United States: New Requirements And Increased Supervision Over Economic Stimulus And Bailout Funds May Increase Potential False Claims Act Liability For Recipients

The public outrage over the spending of bailout funds, especially in light of bonuses paid to executives at bailout fund recipients, has prompted the government to take measures to ensure recipients spend the funds for their stated use. New supervisory measures over the economic stimulus and bailout funds could increase the risk of potential civil and criminal liability for recipients, including potential claims by the United States Department of Justice (DoJ) or private whistleblowers under the False Claims Act (FCA).1 The FCA allows recovery of three times any "loss" to the government arising from false claims, plus civil penalties. Although initially, the lack of certifications or conditions imposed by the government made application of the FCA to bailout funds somewhat questionable, recent developments increase the risk of FCA liability for recipients of government funds.

What Is the False Claims Act?

The FCA provides that a person or entity may be held liable for knowingly submitting, or causing another to submit, false claims for payment of federal funds. False certifications have been the basis of FCA suits when material to the government's decision to release funds or not to seek return of funds2. The FCA generally imposes liability on any person who:

Knowingly presents, or causes to be presented, to an officer or employee of the U.S. government or a member of the armed forces of the United States a false or fraudulent claim for payment

Knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government

Knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the government3

Two of the primary potential theories of FCA liability for bailout fund recipients, as discussed below, are likely to be false certifications that are material to the government's decision to (1) pay funds or (2) not seek return of funds, particularly with regard to certifications before funds are received.

The FCA contains private whistleblower provisions that allow citizens with evidence of fraud to sue, on behalf of the government, in order to recover the funds paid under government contracts or programs. A private whistleblower suit initially remains under seal for at least 60 days during which the DoJ can investigate and decide whether to join the action. Private whistleblowers who sue under the FCA can share in as much as 30 percent of the government's recovery of treble damages and penalties. Since 1986, private whistleblower lawsuits have returned more than $12.6 billion to the U.S. Department of the Treasury (Treasury), with more than $2 billion of this amount being rewarded to the private whistleblowers.4

Governmental Oversight of the American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 (ARRA)5, commonly referred to as the Economic Stimulus Package, was signed into law on February 17, 2009 and aims to create and save millions of jobs through massive investments in energy, transportation, education, and health care projects, while reviving social safety-net programs. The Economic Stimulus Package allocates approximately $787 billion of federal taxpayer funds to the stimulus effort.

The ARRA requires entities receiving federal funds to file quarterly accountability reports that contain, among other things, a detailed list of projects or activities for which the recovery funds were expended. A false or inaccurate response contained in these reports could subject the recipients to liability under the FCA. In addition, an amendment to the Economic Stimulus Package, generally referred to as the McCaskill Amendment, contains broad protections for retaliation against whistleblowers. The McCaskill Amendment prohibits non-federal employers receiving stimulus funds from discharging, demoting, or otherwise discriminating against whistleblowers for making complaints to the Recovery Act Accountability and Transparency Board, an inspector general, a government agency, a court, or a grand jury if the employee reasonably believes that there has been evidence of:

Gross mismanagement of any agency contract or grant related to covered funds

A gross waste of covered funds

An abuse of authority related to the use of covered funds

A violation of a law, rule, or regulation related to (1) an agency contract (including the negotiation of the contract) or (2) a grant of covered funds6

These whistleblower protections are more expansive than those under the FCA and may serve to further encourage employees to expose their employers' abuse of the stimulus funds, potentially resulting in increased liability under the FCA.

Recipients of Economic Stimulus Package funds may face potential liability under the FCA, as recipients may be required to file certifications with the government as to the funds' use before the funds are released. In that instance, participants should expect that the DoJ and/or private whistleblowers may argue that the representations in the contract were "material" to the decision to release the funds, subjecting recipients to potential FCA liability. In addition, due to the whistleblower protections in the McCaskill Amendment, the risk of liability from disgruntled employees under the FCA is magnified.

Governmental Attempts to Establish Greater Oversight of TARP

The Troubled Asset Relief Program (TARP) was created to purchase and insure up to $700 billion of troubled assets held by banks and other financial institutions in an effort to stabilize and otherwise "bail out" the financial markets. The Emergency Economic Stabilization Act of 2008, which authorized TARP, established the Office of the Special Inspector General for TARP, which is commonly referred to as SIGTARP. SIGTARP is empowered to "conduct, supervise, and coordinate audits and investigations of the purchase, management and sale of assets" under TARP7. On December 15, 2008, Neil M. Barofsky was sworn in as SIGTARP and announced that he intended to review the use of TARP funds by recipients.

In furtherance of his commitment to review the use of TARP funds, Mr. Barofsky urged the Treasury to include language in all TARP contracts entered into after January 7, 2009 that requires the recipient to, among other things:

Account for the use of TARP funds

Set up internal controls to ensure compliance with the remainder of the TARP contract

Provide a signed certification from a senior officer as to the accuracy of the information provided8

In addition, the SIGTARP announced the plan to send letters of intent to each current TARP recipient retroactively requesting information. Entities that received TARP funds prior to Mr. Barofsky's requirement for specific language in TARP contracts will be expected to provide SIGTARP, within 30 days of the request:

A narrative response outlining their use (or expected use) of TARP funds

Copies of documentation (financial or otherwise) supporting the response

A signed certification from a senior officer as to the accuracy of the information provided9

False responses to these inquiries could subject TARP recipients to potential liability under the FCA.

Since the inception of TARP in October 2008, there has been a push for oversight over the use of the funds by recipients. As early as November 2008, Sen. Charles Grassley (R-Ohio) suggested that those found to be using TARP funds under false pretenses should be subject to liability under the FCA.10 However, the applicability of the FCA to pre-SIGTARP recipients is less certain than to those recipients certifying under SIGTARP requirements to the funds use prior to receiving the funds.

It may be argued that false certifications in response to the SIGTARP's request should not be considered "claims" under the FCA because the TARP funds that are the subject of the certifications were distributed before requirements as to their use were imposed. However, it could be argued that funds already distributed are subject to the FCA if it can be proven that there was (1) an express or implied condition on the recipient to use the funds for a specific purpose and (2) an express or implied obligation to return the funds if the condition of use was violated.

The case for FCA liability with respect to new TARP distributions is considerably stronger as the funds are typically not be distributed by the government until after the letter of intent is submitted. In that instance, recipients should expect that the DoJ and/or private whistleblowers will argue that the false certification was material to the payment decision to release the funds, subjecting the entire amount to trebling of the government's loss, plus penalties.

Legislative Initiatives

Bailout-fund recipients' potential liability under the FCA may be further increased if the Fraud Enforcement and Recovery Act of 2009 (FERA), passed by the United States Senate on April 28, 2009, is signed into law. Among other provisions, FERA would, as currently drafted:

  1. Expand the current FCA to any request or demand for payment presented to contractors, grantees, or others involving government funds to be spent on the government's behalf or to advance its interests, not just presentment to government officers or with intent that the government itself would pay the claim
  2. Allow FCA actions for any false records or statements material to submission of a false claim, not just those statements made or used to get a false claim paid11
  3. Expand the reverse FCA provision to apply to more payment obligations
  4. Expand the conspiracy provision of the FCA to include conspiracies to violate any requirement of the FCA, not just conspiracies to get false claims paid12

The bill also would authorize the appropriation of $490 million for the DoJ and other agencies to investigate and prosecute violators of the bill's provisions.13

Next Steps

In order to reduce the risk of liability under the FCA, all recipients of federal economic stimulus or bailout funds should implement oversight mechanisms for monitoring submissions and paperwork to the government as well as the manner in which funds are used. For larger institutions, a special corporate oversight committee might be recommended to ensure that funds are accounted for and being used properly. Because of the potential for private whistleblowers, particularly those afforded additional protection under the McCaskill Amendment, to report suspected non-compliance issues, participants should establish clear policies for reporting and investigating alleged violations within the company. By taking such steps, recipients of government funds may be able to reduce their risk of liability under the FCA.


1 31 U.S.C. § 3729, et. seq.

2 See, e.g., United States ex rel. Siewick v. Jamieson Sci. & Eng'g, Inc., 214 F.3d 1372 (D.C. Cir. 2000).

3 See FCA at § 3729(a)(1),(2) and (7).

4 Reported by the DoJ in September 2007.

5 For background information on the Economic Stimulus Package and bail-out legislation, please refer to the Foley Financial Crisis Response Team's series of publications at: http://www.foley.com/news/hottopic_detail.aspx?hottopicid=000052424324 .

6 See Section 1553 of the ARRA located at: http://www.whitehouse.gov/the_press_office/arra_public_review/ .

7 See the Emergency Economic Stabilization Act of 2008 at page 63.

8 See Mr. Barofsky's January 7, 2009 letter to the United States Senate Committee on Finance at: http://finance.senate.gov/press/Bpress/2009press/prb010709.pdf .

9 See Mr. Barofsky's January 22, 2009 letter to the United States Senate Committee on Finance at: http://finance.senate.gov/press/Gpress/2009/prg012209.pdf .

10 In addition to recipients of government funds facing potential increased FCA liability, private sector contractors and agents providing services to the Treasury in connection with TARP, known as "retained entities," may face increased potential liability under the FCA in connection with new conflict of interest and mandatory disclosure requirements under an interim rule issued by the Treasury. See Department of the Treasury, TARP Conflicts of Interest Interim Rule, 74 Fed. Reg. 3431 (Jan. 21, 2009) (to be codified at 31 C.F.R. pt. 31).

11 The intent of (A) and (B) in part is to reverse the effects of Allison Engine Co. v. U.S. ex rel. Sanders. See Foley's June 10, 2008 Legal News Alert at http://www.foley.com/publications/pub_detail.aspx?pubid=5090.

12 Senate Bill 386 (2009).

13 Congressional Budget Office Cost Estimate, March 18, 2009.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions