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Doing Business With the Federal Government? Watch Out for the False Claims Act

With attention focused on healthcare reform and the "fiscal cliff," it is a good time to be reminded of the consequences of violation of the federal False Claims Act ("FCA"), which is seen by some as an important component of any fiscal compromise in a divided Congress.  The healthcare industry has felt the brunt of the FCA in recent years.  The Department of Justice recently announced that it recovered a record $4.9 billion from FCA judgments and settlements in last FY 2012, with over $3 billion coming from healthcare providers accused of defrauding Medicare and other government programs.  But exposure is not limited to the healthcare industry.  Housing and mortgage fraud accounted for the second largest area of recovery.  In fact, any government contractor or entity, including non-profits, which receives government grants or reimbursements or otherwise "does business" with the federal government, has the potential to run afoul of the FCA.
    
The FCA imposes liability upon any person who knowingly submits a false claim to the government, causes another to submit a false claim to the government, or knowingly makes a false record or statement to get a false claim paid by the government.  The FCA also encompasses reverse false claims, where liability is imposed when one improperly avoids payment to the government, such as when an entity which receives government funds pursuant to a government contract is overpaid but fails to return the overpayment.
   
FCA Violations
To violate the FCA, a person must have submitted, or caused the submission of, a false claim with knowledge of its falsity.  Knowledge is broadly defined to include actual knowledge, deliberate ignorance or reckless disregard of the truth or falsity of the information.  FCA liability may attach to funds received directly from the federal government as well as funds dispensed through intermediaries, such as funds distributed to and by states and state agencies which are derived from the federal government.  Liability will be imputed to an employer for false claims submitted by an employee.

The FCA imposes severe damages and penalties, usually far in excess of the actual damage incurred by the government.  On top of the government's actual damages, the FCA provides for a civil penalty of between $5,500 and $11,000 for each false claim, and three times the government's actual damages, plus costs and attorneys' fees.  In extreme cases, debarment (disqualification as a government contractor) may be imposed, but more likely threatened to leverage a settlement.

In addition to the federal government, private individuals called "whistleblowers" or "qui tam relators," may bring suit on behalf of the government.  In FY 2012, 647 whistleblower suits were filed and $3.3 billion of the total recoveries resulted from these qui tam suits.  Whistleblowers, who can keep up to 30% of the government's total recovery, often are employees of the defendant.  Not only do employee whistleblowers have tremendous financial incentive to report suspected fraud, the FCA also prohibits retaliation against whistleblowers, and an employer must be careful how it responds to an employee whistleblower situation.  Liability for retaliation against an employee whistleblower can include reinstatement, twice the amount of lost wages plus interest, compensation for special damages and attorney's fees.

More Aggressive Enforcement Expected
With the current debate over healthcare reform, cuts in government spending programs and deficit reduction, coupled with record recoveries in FY 2012, expect even more aggressive enforcement of the FCA in FY 2013.  Likewise, increased visibility of the FCA is likely to encourage more private individuals to blow the whistle on suspected fraud by employers and service providers.

What Can be Done to Minimize Risk? 
Companies should review operations to ensure compliance with all billing and certification requirements and all grant or contract terms and conditions.  Employees should be appropriately trained and billing procedures should be updated.  Internal and external audit and control procedures should be in place, routinely updated and utilized.  And, because a majority of employee whistleblowers first raise their concerns internally, employers should implement a code of conduct as well as policies and procedures to encourage internal reporting of compliance concerns.