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The Expanding Procurement Fraud Landscape:

The Expanding Procurement Fraud Landscape:. A Look at the Trends, Cases & Developments in FCA Enforcement Over the Past Year Andy Liu Jonathan Cone. Presentation Preview. Government Enforcement Tools Procurement Fraud Statistics False Claims Act Primer 10 Enforcement Trends For 2013

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The Expanding Procurement Fraud Landscape:

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  1. The Expanding Procurement Fraud Landscape: A Look at the Trends, Cases & Developments in FCA Enforcement Over the Past Year Andy Liu Jonathan Cone

  2. Presentation Preview • Government Enforcement Tools • Procurement Fraud Statistics • False Claims Act Primer • 10 Enforcement Trends For 2013 • Conclusion / Questions

  3. Government Enforcement Tools

  4. Government Enforcement Tools • Inspections, Audits and Investigations • DCMA, DCAA, GAO, IG, DCIS and DOJ • False Claims Act • Including qui tam whistleblower suits • False Statements / Certifications • Suspension and Debarment • Criminal Fines, Penalties, and Imprisonment • Congressional Investigations

  5. Government Enforcement Tools • Inevitable: Audits and Investigations • Congress may be the new sheriff in town • Whistleblowers and their attorneys follow the money • Multi-agency “task forces” • Many Shapes & Sizes • Contract clauses • Agency and grand jury subpoenas • Contract price reductions • Civil investigative demands

  6. Procurement Fraud Statistics

  7. False Claims Act Primer

  8. False Claims Act Primer FCA is “Lincoln’s Law” • Enacted in 1800’s during the Civil War • Targeted war profiteers bilking Union Army • Contained a “qui tam” provision that, while not unusual at the time, is rare now • Statute was quiet for first 120 years • After 1986 amendments, however, it has grown significantly as a tool for the government to fight fraud

  9. False Claims Act Primer • Government’s Principal Anti-Fraud Weapon • $35 billion recovered since the 1986 Amendments • $24 billion from qui tam suits • Qui Tam Provisions • 15-30% bounties for whistleblowers • Government required to investigate and make an intervention decision • Where government intervenes, relator entitled to 15 to 25% • Relator entitled to attorneys fees, even where settled without admission of liability

  10. False Claims Act Primer • False Claims. “Any person who . . . knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1)(A) • False Statements. “Any person who . . . knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(B) • Other Commonly-used Causes of Action • Conspiracy to defraud by getting a false claim paid, 31 U.S.C. § 3729(a)(1)(C) • “Reverse” false claims, 31 U.S.C. § 3729(a)(1)(G)

  11. False Claims Act Primer What do the government and whistleblowers need to prove under a false-claims theory? • A contractor submitted a “claim” for payment. • The contractor’s claim was false or fraudulent. • The contractor knew that the claim was false or fraudulent. • The falsehood was material to the government’s decision to pay the claim.

  12. False Claims Act Primer The meaning of the term “claim” • The FCA defines a “claim” as any request or demand for money or property that is: • Presented to an officer or employee of the United States. • Made to a contractor, grantee or other recipient of government funding, as long as the government provides or has provided any portion of the money or will reimburse any portion of the money requested • Example: Subcontractor submits invoice to a prime contractor working on a USAID contract. • Example: Construction company working on a state contract that is partially funded using federal highway funds.

  13. False Claims Act Primer • Claim: Encompasses virtually all demands or requests for money that are made to a Government agent, a contractor or a grantee, provided that the Government has provided some portion of the money sought. • Any action by the Contractor that has the purpose and effect of causing the Government or a recipient of Government funds to pay out money it is not obligated to pay, or any action that knowingly deprives the Government of money it is due. • Each separate submission that seeks payment from the Government or a recipient of Government funds is a claim for purposes of the FCA, even if each submission is under the same contract.

  14. False Claims Act Primer The meaning of the term “knowingly” • Although the FCA is thought of as a “fraud” statute, it is different than most fraud actions. • FCA definition of “knowingly” • Actual knowledge (of false information) • Deliberate ignorance of the truth or falsity • Reckless disregard of the truth or falsity • “No proof of specific intent to defraud is required”

  15. False Claims Act Primer The meaning of the term “material” • To be material, a falsity must either: • have a “natural tendency to influence,” OR • be “capable of influencing,” the payment or receipt of money or property. • Common examples: • The Government relied upon the false information in deciding to pay the claim; or • The falsity had the potential to influence the Government’s payment decision.

  16. False Claims Act Primer Examples of Common FCA Cases • Government Accounting Rules (e.g., unallowable costs) • Labor and Material Overcharging • Truth in Negotiations Act • False Certifications of Compliance • Implied Certifications • Kickbacks • Fraudulent Inducement (e.g., grant applications)

  17. False Claims Act Primer What is the potential liability for my organization? • Treble damages are 3x the actual damages the Government sustained because of the prohibited act. • Traditional measure is the difference between the value the government received versus what it paid. • Full contract/grant value in some situations. • Civil penalties for each false invoice/claim. • Up to $11,000 per claim is the maximum penalty

  18. The 10 Enforcement Trends of 2013 Trend # 1: Rise of the Relator • Increase in whistleblower lawsuits filed by current or former employees. • These cases are often triggered by an employee’s retaliation (real or perceived) concerns. • Investigation and litigation costs are substantial, even if contractor is innocent.

  19. The 10 Enforcement Trends of 2013 Trend # 2: Anyone, Even Competitors, Can Be Whistleblowers • Toyo Ink paid $45 million to settle allegations that it failed to pay antidumping and countervailing duties. • Case was brought by a qui tam whistleblower who was Toyo’s competitor. • The DOJ is willing to investigate and litigate cases, even when the whistleblower has a motive of harm. • Government is focusing on non-traditional government contractors • Companies should be careful to monitor the pricing and other data that is made available to competitors.

  20. The 10 Enforcement Trends of 2013 Trend # 3: Damages Equal Full Grant or Contract Value • Court finds that Cornell University Medical College misused federal grant funds and that the government’s damages were the full amount of the grant for entire funding years. • Educational institutions and companies that prepare grant applications may be liable under the FCA for material misstatements about their curriculum and key personnel under a theory of fraud-in-the-inducement. • Contractors not eligible for certain contracts, e.g., under a small or disadvantaged business program, may be liable for 3x the entire contract. • The determining factor is whether the government receives only an intangible benefit from the grant or award—like many research grants.

  21. The 10 Enforcement Trends of 2013 Trend # 4: Focus On Statutory & Regulatory Compliance • Failing to comply with certain statutory or regulatory requirements may render claims “false.” • Important to understand statutory requirements to which your company may certify compliance. • Certifying compliance with a statute or regulation should be a “red flag.” • Court finds that a company’s failure to pay prevailing wages to its employees as required by the Davis-Bacon Act is actionable under FCA. • Government is focusing on origin requirements of products sold to the government under the Trade Agreements Act. • ADC Telecommunications settlement for $ 1 million.

  22. The 10 Enforcement Trends of 2013 Trend # 5: Focus on Implied Certifications • Even if there is not an express certification, courts may find an implied certification with contractual provisions. • Government will challenge a contractor’s compliance with even ambiguous provisions. • Government may intervene in a case against Lance Armstrong • Postal Service contract said “negative publicity” due to “alleged possession, use or sale of banned substances” by riders would constitute an event of default,” as would a failure to take “action” if a rider violates a morals or drug clause. • An implied-certification case is a risk for anyone doing business with the government.

  23. The 10 Enforcement Trends of 2013 Trend # 6: Focus on Defective Parts & Products • ATK Launch Systems settles allegations that it sold defective flares to the U.S. Army and Air Force. • Products that do not meet performance specifications may be actionable under the FCA. • The key issue for the Government will often be knowledge—did the company know about the problem? • Was the company reckless in not knowing? • Important to have systems in place to detect defects and to inform government customers.

  24. The 10 Enforcement Trends of 2013 Trend # 7: Cost Estimates Can Be False • Court finds that a defense contractor’s estimates can be false and actionable under the FCA. • A cost estimate may be false if : • A bid is not what the contractor intends to charge the government (under-bidding). • When the contractor knows facts that would preclude its estimate (over-bidding). • Government is willing to challenge estimates for both T&M and fixed-price contracts.

  25. The 10 Enforcement Trends of 2013 Trend # 8: Subcontractor Conduct Leads To Liability • Lockheed agreed to pay $15 million to settle allegations that the government was overcharged on perishable tools. • Subcontractor misconduct may lead to liability for the prime contractor where it acts “recklessly” in overseeing the subcontractor. • Prime contractors need adequate controls to ensure that they do not pass inflated costs on to the government. • Merely having a subcontract, when you’re not supposed to, may lead to allegations of FCA liability in some situations.

  26. The 10 Enforcement Trends of 2013 Trend # 9: Regulations are a Trap for the Unwary • Government sues healthcare provider for interpreting federal regulation in a way that maximizes its own profit. • It may not always be enough to simply take a reasonable interpretation of a federal regulation. • Contractors can protect themselves by: • Following industry standards and best practices. • Being transparent and forthright with the government. • Seeking the advice of in-house and outside counsel. • Requesting guidance from the responsible agency.

  27. The 10 Enforcement Trends of 2013 Trend # 10: Government Targeting New Industries • The country’s five largest mortgage servicers agreed to pay $25 billion for loan-servicing and foreclosure violations. • Educational company paid $10 million to resolve allegations that it fabricated attendance records to seek federal reimbursements. • FCA covers any request for payment when any portion of the money has been provided (or will be reimbursed) by the federal government.

  28. Conclusion / Questions

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