Violations of the False Claims Act and
The Importance of a Timely and Proper
Response to Whistleblower Allegations
Daniel J. Kelly
Thomas J. Finn
Paula Cruz Cedillo
Overview
 Trends In Claims Asserted Under the
False
Claims Act and Rise in Qui Tam Actions
 Responding to Potential Violations
 Potential Criminal Implications
False Claims Act
 Oldest But Most Powerful Tool Used to
Combat Fraud Against the Federal
Government
 FCA Prohibits Anyone from Knowingly
Presenting a False Claim to the Government
False Claims Act
 What is a False Claim?
 What Does “Knowingly” Mean?
– Actual Knowledge
– Deliberate Ignorance
– Reckless Disregard for the Truth
– No Specific Intent to Defraud is Required
False Claims Act
 Penalties Range from $5,000 to $10,000 per
False Claim
 Government can Recover Treble Damages
 $3 Billion in Settlements & Judgments in 2010
 Contractors Face Suspension & Debarment
The Qui Tam Action
 Allows Relator (i.e., whistleblower) to Stand
in the Government’s Shoes and Commence
Litigation Against a Government Contractor
 Relator Receives a Percentage of the Recovery
– 15% to 25% if Government Intervenes
– 25% to 30% if Government Does Not Intervene, as
well as Attorneys Fees and Costs
The Qui Tam Action
 Unique Procedure of Qui Tam Actions Creates
Unique Issues for Government Contractors
–
–
–
–
Complaint is Filed Under Seal
Allegations Are Investigated by Government
Government Then Determines Whether to Intervene
Relator May Pursue Lawsuit Even if Government
Does Not Intervene
– Relator Entitled to Receive Portion of Recovery
The Qui Tam Action
 Competing Interests & Complex Dynamic All
Working Against Government Contractor
– Department of Justice (DOJ) or U.S. Attorney’s Office
• The Fight Against Fraud & Restoring Public Faith
• Recouping Funds for the Government
– The Defrauded Government Agency
• Maintain Long-Standing & On-going Relationship with
Government Contractor
– The Relator
• Personal Financial Interest
Recent Trends in FCA Claims
and Qui Tam Actions
 Congress Looking to Increase Efforts to Combat
Fraud by those Receiving Government Funds
– Fraud Enforcement and Recovery Act of 2009
– Patient Protection and Affordable Care Act
 Amendments Expected To Have Serious Impact
on Government Contractors
Recent Trends in FCA Claims
and Qui Tam Actions
 Significant Rise in Litigation Given the Recent
Amendments to the FCA
– 709 New FCA Actions in 2010
• 144 Increase Over 2009
– 573 New Qui Tam Actions in 2010
• 140 Increase Over 2009
– 1,246 Matters Under Investigation
Source: Andy Liu & W. Stanfield Johnson of Crowell & Moring LLP, West's Government Contracts
Year in Review Conference (November 2011).
Fraud Enforcement and Recovery Act of 2009
(FERA)
 “Claim” Means Any Request for Money – Whether
Presented Directly to Government or Anyone Else –
that is Ultimately Spent or Used by the Government or to
Advance a Government Program
 Effect?
– FCA Applies to Anyone Who Touches Federal Funds
– May Subject Any Person or Entity to an FCA Claim
• Regardless of Whether Actually Intended to Submit a False Claim
to the Government
• Regardless of Whether Contractor Knew Government was the
Ultimate Purchaser of Goods
Fraud Enforcement and Recovery Act of 2009
(FERA)
 Increased Government’s Investigative Ability to Use
Civil Investigative Demands (CIDs)
– Attorney General Can Delegate Authority to Issue CIDs
– U.S. Attorneys Have Authority to Issue CIDs
 Effect?
– Increased Use and Impact of CIDs
– Contractors Can be Compelled to Turn Over Requested
Documents, Respond to Interrogatories, and Depositions Can be
Taken of Company Personnel Very Early On
• Even Before Government Intervenes
– Information Can Now be Shared with Whistleblowers
Patient Protection and Affordable Care Act
(PPACA)
 Weakened the Public Disclosure Bar
 Before: Whistleblower Could Not Maintain a Lawsuit
if the Underlying Facts were Publicly Disclosed
 Now?
– Relator Can Bring Qui Tam Action Even if Underlying
Facts Were Already Public, if Government Approves
– “Public Disclosure” Means Disclosure by the News
Media or a Federal Source – Not Disclosure by
a State Source
Responding to Suspected or Potential
Violations of the FCA
 How Do Contractors Receive Notice of
Purported Misconduct?
– Internally
• Employee Hotlines or Reporting Procedures
• Internal Company Audits
– Traditional Government Investigative Tools
• Grand Jury Subpoena
• Search Warrant
Responding to Suspected or Potential
Violations of the FCA
– Government Investigative Tools Unique to
Government Contractors
• Inspector General Subpoena
• Civil Investigative Demand
– The Qui Tam Call
Responding to Suspected or Potential
Violations of the FCA
 Unique Considerations for Contractors
– Significant Investigation Already Completed by
Government and Whistleblower Prior to
Contractor’s Awareness of Claim
– Contractor May Want to Settle Before Qui Tam
Action is Unsealed in Order to Minimize Bad
Publicity
Responding to Suspected or Potential
Violations of the FCA
– Maintain or Salvage Business Relationship with
“Defrauded” Government Agency
– Convince Government Not to Intervene Because
Claims are Meritless
Responding to Suspected or Potential
Violations of the FCA
 In this Climate, Government Contractors Must:
– Have Heightened Sensitivity to Allegations of
Wrongdoing
– Be Quick to Conduct Internal Investigation and
Thoroughly Investigate Purported Wrongdoing
– Determine Whether Violation Exists in Order to
Minimize Consequences
– Take Great Care When Responding to Government
Inquiries
Internal Investigation
 Internal Investigations are Critical
– To Determine Credibility of Allegations
– To Assess Scope of Alleged Wrongdoing
– To Help Mitigate Resulting FCA Liability
– To Convince the Government Not to Intervene
in Qui Tam Action
Internal Investigation
 Importance of No Government Intervention
– The Government
• Has Significant Resources
• Has Significant Institutional Knowledge & Expertise
– Government’s Decision Not to Intervene
• Strengthens Contractor’s Position
• Relator’s Resources are Likely Limited
Self Reporting Obligations
 Contractor Must Decide Whether to Report
Results of Internal Investigation
– Voluntary Disclosure
• Formal Voluntary Disclosure Program
• Cooperation May Result in Reduction of FCA Damages
– Mandatory Disclosure
• Nondisclosure Itself Would Constitute a Crime
Business Ethics
 New Requirement Since December 24, 2008
– Written Code of Business Ethics and Conduct
– Internal Controls System
– Employee Compliance Training Program
 Mandatory for Contracts and Subcontracts
Valued over $5 Million with a Performance
Period of 120+ Days
– But Best Practice for All Contractors and
Subcontractors to Follow
Business Ethics
 Written Code of Business Ethics and Conduct
– Written Standards of Conduct Stating Company’s Values
and Commitment to Compliance with All Relevant Laws,
Regulations, and Contract Provisions
– Must Include Periodic Review and Self-Audit
– Must Provide a Written Copy to Each Employee
 DCAA Empowered to Review Ethics Compliance
– Merely Having a Plan on the Shelf is not Enough
– Review of Written Code, Employees’ Acknowledgement of
Receipt of Code, List of Any Violations, and Open
Internal Investigations, etc.
Business Ethics
 Internal Control System
– Facilitate the Timely Discovery and Disclosure of Improper
Conduct
– Must Include an Internal Reporting Mechanism (Hotline)
– Ensure that Corrective Measures are Promptly Instituted
and Followed
– Must Include Disciplinary Actions for Violations
– Must Include Periodic Reviews and Self-Audit
 Does Not Apply to Commercial Item Contractors or
Small Businesses (But Again, Good Practice
for All Companies)
Business Ethics
 Employee Compliance Training Program
– Awareness Program
– Should Include Written Materials and Interactive Training
 Topics to be Covered:
–
–
–
–
–
–
–
Conflicts of Interest
- Export Controls
Gifts and Gratuities
- Defective Pricing
Kickbacks
- Record-Keeping
Lobbying Restrictions
- Contract Compliance
Collusive Bidding
- Revolving Door Restrictions
Labor Charging
- Price Reductions
Protection of Proprietary Information
Mandatory Disclosures
 New Requirement Since December 12, 2008
 What Must be Disclosed?
– Certain Crimes: Fraud, Conflict of Interest Violations, Bribery,
Improper Gratuities
• By a Principal, Employee, Agent, or Subcontractor
– False Claims Act Violations
– Significant Overpayments
 When Must a Disclosure be Made?
– “Credible Evidence” / Actual Knowledge Standard
 Must Make Disclosure to OIG & Contracting Officer
– Until 3 Years After Final Payment
Mandatory Disclosures
 Two Separate Sources of Obligation to Disclose:
– 1. Disclosure Required to Avoid Suspension or Debarment
(FAR 3.1001)
• Applies to All Contractors
• Disclosure Must Only be Made to CO
– 2. Disclosure Required by Contract (FAR 52.203-13 and
Payment Clauses 52.212-4(i)(5); 52.232-25(d), 52.23226(c) and 52.232-27(l))
• Mandatory for Contracts Over $5 Million with a Performance Period of
120+ Days (52.203-13); Payment Clauses Require Remittance of
Overpayments for All Contracts
• Disclosure Must be Made to OIG and CO
Guidance by Government on Disclosures
 DoD’s Disclosure Form: Date, Full
Description, Names, Report on Internal
Investigation, Records, Remedial Actions,
Financial Impact, Certification on Truth and
Accuracy
 Disclosure to be in Writing Through Online
Submissions
 Privileges and Exemptions to FOIA to Apply
Credible Evidence and Timing
 Credible Evidence is Not a Defined Term
– Work in Progress
 Disclosure Must be Timely
– Government Talks in Terms of 6 to 8 Weeks
 Question as to Whether Partial Disclosures
Inoculate Contractor
 No Suspensions and Debarments Due to Failure
to Disclose or Incomplete/Misleading Disclosure
Operation of MDR Program
 Most Made to DoD; 320 by November 2010;
10% to GSA
 Abundance of Caution Disclosures
 Aggregation Common
Source: Stuart (Stu) B. Nibley & David Nadler of Dickstein Shapiro LLP, West's Government Contracts
Year in Review Conference (November 2011).
What Happens to Disclosures
 DoD Gives to DOJ, DCAA, CO and
Suspension and Debarment Authority
 If Disclosure is a “Top 100” DoD Contractor,
Referred to DCIS and Agency Investigative
Service
 CO has Authority to Negotiate Settlement
 IG sends Closure Notice
DCAA Role
 DCAA Empowered to Review Compliance
– Review of Any Disclosures Made
• Confirmation that All Disclosures Were “Timely” Made
– Review of Any Corrective Action Taken by
Contractor
– Examination of Internal Control System
• Auditors will Review to Make Sure Policy Includes a
Reasonable Definition of “Credible Evidence” and
Reasonable Timeframes for Disclosure
Potential Criminal Implications
 High Probability that Allegations Against
Government Contractor Will Also be
Reviewed for Possible Criminal Prosecution
 If Government Pursues a Civil Fraud
Investigation, Will Likely Also Conduct a
Parallel Criminal Investigation
Effect of Parallel Criminal Investigation
 Information from Internal Investigation or
Civil Proceedings Used in Criminal Matter
 Contractor’s Choice to Voluntarily Self Report
– Demonstrate Good Faith and Cooperation
– Disclosure of Internal Investigation to Escape
Indictment
– Beneficial in Prosecutor’s Charging Decisions and
Sentencing
Violations of the False Claims Act and
The Importance of a Timely and Proper
Response to Whistleblower Allegations
Daniel J. Kelly
Thomas J. Finn
Paula Cruz Cedillo