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Ethics Corner 

Corporate Teaming Needed to Reduce False Claims Exposure 

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By David Hickey 

Recent Civil False Claims Act activity in Washington is causing
companies to reexamine their internal compliance controls, particularly
their reporting mechanisms.

Congress and the Department of Justice have tag-teamed to expand the
scope of the FCA. Recently introduced legislation would expand the
breadth of FCA claims and increase the number of plaintiffs eligible to
file FCA actions. Justice is seeking to add mandatory FCA reporting to
the proposed Federal Acquisition Regulations amendments requiring
self-disclosure of criminal violations. These developments, and others,
reflect the fact that the government will continue to look to the FCA
as a primary enforcement weapon. Consequently, would-be whistleblowers
are more encouraged to report fraud externally.

Enacted during the Civil War era and amended in 1986 to provide
financial incentives to whistleblowers, the FCA has proved to be a
valuable government enforcement tool. “Whistleblower” provisions permit
private parties relators to file a complaint against a contractor on
behalf of the federal government. Relators, often company employees,
may obtain eye-popping recoveries. The FCA imposes civil liability on
any person who knowingly uses a “false record or statement to get a
false or fraudulent claim paid or approved by the government,” and any
person who “conspires to defraud the government by getting a false or
fraudulent claim allowed or paid.” Civil penalties include $5,000 to
$10,000 per claim, plus treble damages.

One common FCA allegation involves the submission of a false or
fraudulent claim. Proof of such a claim previously required submission
of a claim for payment to the federal government; and such claim being
knowingly supported (either directly or indirectly) by a materially
false or fraudulent statement.

In a recent Navy shipbuilding contract case (Allison Engine Co., Inc.
v. U.S., 533 U.S. (2008)) the Supreme Court made it harder for
plaintiffs under the FCA, now requiring proof that the defendant
intended that his false statement be material to the government’s
decision to pay or approve the allegedly false claim. Plaintiffs
therefore can no longer prove a claim by showing that a false
statement’s use resulted in claim payment or approval or that
government money was used to pay the false or fraudulent claim.

Congress has reacted swiftly to this and other recent Supreme Court
decisions by exploring ways to make it easier to prove an FCA
violation. The House and Senate are both considering “False Claims Act
Correction” legislation to further encourage whistleblowers to come
forward. If enacted, that legislation will relax the presentment
requirement by only asking that the claim be “for government money or
property;” impose liability for retention of overpayments; narrow the
scope of the public disclosure bar, leaving the authority to seek
dismissal on that basis to the government; and extend the statute of
limitations, making it more difficult to secure dismissals.

Recently, Justice successfully moved the FAR Council to include
mandatory reporting of civil False Claims Act violations in proposed
FAR amendments that will require timely notification of violations of
federal criminal law or overpayments in connection with a government
contract or subcontract.  These provisions will likely be enacted given
that the president signed the Emergency Military Supplemental
Appropriations Act requiring a FAR amendment implementing the mandatory
self-disclosure rules by year-end.

In the past five years Justice has received almost 2,000 referrals,
investigations and private party actions under the FCA, and recovered
more than $20 billion during the past 20 years. From the department’s
perspective, the FCA has proven to an effective weapon in combating
fraud. In light of these developments, the FCA is here to stay.
Plaintiffs and employees are becoming more empowered to report
violations externally.

Contractors should audit, from top to bottom, the FCA portions of their
ethics and compliance programs. Perhaps the most critical control
mechanisms to prevent FCA liability (except perhaps robust accounting
and invoice controls) are internal reporting mechanisms. How does a
company maximize internal reports given strong incentives for external
reporting in the form of private party actions? The short answer is an
ethical culture of shared values among employees and management.
Following are best practices that encourage internal reporting and
reduce the likelihood of exposure to such suits:

• Train and encourage employees to identify FCA violations and convince
employees that their reports of suspected violations are encouraged.
• Reward employees for buying in to the ethics program and for
reporting misconduct.

• Honor pledges of confidentiality and non-retaliation.
• Discipline proven reporting failures.
• Create an anonymous “hot line” to report suspected violations and
alternative reporting mechanisms such as an e-mail address, drop box or
post office box.
• Encourage oral reports to supervisors and an open-door policy on the
part of compliance personnel.
• Include subcontractors, suppliers, and other stakeholders in
reporting mechanisms.
• Effectively receive complaints and completely review and resolve all
complaints.
• Periodically audit or test to ensure that procedures established for
complaint intake and resolution are followed.
• Discourage management override of reporting mechanisms and internal
controls.

David T. Hickey (202.331.3159; hickeyd@gtlaw.com) is a government
contracts law attorney at Greenberg Traurig LLP. The views expressed
are solely his.
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