What Contractors Should Know about the False Claims Act

The Department of Justice adjusted for inflation the monetary penalties on the False Claims Act this summer. As a result, the civil penalties have doubled as of August 2016.

The False Claims Act, known as the Lincoln Law, is a federal law that combats fraudulent claims for payment made to federal programs. In the span of about 30 years, the federal government has collected back $38.9 billion from case brought under the act.

Special attention is given to whistleblowers, or relators, who are the ones that report such cases. The act has previewed financial incentives for them, which have now also increased with the doubling of the penalties.

To avoid problematic situations with false claims, contractors should be well aware of the False Claims Act provisions and what can trigger a case under this legislation. Below is an overview of the act and the increased penalties, as well as an explanation of false claims and the whistleblower initiative.

What to Know

The main provisions of the False Claims Act that concern contractors working on federal projects focus on the liability that is brought upon a person who, in any way, takes part in a fraudulent or false claim for payment to the government. The main prohibited actions relevant for contractors include:

• Presenting a false claim for payment or approval in full knowledge
• Making a false record or statement material to a false or fraudulent claim
• Committing fraud regarding the type or amount of property to be used by the government
• Making a false record to avoid or decrease a payment or property transmit to the government

The goal of the legislation is to prevent and penalize stealing of taxpayers’ money by individuals and companies that are contracted on federal projects. By 2014, more than 30 states had created similar legislation on the state level to protect public funds.

Penalties

As for the False Claims Act penalties, previously the amounts were set at $5,500 to $11,000 per claim. The inflation adjustment brought these to $10,781.40 and $21,562.80 per claim, almost a twofold increase. The doubling came into effect on August 1, 2016, but it concerns claims after November 2, 2015. Additionally, contractors are liable to repay three times the amount of the damages suffered by the federal body in relation to the false claims.

What Constitutes a Case

The purpose of the False Claims Act is much larger than catching accounting errors. The act was set in motion to tackle cases when individuals and companies intentionally manipulate project finances in order to misuse federal funding or in other ways commit a fraud against the government.

In a number of cases, problems with contractors failing to complete projects in time or in good quality according to their contractual obligations can be tackled via surety bond claims. Proven bond claims ensure financial compensation to affected parties and allow the completion of the project.

However, some actions by contractors can constitute a breach under the False Claims Act and can be prosecuted in a more serious legal manner. Examples include defective work by contractors that has been signed off in a certification to the government stating it complies with contractual obligations and other cases of non-compliance with the contract that have been certified officially to federal authorities as complying to contractual obligations.

The Whistleblower Incentive

One of the main ways the False Claims Act is used is through incentivizing relators, or whistleblowers, and is known as qui tam. It allows citizens to bring up lawsuits on behalf of the federal government. A large part of all cases under the act have been brought by whistleblowers. Penalties are used as a financial incentive for relators who report fraud against the federal government. Up to 30 percent of case fines can be rewarded to whistleblowers.

Relators often work at the companies who are engaging in the fraudulent actions. Typically, they first attempt to address the cases internally and turn to reporting externally if this does not succeed. The False Claims Act whistleblower protection ensures their rights in such cases. 

While the application of the Act has led to recollection of millions for the federal government, it remains controversial, as cases of false whistleblowers’ reports can occur and are difficult to tackle. Relators can skip internal reporting and directly file a court complaint under seal, which means that the case remains closed to the public while the investigation is in motion.