by Michael Volkov
Companies complain about the burdens of anti-corruption compliance. They need to put things in perspective. The “greatest” risk of them all may be the False Claims Act (FCA).
FCA violations can lead to severe consequences, especially for government contractors. Since the FCA was amended in 1986, more than $30 billion dollars has been recovered in damages, fines and penalties, impacting a wide array of industries including health care, mortgage financing and government procurement. In addition to FCA violations being subject to treble damages and penalties of $5,500 to $11,000 per claim, companies face the risk of suspension, debarment and, in some cases, criminal prosecution.
False Claims Act
The False Claims Act (FCA), 31 U.S.C. §§ 3729-3733, has come a long way since it was passed during the Civil War to combat fraud against the government perpetrated in the form of faulty war supplies. Though FCA lawsuits have been on the rise since 1986, Congress has amended the FCA in response to repeated uncovering of fraud against the government.
In the past few years, Congress has continued to expand the reach of the FCA and this expansion has put businesses at higher risk than ever of FCA enforcement by employees or ex-employees, customers, auditors, consultants or other professionals.
The Fraud Enforcement and Recovery Act of 2009 (FERA) and the Patient Protection and Affordability Care Act (PPACA) expanded the scope of FCA violations and imposed procedural changes favoring the government and relators who bring cases under the qui tam provisions of the FCA. In addition, mandatory disclosure requirements of FCA violations were included in several pieces of legislation, including the 2008 amendments to the Federal Acquisition Regulation (FAR), the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act of 2009.
These legislative changes are a significant concern to companies that do business directly with the government, that report to or make certifications to the government, or that receive government contracts or grants. The Department of Justice has been recovering record amounts for health care fraud, and it is estimated that there may be as many as 1,000 FCA actions currently under seal and being investigated by the government.
The FCA identifies seven potential acts or omissions as violations. Four of the seven are: knowingly submitting a false or fraudulent claim for payment to the federal government; making a false statement in order to have a claim paid; conspiring to defraud in order to have a claim paid; and making a false record or statement to conceal an obligation to pay money to the federal government. The most common violation of the FCA is the knowing submission of a false or fraudulent claim. Probably the most underappreciated violation is the making of a false record or statement to conceal an obligation to pay money to the federal government.
False Claims Act Violations
FCA violations can result in severe punishment. First, any actual damages suffered by the government will be trebled. (Actual damages are not necessary to establish an FCA violation. A violation can occur if the false claim was never paid by the government).
An FCA violation is grounds for suspension or debarment from doing business with the federal government, and if the conduct or omission violates a comparable state false claims act, could result in exclusion from state contracting opportunities.
FCA claims are brought in one of two ways. The federal government, through the Justice Department, can file a civil action against a contractor in a federal court. The government may also pursue an FCA claim against the contractor in the court of federal claims by way of a counterclaim in an action originally initiated by the contractor.
The FCA includes “whistleblower” provisions that permit private parties with knowledge of an alleged FCA violation to file a complaint against a contractor on behalf of the federal government. The whistleblower is formally referred to as a qui tam relator, and the FCA provides powerful incentives for relators to come forward with information about potential FCA violations – the FCA provides a bounty to the relator, meaning the relator is entitled to a significant percentage of any recovery from the contractor, including the treble damages.
In light of today’s FCA risks, businesses should be proactive. Vulnerabilities need to be identified and systems put in place to better manage government reporting and facilitate employee communication. The effective management of FCA risk requires careful risk assessments, audits and internal controls and supervision to avoid false claims or certifications.
The elements of an FCA compliance program are not anything new to readers – the essential elements for a compliance program are the same. The substance of compliance, however, is a different focus – detection of potential false or inaccurate claims (expenses or costs) and possible inaccurate certifications. Unlike the FCPA, which focuses on bribery and potential inaccurate books and records, the FCA is aimed at expenses and certifications made to the government or which affect government programs.
Michael Volkov is a shareholder at the national law firm of LeClairRyan. His practice focuses on white collar defense, corporate compliance, internal investigations and regulatory enforcement matters, and he is a former federal prosecutor with almost 30 years of experience in a variety of government positions and private practice.