storage tanks for the Government. Thus, the tanks purchased with Government funds may not have been as structurally sound as they should have been.
- Contract cost rules are set forth in FAR, 48 C.F.R. § 31. United States v. Castner, 50 F.3d 1267, 1276 (4th Cir. 1995) (Government contractors fraudulently substituted unauthorized materials and wrongfully billed on the basis of price rather than cost). See Boeckel, “Feds, County Settle,” available at http://www.ydr.com/portlet/article/html/fragments/print_article.jsp?articleID-3757513&siteID=515 (last visited Oct. 18, 2006 and has since been moved or archived). In 2006, York County, Pennsylvania, settled a dispute with the federal Government agreeing to pay $18.5 million after allegedly charging the Government $60 a day per immigration detainee, when it should have charged only $38 a day per detainee. DOJ Press Release, “Mario Gabelli & Affiliate Companies Pay U.S. $130 Million for Allegedly Defrauding FCC,” available at http://www.usdoj.gov/opa/pr/2006/July/06_civ_431.html (last visited Sept. 29, 2006). The Justice Department reached a settlement of $130 million with Wall Street money manager Mario Gabelli, who was accused of designing a scheme in which he recruited friends and relatives to participate in FCC auctions reserved for small or very small businesses.
- FAR Sections 15.403-4 and 15.408 state that contractors can be required to execute a certificate stating that the date submitted is accurate, complete, and current. See http://www.sfgate.com/cgi-bin/article.cgi?file=/n/a/2006/05/040national/w125408D26.DTL (last visited Oct. 18, 2006 and has since been moved or archived). The clean-up effort post-Hurricane Katrina (i.e. after September 2005) has caused a $63 billion overbilling problem for the Government. According to reports, mileage claims were overstated to earn extra fees, debris was mixed improperly to inflate disposal charges, and companies sent bills twice for removing the same loads. Some estimates purport that prime contractors were paid $26 to $28 per cubic yard to haul debris when the going rate of privately employed contractors was $6 per cubic yard.
- 18 U.S.C. § 1001 (false statements); 18 U.S.C. § 287 (false claims); 18 U.S.C. § 1031 (major fraud allegations).
- FAR, 48 C.F.R. §§ 9.406 to 9.407. See Chapter 10 infra regarding suspension and debarment. See also Gates and Mundy, “Boeing Lawyer Warns of Company’s Legal Peril,” The Seattle Times (Jan. 31, 2006), available at http://seattletimes.nwsource.com/html/businesstechnology/2002772936_boeing31.html (last visited April 12, 2006)(Boeing’s General Counsel discusses the worst case scenario, such as damages exceeding $5 billion and debarment, for the company in light of recent scandals involving false claims, breaches of export laws, and other violations).
- Federal Acquisition Regulation for Contractor Business Ethics Compliance Program and Disclosure Requirements, 73 Fed. Reg. 67,075 (Nov. 12, 2008); 48 C.F.R. § 52.203-13(c)(2)(ii)(F).
- For example, non-compliance with cost or pricing data submission requirements of the Truth in Negotiations Act and violation of the Procurement Integrity Act. See: 10 U.S.C. § 2306a and 41 U.S.C. § 423.
- 73 Fed. Reg. 67,075 (Nov. 12, 2008).
- Michael G. Scheininger, Partner, McKenna Long & Aldridge L.L.P., Address during BNA Audioconference, “New FAR Mandatory Self-Disclosure Requirements: A Guide to the Application of Key Provisions” (Dec. 2008) (written copy on file with author).
- 73 Fed. Reg. 67,075 (Nov. 12, 2008).
- FAR § 3.1003(a)(3).
- 73 Fed. Reg. 67,075 (Nov. 12, 2008).
- Fed. R. Evid. 502 (signed into law on September 19, 2008).
- Madsen and Waldron, “The FAR Mandatory Disclosure Rule: Is This Supposed to Improve Acquisition?” 3:25 White Collar Crime Rep., at p. 842 (Dec. 5, 2008).
iAuthor of treatise, Federal False Claims Act and Qui Tam Litigation, Law Journal Press (2010), research source of the issues discussed in this article.
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