Governmental False Claims: What They Are and How to Avoid ThemLouisiana and the Gulf Coast Region is set to receive hundreds of millions of dollars in federal money earmarked for transportation and other construction projects. However, the significant influx of federal spending brings with it the significant risk of fraud, waste, and abuse. Where the government finds such fraud waste, and abuse, it can recover significant damages and spending under the False Claims Act. The following is a brief overview of the federal government’s most powerful tool in recovering for false claim violations, as well as some guidance on the best practices to minimize the risk of violations.
What Is The False Claim Act
The Federal False Claims Act gives the federal government the power to recover damages and penalties for the false and/or fraudulent claims for payment. The False Claims Act applies to federal funding of projects through contracts as well as federal grants. Under the Act, the government can recover up to three times the amount that was paid under the false claims as well as statutory penalties between $10,957 to $21,916 per claim.
When does a claim for payment rise to the level of a violation of the Act? To be considered a "false claim" under the act, the claim must be (1) false; (2) knowingly made; and (3) material.
- To find that a payee "knowingly" submitted the false claim, the government does not have to prove actual knowledge that the claim was false; rather, it need only show that the payee acted with "deliberate ignorance" of the truth of falsity of the claim, or with "reckless disregard for the truth."
- Further, the Act does not cover any and all misrepresentations or any and all failures to follow regulatory requirements; to be "material" the false claim must affect the government's decision to pay.
- The materiality requirement prevents all garden variety contract and regulatory disputes from coming within the scope of False Claims Act liability. However, it's important to realize that such disputes may give rise to False Claims Act exposure if the falsity of the claim was done with knowledge and the falsity affected the government's payment decision.
The majority of actions under the False Claims Act raised by the government are brought by a whistleblower. The majority of whistleblowers are current or former employees with knowledge of the employer's government billings, although occasionally competitors can blow the whistle on their competition.
- The whistleblower files a case under seal in the court against the defendant and alleges false claims.
- While the case is still sealed, the government investigates the allegations and determines whether it will go forward with the prosecution of the case. If it does not, the whistleblower (known legally as a "relator") may proceed with the suit.
- There is a strong financial incentive for the whistleblower: if the government recovers, the whistleblower is awarded a percentage of the recovery, from 15% to 30%. If whistleblower is successful, the defendant will have to pay reasonable attorney fees as well.
- A whistleblower may also be awarded damages if he or she can prove that the employer retaliated against him or her for the whistleblowing.
The False Claims Act in Construction Claims
At the outset, it's important to note that a company can be liable under the False Claims Act even if it was not the person submitting the claim. In the context of construction, this means that subcontractors who present false claims can be liable to the same extent as the contractor. Further, if the contractor knows or should have known of the falsity of the subcontrator's claim, or conspires with the contractor to submit a false claim, it can be liable as well.
It's also important to note that under the False Claims Act even the knowing retention of an overpayment can give rise to a False Claims Act prosecution or suit. Known as a "reverse false claim," this is a common theory of recovery in construction false claims. For example, if a government authority reimburses for payroll taxes, and a subcontractor is overpaid such taxes, the failure to remit back to the government the amount of an overpayment may result (and has resulted in the past) in liability under the False Claims Act.
Although there is no comprehensive list of the types of suits, the following are suits that are common in the construction industry context:
- Bid rigging
- Product substitution/substandard products
- Substandard workmanship
- False reports and certifications
- Overcharging for materials/wages
- Falsifying minority status
- Failure to follow contract specifications
Although it's impossible to eliminate all risks of liability, there are some steps that a company can take to help minimize its exposure to False Claims Act liability. These include:
- Written policies against false claims (including bribes/kickbacks)
- Development of procedures for review of all submissions for payment
- Written document retention policies for all cost-based reporting
- Mandatory periodic training for employees who handle documentation/claim submissions
- Procedures for screening subcontractor claims for reimbursement
- Establish procedures for hearing employee complaints and institute exit interviews for employees
Catherine Maraist, partner at Breazeale, Sachse & Wilson, L.L.P. General Counsel for Louisiana Associated General Contractors. Catherine is a former Assistant U.S. Attorney for the Middle District of Louisiana and has extensive experience in federal criminal and civil law procedure.