CHAPTER

27

FRAUD

Because the government spends so much money on procurement, the possibilities for fraud in procurement are great. The government has given itself a number of weapons to fight fraud; as a result, a contractor can pay dearly if it tries to defraud the government.

    What are the government’s remedies for contractor fraud?

Treble damages for one. Forfeiture of the claim for another. And in some cases, forfeiture of the entire contract proceeds. Sometimes, all of the above.

In one case of fraud, the contractor had an interesting interpretation of the word incurred, as in the phrase incurred costs. It submitted as incurred costs material costs that had never been invoiced and in some cases costs for material that had never been received. The contractor even conceded that its material costs were not amounts actually paid to companies or reflected on invoices. For example, the contractor considered as an incurred cost “unbilled escalation” which, in the words of one court, occurred when a company did not bill or invoice the contractor for an increase in material costs, despite the fact that the contractor’s purchase orders contained escalation clauses that typically triggered a price increase on a certain date. The contractor felt that the escalation price increase was an “actual cost” because it believed it would eventually owe it to its companies.

The court came down hard on the contractor. Federal remedies for fraud, the court noted, are “cumulative and not in the alternative.” The court found the contractor liable under several statutes. First, under the Special Plea in Fraud provision of the U.S. Code, fraudulent claims are forfeited. Second, under the False Claims Act, the contractor can be liable for civil penalties if it violates its duty to examine “its records to determine what amounts the government already has paid or whether payments are actually owed to subcontractors or vendors.” Third, the Contract Disputes Act allows the government to recover the false or unsupported portion of a claim that can be tied to misrepresentation or fraud.

This fraud case was more like “aggravated stupidity.” When the contractor submitted the claim close to the end of the contract, it had almost all the invoices for the materials used in the contract. Yet it submitted the total amount of the purchase orders with its companies whether or not they had been paid or had even sent the contractor an invoice. The court held that the contractor’s actions forfeited the almost $4 million claim, imposed a $10,000 civil penalty, made the contractor pay the government the unsupported portion of the claim ($223,500), and made the contractor pay the government’s costs of review (UMC Electronics Co., U.S. Court of Federal Claims No. 93-709C, June 23, 1999).

Terminating a contract for default is another remedy that the government has for fraud in government contracts. Curiously, the clause itself does not specifically allow a default simply on the basis of fraud. However, failure to perform a contract clause is one specified reason to terminate a contract for default. And a contractor’s overbilling can be construed to be a failure to follow the contract clause demanding accurate invoices and can therefore be used as a basis for terminating for default.

In one case, the contractor’s conduct was outrageous. The president of the company prepared invoices without even looking at the company files. The invoices were simply copied from previous invoices. Because the agency had corrected mistakes in invoices in the past, the company president relied on the agency correcting the invoices she prepared. She considered her invoices to be scratch or draft invoices. A board upheld the agency’s termination for default of the contract.

    With all these remedies, what is the contracting officer’s role when fraud is discovered in the claims process?

In two words, stay out. Leave it to the U.S. Department of Justice. Contracting officers (COs) should not address a fraud-tainted claim. In fact, a CO is prohibited by law from handling any claims involving fraud.

The disputes clause of a contract (typically FAR 52.233-1) seems to give the CO broad authority to handle all kinds of claims: claims arising under or relating to a contract. In fact, the CO’s authority has been called “all disputes authority.” But amid all this authority is one type of claim that is excluded from a CO’s authority: a claim that has fraud associated with it. This type of claim not only cannot be handled by the CO—it is beyond the jurisdiction of the courts and boards.

One case had an interesting twist: The CO had no authority to handle the claim even though an official fraud-fighter in the government, the Air Force’s Office of Special Investigation (OSI), had concluded that it would not pursue the fraud allegations against the contractor, mainly for procedural reasons.

A contractor submitted invoices that the government thought were forgeries. Later, the government did a termination for convenience. The CO denied the contractor any money for a settlement of the termination for convenience due to the “apparently fraudulent invoices,” in the words of the CO. The contractor appealed to the court, where it lost as well. The court concluded that the CO was not authorized to issue a CO final decision because the Contract Disputes Act removes fraud from the CO’s consideration. Regardless of what OSI thought, the CO still believed there was fraud in the submission of some payment vouchers. So the CO’s final decision was unauthorized and invalid.

    What is this land mine for contractors called an “implied certification”?

It’s hard to believe that the submission of something as simple and ordinary as an accurate monthly invoice can be considered a False Claim Act violation. But it can if the invoice requires the contractor to certify that it is complying with federal law when in fact it is not.

This land mine is called an implied certification. Implied obligations can present a real problem because they are implied. They are not written down anywhere because they are so obvious. So the absence of something in writing makes implied obligations—like the implied certification—very subtle.

Courts have recently been finding implied obligations in invoices. They are finding an implied certification of contract compliance attached to requests for payment made by a contractor to the government.

In violation of federal laws, a government contractor was disposing of chemicals associated with a government contract. The president of the company knew that the company was not complying. Nonetheless, the company submitted routine invoices. There was no express certification on the invoices that the company was complying with Environmental Protection Agency regulations or any other regulations. A court found that the invoices had an implied certification that the contractor was complying with federal laws. And it was not.

The court based its decision on the legislative history of the False Claims Act. The Senate Judiciary Committee said that the FCA applied to “a claim for goods not provided or provided in violation of contract terms, specification, statute, or regulation.”

Other courts have also found violations of implied certifications. The Court of Federal Claims found a violation when an 8(a) firm submitted invoices to the government after signing a prohibited comanagement agreement with a subcontractor that made the 8(a) firm no longer an 8(a) firm. In another case, a court found a violation of an implied certification when a Medicare provider submitted invoices for payments knowing that the provider was not complying with all Medicare requirements. In a third case, another appeals court found a violation of the FCA when a contractor knowingly omitted from progress reports material information concerning noncompliance with the program it had contracted to implement.

The “knowing” violation requirement is critical. Inadvertent violations are no problem legally. The standard for “knowing” is that the contractor knew, or recklessly disregarded the risk, that its implied certification of compliance was false.

But there are limits to the implied certification. In one case, a bounty hunter looking for a reward argued that invoices violated the FCA because they were signed by a former government employee who, in the eyes of the bounty-hunter, was violating the federal anti-revolving door statutes imposed on former government employees. A court ruled that this interpretation was a stretch: “a false certification of compliance with a statute or regulation cannot serve as the basis for a qui tam action under the FCA unless payment is conditioned on that certification. By itself, breaking the law is not enough. It’s the false certification of compliance that creates liability when certification is a prerequisite to obtaining a government benefit.

Courts will infer certification from silence, but only where certification was a prerequisite to the government action sought.

    Can government contractors violate the False Statements Act?

Certainly they can. And there is one classic land mine resulting from a loophole recently closed.

Contractors are also subject to the FCA. Government contractors must be careful of what answers they give to questions from the government. The truth, and the whole truth, is required. Because of the way the law is interpreted, it is better to remain silent in response to a question by the government agent in a government inquiry rather than answer “no.” A “no” can be considered a lie.

This can be a common problem. Government contractors talk to a lot of different federal officials during the course of their contract. Contractor candor has always been the best policy. But absolute candor is required.

The problem is the “exculpatory no.” When a person answers “no” to a federal inquiry, can a person answer “no” solely to protect his or her rights under the Fifth Amendment? Some courts had given people the right to say “no” because “yes” would be self-incriminating.

That’s no longer true. The False Statements Act makes it a crime to give “any” false statement to government agents. And when you think about it, the Fifth Amendment does not give a person the right to lie. It simply gives people the right to remain silent. There is no constitutional privilege to lie to government agents.