The Expanding Procurement Fraud Landscape: A Look at the Trends, Cases & Developments in FCA Enforcement Over the Past Year Andy Liu Jonathan Cone

Presentation Preview » Government Enforcement Tools » Procurement Fraud Statistics » False Claims Act Primer » 10 Enforcement Trends For 2013 » Conclusion / Questions 2

Government Enforcement Tools 3

» Inspections, Audits and Investigations –DCMA, DCAA, GAO, IG, DCIS and DOJ » False Claims Act –Including qui tam whistleblower suits » False Statements / Certifications » Suspension and Debarment » Criminal Fines, Penalties, and Imprisonment » Congressional Investigations 4

Government Enforcement Tools » Inevitable: Audits and Investigations –Congress may be the new sheriff in town –Whistleblowers and their attorneys follow the money –Multi-agency “task forces” » Many Shapes & Sizes –Contract clauses –Agency and grand jury subpoenas –Contract price reductions –Civil investigative demands 5

Procurement Fraud Statistics 6

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False Claims Act Primer 12

False Claims Act Primer FCA is “Lincoln’s Law” » Enacted in 1800’s during the Civil War –Targeted war profiteers bilking Union Army –Contained a “qui tam” provision that, while not unusual at the time, is rare now » Statute was quiet for first 120 years –After 1986 amendments, however, it has grown significantly as a tool for the government to fight fraud 13

False Claims Act Primer » Government’s Principal Anti-Fraud Weapon –$35 billion recovered since the 1986 Amendments –$24 billion from qui tam suits » Qui Tam Provisions –15-30% bounties for whistleblowers –Government required to investigate and make an intervention decision –Where government intervenes, relator entitled to 15 to 25% –Relator entitled to attorneys fees, even where settled without admission of liability 14

False Claims Act Primer » False Claims. “Any person who... knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1)(A) » False Statements. “Any person who... knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(B) » Other Commonly-used Causes of Action –Conspiracy to defraud by getting a false claim paid, 31 U.S.C. § 3729(a)(1)(C) –“Reverse” false claims, 31 U.S.C. § 3729(a)(1)(G) 15

False Claims Act Primer What do the government and whistleblowers need to prove under a false-claims theory? 1.A contractor submitted a “claim” for payment. 2.The contractor’s claim was false or fraudulent. 3.The contractor knew that the claim was false or fraudulent. 4.The falsehood was material to the government’s decision to pay the claim. 16

False Claims Act Primer The meaning of the term “claim” » The FCA defines a “claim” as any request or demand for money or property that is:  Presented to an officer or employee of the United States.  Made to a contractor, grantee or other recipient of government funding, as long as the government provides or has provided any portion of the money or will reimburse any portion of the money requested Example: Subcontractor submits invoice to a prime contractor working on a USAID contract. Example: Construction company working on a state contract that is partially funded using federal highway funds. 17

18 False Claims Act Primer » Claim: Encompasses virtually all demands or requests for money that are made to a Government agent, a contractor or a grantee, provided that the Government has provided some portion of the money sought. –Any action by the Contractor that has the purpose and effect of causing the Government or a recipient of Government funds to pay out money it is not obligated to pay, or any action that knowingly deprives the Government of money it is due. –Each separate submission that seeks payment from the Government or a recipient of Government funds is a claim for purposes of the FCA, even if each submission is under the same contract.

19 False Claims Act Primer The meaning of the term “knowingly” » Although the FCA is thought of as a “fraud” statute, it is different than most fraud actions. » FCA definition of “knowingly” –Actual knowledge (of false information) –Deliberate ignorance of the truth or falsity –Reckless disregard of the truth or falsity » “No proof of specific intent to defraud is required”

20 False Claims Act Primer The meaning of the term “material” » To be material, a falsity must either:  have a “natural tendency to influence,” OR  be “capable of influencing,” the payment or receipt of money or property. » Common examples: –The Government relied upon the false information in deciding to pay the claim; or –The falsity had the potential to influence the Government’s payment decision.

21 False Claims Act Primer Examples of Common FCA Cases » Government Accounting Rules (e.g., unallowable costs) » Labor and Material Overcharging » Truth in Negotiations Act » False Certifications of Compliance » Implied Certifications » Kickbacks » Fraudulent Inducement (e.g., grant applications)

False Claims Act Primer What is the potential liability for my organization? » Treble damages are 3x the actual damages the Government sustained because of the prohibited act. –Traditional measure is the difference between the value the government received versus what it paid. –Full contract/grant value in some situations. » Civil penalties for each false invoice/claim. –Up to $11,000 per claim is the maximum penalty 22

The 10 Enforcement Trends of 2013 Trend # 1: Rise of the Relator » Increase in whistleblower lawsuits filed by current or former employees. » These cases are often triggered by an employee’s retaliation (real or perceived) concerns. » Investigation and litigation costs are substantial, even if contractor is innocent. 23

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The 10 Enforcement Trends of 2013 Trend # 2: Anyone, Even Competitors, Can Be Whistleblowers » Toyo Ink paid $45 million to settle allegations that it failed to pay antidumping and countervailing duties. –Case was brought by a qui tam whistleblower who was Toyo’s competitor. » The DOJ is willing to investigate and litigate cases, even when the whistleblower has a motive of harm. » Government is focusing on non-traditional government contractors » Companies should be careful to monitor the pricing and other data that is made available to competitors. 25

The 10 Enforcement Trends of 2013 Trend # 3: Damages Equal Full Grant or Contract Value » Court finds that Cornell University Medical College misused federal grant funds and that the government’s damages were the full amount of the grant for entire funding years. » Educational institutions and companies that prepare grant applications may be liable under the FCA for material misstatements about their curriculum and key personnel under a theory of fraud-in-the-inducement. » Contractors not eligible for certain contracts, e.g., under a small or disadvantaged business program, may be liable for 3x the entire contract. » The determining factor is whether the government receives only an intangible benefit from the grant or award—like many research grants. 26

The 10 Enforcement Trends of 2013 Trend # 4: Focus On Statutory & Regulatory Compliance » Failing to comply with certain statutory or regulatory requirements may render claims “false.” –Important to understand statutory requirements to which your company may certify compliance. » Certifying compliance with a statute or regulation should be a “red flag.” » Court finds that a company’s failure to pay prevailing wages to its employees as required by the Davis-Bacon Act is actionable under FCA. » Government is focusing on origin requirements of products sold to the government under the Trade Agreements Act. –ADC Telecommunications settlement for $ 1 million. 27

The 10 Enforcement Trends of 2013 Trend # 5: Focus on Implied Certifications » Even if there is not an express certification, courts may find an implied certification with contractual provisions. –Government will challenge a contractor’s compliance with even ambiguous provisions. » Government may intervene in a case against Lance Armstrong –Postal Service contract said “negative publicity” due to “alleged possession, use or sale of banned substances” by riders would constitute an event of default,” as would a failure to take “action” if a rider violates a morals or drug clause. » An implied-certification case is a risk for anyone doing business with the government. 28

The 10 Enforcement Trends of 2013 Trend # 6: Focus on Defective Parts & Products » ATK Launch Systems settles allegations that it sold defective flares to the U.S. Army and Air Force. » Products that do not meet performance specifications may be actionable under the FCA. » The key issue for the Government will often be knowledge— did the company know about the problem? –Was the company reckless in not knowing? » Important to have systems in place to detect defects and to inform government customers. 29

The 10 Enforcement Trends of 2013 Trend # 7: Cost Estimates Can Be False » Court finds that a defense contractor’s estimates can be false and actionable under the FCA. » A cost estimate may be false if :  A bid is not what the contractor intends to charge the government (under-bidding).  When the contractor knows facts that would preclude its estimate (over-bidding). » Government is willing to challenge estimates for both T&M and fixed-price contracts. 30

The 10 Enforcement Trends of 2013 Trend # 8: Subcontractor Conduct Leads To Liability » Lockheed agreed to pay $15 million to settle allegations that the government was overcharged on perishable tools. » Subcontractor misconduct may lead to liability for the prime contractor where it acts “recklessly” in overseeing the subcontractor. » Prime contractors need adequate controls to ensure that they do not pass inflated costs on to the government. » Merely having a subcontract, when you’re not supposed to, may lead to allegations of FCA liability in some situations. 31

The 10 Enforcement Trends of 2013 Trend # 9: Regulations are a Trap for the Unwary » Government sues healthcare provider for interpreting federal regulation in a way that maximizes its own profit. » It may not always be enough to simply take a reasonable interpretation of a federal regulation. » Contractors can protect themselves by: 1.Following industry standards and best practices. 2.Being transparent and forthright with the government. 3.Seeking the advice of in-house and outside counsel. 4.Requesting guidance from the responsible agency. 32

The 10 Enforcement Trends of 2013 Trend # 10: Government Targeting New Industries » The country’s five largest mortgage servicers agreed to pay $25 billion for loan-servicing and foreclosure violations. » Educational company paid $10 million to resolve allegations that it fabricated attendance records to seek federal reimbursements. » FCA covers any request for payment when any portion of the money has been provided (or will be reimbursed) by the federal government. 33

Conclusion / Questions 34