Federal Procurement Fraud: Government Contracting Fraud.

When Does a Contracting Dispute Become Federal Procurement Fraud? A contracting dispute becomes federal procurement fraud when the government can prove one or more of several types of liability. Typically, the government relies on the False Claims Act (FCA) to seek civil penalties and treble damages, but other statutes, regulations, and contracting principles also allow for government recovery under certain circumstances.

In civil FCA cases, for example, the government must prove:

• Falsity;
• Materiality;
• Knowledge (discussed below); and
• A claim for payment or a request for money.

Under the FCA, knowledge does not necessarily mean that a contractor knew the claim was false. A contractor may also know a claim is false if the contractor “(ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information;” This is an extremely low bar for the government to meet. Furthermore, under the FCA, the government is not required to prove that a contractor acted with the specific intent to defraud the government, either generally or in respect to a specific claim or request for money.

Contract nonperformance alone is not enough to establish FCA liability either. In most cases, for a company’s nonperformance to lead to civil liability under the FCA, the government will need to prove that the company committed or ordered a material falsehood with knowledge in order to obtain payment.

What is a “False Claim” in Government Contracting?

Under the False Claims Act, a “false claim” is defined broadly. A false claim may consist of:

• Inaccurate payment applications, requests for payment, or other claims for payment; or
• False records or statements that are material to a false or fraudulent claim, including statements made in connection with obtaining or performing a government contract.

The False Claims Act’s reach is also not limited to claims for payment. It also applies to “false records or statements.” For example, regulatory mistakes made by contractors can lead to FCA liability when the government can prove that the contractor certified compliance with the applicable regulations and that the certification was linked to a request for payment. The certification itself is false, and the request for payment triggered FCA liability.

What Are the Risks of a Federal Procurement Fraud Investigation?

The risks of a federal procurement fraud investigation are extensive, potentially involving:

• Civil or criminal penalties;
• False Claims Act (FCA) liability;
• Contract termination for default or convenience;
• Debarment or suspension of government contracting privileges; and
• Reputational harm that can have long-term business consequences.

What Do Investigative Demands Signal About Procurement Fraud Exposure?

If the Justice Department (DOJ) or another federal investigative agency has issued a demand, subpoena, or other request for information, your company must be prepared to respond promptly while protecting pertinent information. Because the scope of the federal government’s inquiry can be extensive, it is critical to ensure that your investigative counsel works together with your company’s key personnel to formulate a response that is comprehensive and provides the government with a clear understanding of the nature of your company’s practices and contractual compliance.

Civil Investigative Demands

When the DOJ investigates government contracting fraud under the False Claims Act (FCA), it will frequently use Civil Investigative Demands (CIDs). Civil investigative demands are authorized by several federal statutes, including the FCA; like subpoenas in civil litigation, FCA CIDs allow the DOJ to demand documents, written answers to specific questions, and oral testimony. Notably, CIDs can be issued prior to the government filing any formal complaint, and they are not limited to the defendant in the investigation. The DOJ will use the information gathered through CIDs to assess whether it is warranted to seek civil penalties and treble damages under the FCA.

Grand-Jury Subpoenas

If a grand-jury subpoena is involved, this indicates that a federal grand jury is investigating potential criminal conduct and may return an indictment. However, issuance of a grand-jury subpoena does not necessarily mean that charges will follow, nor does it mean that a subpoena recipient will certainly face criminal liability. A subpoena recipient can be an accused defendant, but a subpoena recipient can also be a witness, a “subject,” or a “target” of the investigation.

Requests for Mail and Wire Communications

If a subpoena or CID requests copies of any mail or wire communications (including communications sent via the internet), this could indicate that the DOJ or federal investigative agency is attempting to gather evidence that would support charges under 18 U.S.C. §§ 1341 (Mail Fraud) and 1343 (Wire Fraud). Both of these statutes apply in federal procurement fraud cases, and both of these statutes have broad application.

How Can Billing, Eligibility, and Subcontracting Rules Create False Claims?

Billing and labor mischarging fraud allegations are common in federal government contracting investigations. The DOJ frequently targets companies for alleged cases involving:

• Cross-charging (The improper practice of assigning costs that a contractor incurred under one government contract to another government contract, often in cost-reimbursable contract arrangements); and,
• Labor mischarging (Which can involve a contractor billing the government for hours not actually worked, billing for a higher labor category than what was assigned, or using unauthorized labor rates).

In addition to billing and labor-related fraud investigations, the DOJ and other federal agencies frequently target suspected product substitution fraud. These investigations often stem from allegations that a contractor improperly used unauthorized materials during production or provided goods that failed to meet the specifications outlined in the government contract.

Along the lines of product substitution fraud, allegations of False Claims Act (FCA) violations can also stem from violations of the Buy American Act (BAA) and Trade Agreements Act (TAA). These types of investigations are also typically concerned with the specifications and material properties of the goods being provided to the government. With these types of investigations, a key question that needs to be addressed is whether the goods being produced were subject to BAA or TAA compliance requirements and whether the goods are of an American origin (if so required).

Small Business Procurement Fraud

Finally, investigations involving alleged federal procurement fraud and civil enforcement under the False Claims Act frequently center on allegations of small-business fraud. While the federal government’s small-business set-aside programs provide opportunities for certain companies to compete for federal contracts, they also impose numerous substantive requirements and qualifications. Allegations of fraud can surface when contractors misrepresent their qualifications in order to take advantage of these programs, and these investigations frequently involve eligibility requirements for federal set-aside programs including:

• The 8(a) Program;
• The Historically Underutilized Business Zone (HUBZone) Program;
• The Service-Disabled Veteran-Owned Small Business (SDVOSB) Program; and,
• The Woman-Owned Small Business (WOSB) Program.

What Must a Contractor Preserve, Disclose, and Coordinate Before Proceedings Expand?

When faced with an allegation of procurement fraud, an affected company must be prepared to answer a range of critical questions that will impact its next steps. The following are six critical questions:

• Is my company facing consequences under the False Claims Act (FCA), the Buy American Act (BAA), or the Trade Agreements Act (TAA)?
• Is my company at risk for debarment or suspension from government contracting?
• What are the consequences for my company’s security clearance and ability to continue business operations?
• Is the government pursuing charges for mail fraud, wire fraud, or another criminal offense?
• Does the government have evidence of a material misstatement, misrepresentation, or fraud?
• Is the DOJ seeking to collect penalties and damages against my company?

With these questions and issues in mind, the three key issues a contractor needs to address are:

Preserving and/or Disclosing Information

While most contractors should not destroy, alter, or otherwise conceal records or other information responsive to an investigation, some contractors may also need to disclose information to the government. For example, while the Justice Department’s Justice Manual advises against pursuing suspension or debarment in cases where companies self-report misconduct (such as under the DOJ’s “Corporate Voluntary Self-Disclosure Policy”), a knowing failure to timely disclose credible evidence of government contract fraud (as described below) can itself create suspension or debarment consequences. For contracts subject to applicable disclosure requirements, contractors generally must disclose credible evidence of:

• Federal criminal violations involving fraud, conflict of interest, bribery, or gratuity violations;
• False Claims Act (FCA) violations; and,
• Government overpayments, including credible evidence of a significant overpayment, when disclosure is required by applicable procurement rules.

Coordinating Documents, Employees, the Government, and Parallel Proceedings

Once a company knows that an investigation is underway, the timing of its next steps are critical. Effective counsel will focus on coordinating:

• Gathering pertinent documents while avoiding obstruction or spoliation consequences;
• Interviewing key personnel while maintaining attorney-client privilege;
• Working with government agents and prosecutors; and,
• Managing issues across parallel proceedings in civil, criminal, administrative, and other contexts.

Preparing Response Strategies for All Relevant Forums

Once the federal government files a complaint, a contractor must be prepared to respond in the appropriate forum. Because each forum has different standards, defenses, and burdens of proof, this will require an assessment of what the government has and what it will need to prove in each case. The contractor’s response will need to be based on a comprehensive analysis of each potential scenario and will need to account for potential consequences across all relevant forums.

Talk It Through With a Lawyer

Every case turns on its own facts. Todd Spodek is the managing partner of Spodek Law Group, a second generation firm his father opened in 1976, and the firm takes federal criminal and white collar matters nationwide. Call 888 348 8028 to talk it through.