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How does the False Claims Act apply to federal grants and contracts?
How the False Claims Act Applies to Federal Grants and Contracts
The False Claims Act (FCA) is an important law used to combat fraud against the federal government. It allows both the federal government and whistleblowers to file lawsuits against individuals or companies that knowingly submit false claims to get money or property from the government.
The FCA is especially relevant for organizations that receive federal grants or contracts. If you work for a company or nonprofit that gets federal funding, you need to understand how the False Claims Act could apply.
What is the False Claims Act?
The FCA imposes liability on any person or organization that:
- Knowingly submits a false claim for payment to the federal government
- Knowingly makes a false record or statement to get a false claim paid
- Conspires to defraud the government by getting a false claim allowed or paid
The law covers claims submitted to any part of the executive, legislative, or judicial branch of the federal government. Common targets include Medicare, Medicaid, defense contractors, education funding, and research grants.
Under the FCA, violators face fines of $11,000 – $22,000 per false claim. They can also get damages up to 3 times the amount of money the government lost due to the false claim. So the penalties can really add up, especially if thousands of false claims were submitted.
How Does the FCA Work?
Lawsuits under the False Claims Act can be initiated in two ways:
- The federal government itself can file a civil action against an alleged false claimant.
- A whistleblower, also called a “relator,” can file a qui tam lawsuit on behalf of the government against the false claimant. (Qui tam is short for a Latin phrase meaning “he who brings a case on behalf of our lord the King.”)
If a whistleblower initiates the lawsuit, it is initially filed under seal to allow the government time to investigate. The government can choose to intervene in the qui tam case and take it over, or decline to intervene and allow the whistleblower to proceed alone.
If the FCA lawsuit is successful, the whistleblower can receive 15-30% of the amount recovered. So relators have a strong financial incentive to come forward if they discover fraud against the government.
Knowingly Submitting False Claims
One of the key elements of False Claims Act liability is “knowingly” submitting false claims. This includes situations where the person or organization:
- Has actual knowledge the claim is false
- Acts in deliberate ignorance of truth or falsity
- Acts in reckless disregard of truth or falsity
So even if someone didn’t specifically intend to defraud the government, they can still be liable under the FCA if they showed a conscious disregard or deliberate ignorance of facts.
Common Areas for False Claims
Some common areas where false claims arise are:
- Billing for services never performed – This could include billing Medicare for patient visits that never happened.
- Billing for unnecessary services – A physician bills Medicare for tests that weren’t medically needed per standards of care.
- Upcoding – Billing for more expensive services than were actually provided. For example, billing for a 2-hour psychotherapy session when only a 1-hour session was performed.
- Kickbacks – Receiving payments in exchange for referrals, which can violate the Anti-Kickback Statute.
- Off-label marketing – Drug companies promoting off-label uses of medications that are not FDA-approved.
- Inflated costs – Defense contractors billing for excessive costs on projects.
Grantees and contractors who receive federal funds should have robust compliance programs to detect and prevent such false claims from occurring. But mistakes and fraud can still happen in some cases.
FCA Liability for Federal Grantees
Recipients of federal grants and contracts may face False Claims Act liability if they:
- Falsify data or results in grant applications or reports
- Receive grant funding through nepotism or conflicts of interest
- Embezzle or misuse grant funds for unauthorized expenses
- Fail to perform grant obligations after accepting federal funds
For example, in U.S. ex rel. Hendow v. University of Phoenix, the University of Phoenix paid $78.5 million to settle FCA allegations that it violated rules for recruiting students with federal financial aid. The government alleged the University had a financial incentive to enroll students rather than focus on their academic needs.
Even if issues seem minor at first glance, they can still violate the False Claims Act. For instance, in U.S. ex rel. Anti-Discrimination Center v. Westchester County, Westchester County, NY paid $7.5 million to settle claims that it misrepresented its efforts to reduce racial segregation in housing developments. The county received federal grants from HUD for these programs.
Defenses and Limitations
If faced with FCA allegations, grant recipients do have some defenses they can raise. Some key defenses include:
- Lack of materiality – The false statements or noncompliance were minor or had no impact on the government’s funding decision.
- Lack of knowledge – The organization can demonstrate it did not “knowingly” submit false claims.
- Statute of limitations – The FCA has a 6-year statute of limitations from the date of the violation.
In addition, the FCA contains a “reverse false claims” provision. This makes organizations liable if they improperly avoid obligations to repay money or property owed to the government. So grant recipients need to know when they have repayment obligations and comply with them.
The FCA does not allow collective knowledge to be aggregated for “knowing” violations. Each person’s knowledge is evaluated on an individual basis. And it does not impose vicarious liability on organizations for employee violations.
Best Practices for Compliance
Given the risks of False Claims Act liability, federal grantees should implement compliance programs that:
- Provide employee training on recognizing and reporting potential fraud
- Have protocols for conducting internal investigations of fraud allegations
- Establish whistleblower policies prohibiting retaliation
- Require periodic audits and monitoring of claims submitted for federal funds
- Update written policies and procedures to prevent false claims
Having strong controls and compliance helps mitigate the risk of fraudulent activity occurring in the first place. It also shows that your organization made good faith efforts to comply with legal requirements.
The Bottom Line
The False Claims Act is a powerful tool to address fraud involving federal funding. Understanding the law’s provisions can help grant recipients avoid running afoul of it. Putting robust compliance measures in place demonstrates an organization’s commitment to proper stewardship of federal awards.
With knowledge of the FCA, and concerted efforts to prevent false claims, grant recipients can effectively manage risks and fulfill their duties to use federal funds appropriately. This benefits not just individual organizations, but the integrity of taxpayer-funded programs overall.
References
U.S. Department of Justice. (2023). The False Claims Act. Retrieved from https://www.justice.gov/civil/false-claims-act
Phillips & Cohen LLP. (2023). A Guide to the Federal False Claims Act. Retrieved from https://www.whistleblowerllc.com/resources/whistleblower-laws/the-federal-false-claims-act/
U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006).
U.S. ex rel. Anti-Discrimination Center v. Westchester County, 495 F. Supp. 2d 375 (S.D.N.Y. 2007).