In the third segment of a four-part webinar series, attorneys from Venable and a consultant from BDO presented The Civil False Claims Act: What It Is and Why It Is Important Under the CARES Act. The Coronavirus Aid, Relief, and Economic Security (CARES) Act is unprecedented in the scope of financial relief offered to those impacted by the COVID-19 pandemic, which may give rise to allegations of fraud and misuse of funds. The Civil False Claims Act (FCA) is a well-established mechanism through which the government may pursue legal action if misuse of federal funds or property is suspected, including payments made to businesses, including contractors, under the CARES Act. Past disaster relief case law demonstrates that the U.S. government will take action against illegal conduct both civilly and criminally and can do so for years following allegations of misconduct, if necessary. Even without intentional wrongdoing, the government may second-guess actions taken by contractors during disaster relief efforts, potentially rendering expedient actions early in the pandemic difficult to defend. The CARES Act includes oversight mechanisms in addition to existing government oversight, through the Office of Special Inspector General for Pandemic Recovery, Pandemic Response Accountability Committee, and Congressional Oversight Commission.
The panel addressed the ways in which government contractors can ensure compliance with the Civil False Claims Act when they receive payments from the federal government, how contractors can operate to mitigate exposure to potential FCA violations, and how to reduce potential penalties.
What legislation offers financial relief for contractors impacted by the COVID-19 pandemic?
In less than two months, Congress has authorized over $2.5 trillion worth of spending, which is hitting the U.S. economy fairly quickly. Understandably, the government will be interested in how this money is spent.
- The Paycheck Protection Program (PPP) allows small business to apply for and receive loans intended to cover payroll costs, which may be forgiven if used correctly. There is potential fraud risk with PPP funds because an element of qualification is a good faith certification stating economic necessity. Businesses with ample liquidity have been encouraged to return these funds, and federal regulators have stated that loans over $2 million will be audited. The Families First Coronavirus Response Act (FFCRA) grants authorized paid sick or personal leave – related to COVID-19 impact – for small business employees. Employers can be reimbursed through tax credits for the cost of that leave.
- Section 3610 of the CARES Act is directly relevant to contractors. It offers reimbursement for paid leave that contractors provide their employees to keep them in a "ready state." This may present a risk for fraud if contractors attempt to "double dip" and receive reimbursement for the same expenses through this mechanism and through another means of reimbursement.
- Title IV lending facilities are still evolving but allow the federal government to set lending facilities for medium and large businesses, including those critical to maintaining national security.
Can contractors utilize more than one of the programs available, and how can "double dipping" be avoided?
If done legally, contractors may utilize more than one program for financial relief. If not undertaken properly, there is risk for fraud, either intentionally or unintentionally. Contractors should consider the following questions to avoid risk of fraud:
- What programs or facilities is a contractor using to pay for various segments of their operations?
- What programs have already been used?
- What does the contracting officer know and what doesn't that officer know about financial relief programs being utilized?
- Is the contractor keeping solid and transparent documentation to protect its business and defend against potential action by the government?
What can trigger an FCA action?
The False Claims Act imposes civil penalties and damages on parties that submit false or fraudulent claims to the federal government. Liable parties under the FCA include any person who:
- knowingly presents fraudulent documentation for payment or approval (like an invoice)
- uses a false record for payment of a claim
- conspires with other parties to commit a violation of the FCA
- has possession of money or property to be used by the government and knowingly delivers less than all of that money or property
- is authorized to make or deliver a document certifying receipt of property and makes or delivers receipt without proper verification
- receives an obligation of debt from an officer or employee of the federal government who is not authorized to make that pledge or sale
- uses a false record or statement or decreases an obligation to pay the government (also known as a "reverse false claim")
How are penalties and damages assessed for alleged FCA violations?
- Government has burden of proof for violations
- Each component of a fraud allegation constitutes its own individual claim
- Federal fines are adjusted to account for inflation
- Penalty amounts within the allowable range are at the discretion of courts
- Government can seek interest and repayment of fees
- Cooperative defendants can receive partial credit for various reasons, excluding those things required under law
- "Treble" damages refer to the government's right to seek up to three times the amount wrongfully charged to the government
- Double damages are more common, but "treble" damages create settlement pressure because they pose a big financial penalty; double or treble penalties can be reached by using either gross or net calculations
- Damage calculations take into account the wide range of fraudulent acts and include the related documents and data that exist, potential or real impact to government, and best method to calculate damages
- Statistical sampling to determine damages may be useful in some instances and is considered on a case-by-case basis
What are possible defenses against FCA claims against a contractor?
Successful performance of the contract or achieving the grant's goals is not a defense against false claims. Common defenses may include:
- Government knowledge – Contractor can claim the government knew of misconduct. This defense may not work in cases where the government can assert knowledge was insufficient or incomplete to understand the falsity, or the appropriate person in the government did not have knowledge of the falsity.
- Reasonable interpretation – A party's reasonable interpretation of an unclear or ambiguous provision may negate the reckless disregard/intent standard of the FCA.
- Reliance on expert or counsel – An "expert advice" defense may work if a defendant has made full disclosure of facts and an impartial expert returns a favorable opinion; an "advice of counsel" defense requires a waiver of attorney-client privilege, which can result in other issues, even if it provides a strong defense against FCA claims.
- Statistical sampling defense – If the government presents damage amounts that use sampling, this defense can examine samples taken, volume of data, case-specific and appropriate data, and outliers
What are other False Claims Act considerations?
- Qui Tam Actions – The FCA allows private individuals to file claims, not just government regulators and overseers looking for fraud. If a private individual raises a claim, the government can step in at any time to pursue that claim or dismiss the claim, or can decline to intervene. If the government chooses to intervene, the whistleblower can still receive 15-25% of proceeds. Government intervention can result in an amendment to the original complaint or a filing of the government's own complaint. The Attorney General can delegate the authority to issue subpoenas, expanding the volume of information that can be gathered. Investigative information can be shared with the whistleblower or with law enforcement (state or local). The Department of Justice has established an internal policy for assessing qui tam actions and can intervene and dismiss them if it deems them to be meritless, opportunistic, or not in the best interest of the government.
- Mandatory Disclosure Rules – These are incorporated into government contracts and refer to FCA liability. Known or suspected violations must be reported to both the contracting officer and the Inspector General's office under these rules. Failure to disclose can result in suspension or debarment for a government contractor.
Contractors seeking to be compliant and to avoid False Claims Act liability should pay special attention to common problem areas, including sloppy time charging, billing fraud, defective pricing, misappropriating funds between projects, cost mischarging, and product substitution fraud. Red flags should be immediately addressed to stop any real or potential missteps. At a fundamental level, having a compliance program in place, knowing the entirety of a contract, being transparent about issues when they arise, and taking care to avoid over-certifying or taking on additional obligations will contribute to FCA compliance overall.
Specific to financial relief under the CARES Act, because this legislation was drafted and implemented quickly there are some problematic areas. Justifiable interpretations may arise, and a reasonable interpretation defense against wrongdoing may be viable. Maintaining complete documentation and a legitimate rationale behind all contractor actions will contribute to a successful defense in the face of false claim accusations.