Federal Grant Fraud Defense: Government Grant Violations.

The Federal Bureau of Investigation, the IRS, and other federal law enforcement agencies investigate a wide range of alleged grant fraud. Allegations of grant-related fraud can crop up at any stage of the grant process, application, award, performance, or reporting. Examples include:

• Presenting incorrect or incomplete information in order to establish eligibility for a grant or to win a competition
• Misrepresenting how grant funds would be used and then using them for another purpose
• Failing to recertify qualifications in order to receive funding
• Diverting grant funds to other projects
• Forging a federal official’s signature on a progress report
• Presenting false information in order to continue receiving funding

When Does a Grant Violation Become Civil Fraud?

In these situations, when does a grant violation become a federal civil fraud case? When does a grant violation become a federal criminal fraud case? While the specific answers depend on the facts at hand and the particular statute involved, in federal grant-related cases, they are typically governed by the following factors:

1. The Form of the Submission

The federal government imposes liability for certain grant-related conduct involving a false or fraudulent claim, false record or statement material to a false claim, or other conduct listed in 31 U.S.C. § 3729(a)(1). For example, while the False Claims Act (FCA) imposes liability for knowingly presenting false payment claims, the Anti-Kickback Statute only applies to “remuneration” in exchange for “referring to” an entity, which could create a significant difference in the appropriate defenses.

2. Whether the Rule was Established through Funding Requirements

The False Claims Act imposes liability for granting entities that knowingly certify that a project “is not” or “does not” meet certain requirements, but it only applies if those requirements are contained in the grant’s terms and conditions.

3. Materiality

The False Claims Act imposes liability for both grant applicants and grant recipients only if the falsity in question is material to the government’s decision to pay. Materiality is judged from the government’s perspective. When assessing materiality, courts and investigators ask, “[T]he term ‘material’ means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.”

4. Jurisdiction

Federal jurisdiction can depend on whether the United States provides or will reimburse any portion of the money or property requested. To establish federal jurisdiction, the federal government must demonstrate the existence of a “federal interest,” and the specific program rules will generally determine whether this interest exists.

5. Mental State

Similar to other federal fraud prosecutions, the government must establish specific elements of knowledge and intent, though these elements are typically different for civil cases than for criminal cases.

Which Grant Submissions and Statutes Create Exposure after an Award?

In addition to grant applications, grant awardees can also face federal investigation for fraud. With regards to grant recipients, how do certain submissions and activities create exposure? Under which statutes can they face civil and criminal liability? The following statutes that grant recipients are commonly charged under:

1. 18 U.S.C. § 1001, “Statements or Entries Generally”

Among all the fraud statutes used in federal grant cases, 18 U.S.C. § 1001 is arguably the most common. This general statement-fraud statute covers, among many types of conduct, “Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully- (2) makes any materially false, fictitious, or fraudulent statement or representation;” Because it has broad application, we need to address the particular details that make a federal investigation target a specific client.

2. 18 U.S.C. § 287, “False, Fictitious or Fraudulent Claims”

The wire fraud statute (18 U.S.C. § 1343) is more similar to the common-law definition of fraud than 18 U.S.C. § 287, but it can apply in situations where grant recipients (and grant applicants) are accused of knowingly presenting claims for payment that they know to be false or based on false, fictitious, or fraudulent misrepresentations.

3. Wire Fraud under 18 U.S.C. § 1343

While not exclusively targeted toward grant-related fraud, wire fraud is another statute under which federal authorities frequently seek to charge grant recipients. This statute also requires showing that the fraud (or attempted fraud) involved transmission by wire, radio, or television communication in interstate or foreign commerce.

4. 18 U.S.C. § 666, “Theft or Bribery Concerning Programs Receiving Federal Funds”

The last federal statute in grant fraud cases is 18 U.S.C. § 666, which broadly prohibits theft, embezzlement, bribery, and misapplication of grant funds. Section 666 is a criminal statute providing for fines and imprisonment, and it imposes specific requirements on the amount of property involved in theft-related offenses (i.e., the property must be worth $5,000 or more), which can create potential defenses for grant recipients facing theft-related charges.

How do Award Terms, Cost Rules, and SBIR Eligibility shape the Defense?

With the detailed requirements governing each federal grant program, what are the core rules that grant recipients can violate and the primary triggers that can lead to federal investigations? How do issues related to SBIR and STTR eligibility specifically impact how investigators approach grant recipients in these cases?

Cost-Charging Violations

Three of the most common types of allegations include:

• Charging one cost to multiple federal awards: This has sometimes been called “double billing” and is a significant source of grant-related fraud allegations.
• Inflated labor hours, ghost employees, and fabricated invoices: Similar to other types of federal fraud cases, these are common grounds for billing allegations in grant fraud investigations.
• Fabricated research results and progress reports: This can become an issue in grant fraud cases as well, particularly if the fabrication of results or reports impacts whether an awardee is entitled to continue receiving grant funding.

SBIR and STTR Eligibility Violations

When targeted in an SBIR investigation, one of the main defenses we look for is also related to whether the awardee is, in fact, eligible. An applicant must satisfy the applicable eligibility requirements at the time of application and, for Phase I and Phase II awards, at the time of award and at any other time specified by SBA regulations. Along with this, in grant fraud cases, we check to see if all requirements regarding eligibility were met. While SBIR and STTR programs are similar, the requirements to be eligible differ. For example, both programs support eligible domestic small businesses that are developing innovative technologies, but while the SBIR program awards funds only to small businesses, while the STTR program requires small businesses to work in conjunction with research institutions and other eligible organizations. Similarly, while the SBIR and STTR program have similar ownership, control, and performance requirements for funding eligibility, these requirements vary in how they are determined and enforced under the program.

How should an organization respond when an IG, DOJ, or FBI uses a CID, subpoena, audit, or search?

As with all federal investigations, the first step is to properly respond to the investigative contact and seek protection against unwanted penalties. When contacted, an organization or individual should not admit fault or offer information without the guidance of an experienced federal grant fraud defense attorney. The types of investigative tools used by the government are described below.

Civil Investigative Demand (CID) under the False Claims Act (FCA)

While the term “Civil Investigative Demand” is most commonly associated with a False Claims Act (FCA) investigation, these are investigative tools used by the U.S. Department of Justice (DOJ) and other federal authorities to request documents, written answers to interrogatories, and testimony.

Subpoena

Another investigative tool is the subpoena. In federal grant cases, this could be a grand jury subpoena, and it may require the production of documents, other tangible evidence, or testimony.

Preservation of Records and Documentation

Along with responding appropriately to any investigative contact, it is equally important to preserve all relevant records and documentation. Any attempt to destroy or conceal records can create separate exposure under various federal laws targeting obstruction of justice. For organizations, this is particularly important because the government can seek to impose criminal or civil penalties on the organization itself based on its efforts to destroy, conceal, or tamper with evidence, regardless of the underlying allegations at hand.

Audits and Inspections

Audits and inspections are other common investigative tools that the federal government may use in federal grant fraud investigations. Audits and inspections may be conducted in the context of a federal grant fraud investigation, or they may be conducted as part of an agency’s oversight responsibilities.

Target Letters, Search Warrants, and Other Contacts

In certain cases, the government may contact an organization or individual with a target letter, or it may execute a search warrant. These are more severe investigative contacts, and they require specific and targeted responses to protect against the imposition of penalties.

What can alleged grant fraud cost before conviction, and which defense facts matter?

Potential Penalties

While, in many cases, grant fraud allegations end without charges or conviction, when charges are filed, grant fraud can have devastating consequences. The False Claims Act (FCA), for example, includes both damages and penalties as civil remedies for persons or entities that violate the False Claims Act. Specifically, persons or entities that violate the False Claims Act can face “treble damages” (three times the value of the loss incurred by the federal government) in addition to a civil penalty for each individual violation. A federal fraud conviction can lead to restitution, fines, imprisonment, and forfeiture. It may also lead to federal debarment, though, as discussed below, debarment is generally not permanent.

Common Grant-Related Defenses

Along with attacking the elements of the specific statute at issue, there are several common grant-related defenses. Some of the most effective defenses include:

• Showing the research outcome was successful: However, this is not an excuse for a violation. While a successful outcome may be persuasive for reducing sentencing or avoiding certain penalties, the underlying allegation of false billing or certification requires an independent factual defense.
• Showing an accounting mistake: Similar to this, showing that an accounting mistake was made is a common defense in fraud cases. However, an accounting mistake by itself is not sufficient to defeat a False Claims Act case, nor is it sufficient to defeat the criminal intent requirement under the various federal fraud statutes.

Federal Debarment

Generally, a federal debarment is time-limited rather than permanently stripping an entity of its eligibility to receive funding. While some programs have permanently-debarring-grant-violations rules, such is generally not the case. Instead, entities generally are debarred for a specific term, which, if not extended due to further issues, will eventually expire.

Speak With Counsel Before You Answer Anything

If agents have contacted you, the order matters: counsel first, answers second. Spodek Law Group has been practicing since 1976 and defends federal matters nationwide, coast to coast, from offices in New York, Brooklyn, Queens and Los Angeles. Call 888 348 8028.