During the Civil War, the False Claim Act ("FCA") was created to address the fraudulent sale of decrepit horses, ill mules, and faulty riffles to the Union Army. Today, this same law is the government's primary tool for combating fraud. This federal law holds individuals and companies accountable for defrauding the federal government. The FCA has evolved to protect government dollars spent on sophisticated multi-billion-dollar weapons systems to combat enormous Fortune 500 companies like General Electric or Lockheed from defrauding the US Department of Defense.
According to a recent release Department of Defense ("DOD") report, during the five-year period from 2013-2017, there were 1,059 criminal cases of defense contracting fraud resulting in the conviction of 1,087 defendants, including 409 businesses. There were another 443-fraud related civil cases. Defense contractors are entrusted with the responsibility of providing goods and services to the United States military. Yet, the cost of some of these contracts comes with a hefty price tag. For example, in 2017, $1 billion worth of military equipment was never delivered to Iraq by a company found to have defrauded the US government.
With hundreds of billions of dollars in contracts awarded annually, there is a heightened risk for fraud and misuse of funds awarded under these agreements. Fraud is a serious crime with hefty consequences. If a company is found guilty of defense contractor fraud, it could face up to five years in prison for each count, its license to do business with the United States could be revoked, and it may cost the company its ability to ever bid on government contracts in the future.
Types of Fraud in Government Contracting
The types of fraud companies use to cheat the government out its financial resources are:
Price Gouging – In any government contract, a contractor is required to offer the government the lowest possible price on goods or services, including any discounts or incentives offered to private sector customers. Sometimes contractors will bill the government at a rate exceeding that of other clients or may offer clients discounts that are not also offered to the government. In this situation, a contractor may be held liable under the False Claims Act for not only the difference in what it should have charged the government but also for statutory fines of up to $11,000 per violation.
Buy American Act - Providing goods or services that do not comply with the requirements of the Buy American Act, U.S. Trade Agreements, or other export control laws.
Overbilling or Double-billing – An issue that is increasingly common in defense contracts, overbilling or double-billing for services or products has proven to be a pervasive phenomenon in the contract fraud context. Contractors often believe they can get away with padding invoices due to the expansive, voluminous nature of the contract work. In one defense contract case, for instance, a False Claims Act defendant ultimately settled a case involving double-billing for water bottles provided to soldiers overseas. Presumably, the contractor figured the government wouldn’t notice – at least, until a whistleblower stepped in.
Cybersecurity Failures - The federal government imposes cybersecurity requirements on government contractors. In 2016, the Department of Defense, General Services Administration, and NASA amended the Federal Acquisition Regulation to add a new subpart and contract clause on safeguarding information systems containing federal contract information. The Department of Defense’s FAR supplement now requires certain defense contractors to report cyber incidents within 72 hours of their discovery. A contractor’s failure to comply with cybersecurity-related contract terms can give rise to liability under the federal False Claims Act.
Unmet Labor Standards – In many government contracts, particularly those involving sensitive or highly-technical information, the contractor must agree to employ only qualified, highly-trained workers to complete the job. Certainly, this job pool will demand higher pay than less-qualified individuals, which means the company will be required to spend more on payroll. Some companies illegally avoid this burden by hiring workers that do not meet the requisite training, education, and/or experience standards in the agreement, which will quickly trigger liability under the False Claims Act.
Unlawful Procurement – Under most contracts with the federal government, contractors are required to obtain raw materials from certain localities – namely, the United States. If materials must be obtained from overseas, only certain nations may provide goods to be used for government contract work. In some scenarios, a company will attempt to circumvent this requirement by misrepresenting the origin of parts from permissible nations when, in fact, the parts and products derived from a prohibited nation of origin.
Cost Misrepresentations - Making misrepresentations regarding costs, prices, and discounts in violation of most favored customer or best pricing requirements, price reduction clauses, and Truth in Negotiation Act requirements.
Whistleblower Incentives to Blow the Whistle on Government Contracts Fraud
The actions discussed before cover some of the biggest areas that trigger liability under the FCA. A government contractor can face a lawsuit by the U.S. government or a private citizen acting on behalf of the U.S. government. Even when most of these lawsuits usually come from whistleblowers, competitors are also welcomed to bring a qui tam action. The FCA incentivizes qui tam actions by providing the private person with a share of the damages awarded in the lawsuit. The share ranges from 10% to 30%, depending on whether the government chose to become a party to the lawsuit or left the private party to carry out the lawsuit alone. Consequently, when a government contractor faces an FCA action and loses, the court can also award treble damages to the government. This is designed this way in order to discourage contractor fraud and reward those who blow the whistle on corrupt government defense contractors.