What are the risks when the federal government insists that organizations quickly spend billions of dollars? Authors Emlyn Neuman-Javornik and Ron Hickman examine the U.S. False Claims Act and the American Recovery and Reinvestment Act (ARR A) and what both public- and private-sector organizations can do to reduce the associated risks.
ARR A, also known as the federal economic stimulus plan, is the federal government's attempt to halt the declining U.S. economy, create and save jobs, improve infrastructure, and stabilize state and local governments, all while maintaining unprecedented accountability and transparency. A Web site, www.recovery.gov, has been established to give citizens access to information about how stimulus funds are spent. More than $300 million has been appropriated to fund audit and oversight activities of the various federal Offices of Inspector General. The federal government is taking accountability seriously, and even the Office of Management and Budget's April 3, 2009, guidance to agency and department heads on implementing the stimulus plan includes the word fraud, or fraudulent, more than 20 times in its 175 pages.
So what do the False Claims Act and the stimulus plan have to do with each other? Consider the hundreds of billions of federal dollars being pushed out the door in a very short amount of time, the mammoth amount of enacting legislation, and American taxpayers' frustration with a growing list of individuals and companies abusing the federal coffers. Add a growing awareness of the treble damages and qui tam provisions of the federal False Claims Act, and the result is a crop of false claims allegations just waiting to be harvested.
As oversight and transparency become the mantra for the federal government, entities might find themselves facing increased risk of fines and penalties under the False Claims Act. Originally passed in 1863 to punish contractors selling substandard mules, faulty rifles, and spoiled rations to the Union Army, the act has been revised several times and is still an important provision that should be clearly understood by any organization engaging in a financial relationship with the federal government.
Violating the act – even with no specific intent to defraud the government – can expose the offender to significant fines and penalties. That risk is increased greatly with hundreds of billions of dollars being channeled directly into the marketplace as well as funneled through state governments. To make matters worse, these funds, part of ARR A, must be distributed and then spent in a short period of time or be reverted to the federal government for reallocation. With little guidance available yet, the risk of inadvertently running afoul of the False Claims Act is high. And, of course, opportunistic fraudsters already are looking for ways to cash in.
Weary of Wall Street executives receiving massive bailouts and paying themselves large bonuses, Americans are also frustrated with the growing list of people accused of large-scale fraud and are looking for innovative ways to strike back at swindlers, especially those who steal tax money directly from the government. In the face of growing unemployment and shrinking investment portfolios, citizens might decide to exact revenge by committing fraud against individuals and organizations they believe could be misappropriating tax dollars. If the fraudster can fully fund his or her retirement and child's college fund at the same time, why not?
Recent Trends – Stronger Provisions
The False Claims Act was most recently amended in 1986, when its whistleblower provisions were significantly strengthened. Since then, the U.S. Department of Justice has recovered more than $21.6 billion in settlements and judgments under the act – more than $1.3 billion in 2008 alone.1 At one time, the majority of claims involved Department of Defense contracts, but claims involving the Department of Health and Human Services (HHS) began growing rapidly in the 1990s. By 2008, HHS claims accounted for 53 percent of the new cases filed during the year and more than 83 percent of all money recovered.2 With approximately $137 billion in ARR A funds flowing through the HHS,3 such claims are not likely to decrease.
Defense contractors and healthcare providers are not the only ones at risk under the False Claims Act. Recent high-profile cases have involved claimants in educational institutions as well as in banking, manufacturing, and pharmaceutical corporations. Significantly, although state governments are exempted from the act, the U.S. Supreme Court ruled in 2003, in Cook County v. United States ex rel. Chandler, that local governments are subject to its provisions, including qui tam liability and the potential for treble damages for violations.4
Future Trends – Expanded Reach
Judging by recent case law and proposed legislative action, it is reasonable to expect continued growth in both the number of False Claims Act prosecutions and the size of the claims. Much of the ambiguity centers on a fundamental question: Can the act be applied to a disputed claim between two parties – neither of which presents a claim directly to the government – simply because they are working on a federally funded project?
This issue underlies two high-profile cases, United States ex rel. Totten v. Bombardier Corp., which was heard in the D.C. District U.S. Court of Appeals in 2004, and Allison Engine Co. Inc. v. United States ex rel. Sanders, decided by the Supreme Court in 2008. In Totten, the dispute centered on two contractors that allegedly supplied noncompliant goods to Amtrak, the recipient of a federal grant.5 In Allison Engine, the alleged false claim (a document falsely certifying that electric generator sets complied with requirements) was presented by two subcontractors to the prime contractor, Allison Engine, which in turn billed shipyards for the equipment as part of a U.S. Navy contract.6
In both cases, the alleged false documents were never presented directly to the government, and there was no evidence the defendants submitted their claims with the intent to defraud the government. Since the questioned documents were part of the federal government procurement process, however, the relators contended that the False Claims Act should apply. Although these two cases ultimately ended with rulings favorable to the contractors, the questions they raised are far from settled. The rulings themselves were narrowly worded, and the court deliberately left room for Congress to clarify its intention by amending the act.7
Clarifying the law – in a way that expands the act and makes it easier for the qui tam plaintiffs to prevail – is the stated purpose of the False Claims Act Corrections Act of 2009, which was introduced in Congress in March 2009. Its sponsors are hoping to encounter a more friendly reception in this session than the failed False Claims Act Corrections Act of 2008 received last year.
The proposed amendments contain additional controversial provisions. Opponents to the proposed 2008 amendment contend these changes are so sweeping that they would expand the act to encompass virtually any organization that submits documentation to any public or private entity that receives federal funding.8 The proposed 2009 amendment contains many similar provisions.
The Added Risk in Today's Economy
The current economic climate further increases the risk that organizations – both public and private – could find themselves the target of a False Claims Act whistle-blower action.
After the terrorist attacks of 2001, funding for security upgrades and emergency preparedness soared, and there was a rush to implement improvements quickly. It is easy to recognize an analogous situation today with economic stimulus funding. Hundreds of billions of dollars have been spent in the past few months alone to stabilize the credit and financial markets, and there is no sign that the spending is slowing.
Stimulus-related spending may well approach $1 trillion this year, and much of this avalanche of federal funds might be disbursed with less than complete guidance given the urgency of the situation. In the absence of clear-cut regulations, even a well-intentioned effort to speed aid to those in need can expose both private and public organizations to the risk of a False Claims Act complaint.
The economic slowdown also complicates the issue in other ways. Shrinking incomes are forcing public and private entities alike to manage their revenue – including federal contract and grant funds – very aggressively, to ensure every possible revenue source is maximized. But the line between active revenue management and misstatement is not always clear.
Recent qui tam suits have shown that individuals are willing to look at all angles to obtain relators' fees. In United States ex. rel. Hendow v. University of Phoenix, the relators claimed that the university's inappropriate certification of compliance with some federal regulations and alleged violations of other federal regulations constituted a false claim since the university was able to receive federal dollars as a result of these actions.9
A Proactive Approach
Severe budget constraints further strain the resources entities normally would use to develop and enforce internal controls. Maintaining strong internal controls, in spite of budget shortfalls, is an essential first step toward reducing an organization's exposure to risk under the False Claims Act.
Such controls and monitoring programs are especially important now, as organizations face a virtual "perfect storm" of risk, brought on by the simultaneous arrival of multiple forces:
- A long-term trend toward expanded False Claims Act jurisdiction;
- Near-term budget pressures that encourage entities to maximize all possible sources of funding;
- The federal government's commitment to ensuring that taxpayer dollars are spent appropriately;
- A very large and very rapid influx of federal stimulus funds, some of which are disbursed with limited guidance; and
- Severe strains on entities' own internal monitoring and auditing resources.
In this climate, an increase in the number of False Claims Act suits being brought is expected, as citizens are tempted by the prospect of receiving a share of treble damages by helping the federal government fight fraud. With unemployment high, Americans will have more time on their hands to look for ways to take out their fiscal frustrations on government contractors; and, thanks to ARR A, contractors will have more opportunities to run afoul of the False Claims Act.
1 "Fraud Statistics Overview, October 1, 1986 - September 30, 2008," Civil Division, U.S. Department of Justice, www.usdoj.gov/opa/pr/2008/November/fraud-statistics1986-2008.htm .
3 U.S. Department of Health and Human Services, "HHS Launches New Office of Recovery Act Coordination," press release, March 11, 2009.
4 "Local Governments Subject to Qui Tam," Taxpayers Against Fraud Education Fund, www.taf.org/legalupdate.htm .
7 Anne S. Kimbol, J.D., LL.M., "The False Claims Act Correction Act of 2007: Will It Bring a Third Era of False Claims Cases?" University of Houston, www.law.uh.edu/healthlaw/perspectives/2007/(AK)%20FCA.pdf .
8 Glenn V. Whitaker, Victor A. Walton Jr., and Michael J. Bronson, "A Threat Is Looming: The Proposed False Claims Act Amendments Could Prove Devastating to Government Contractors," LawCrossing, www.lawcrossing.com/article/3950/ .
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