Government Contract Fraud

False claims are made in connection with a wide variety of government contracts. The entire scope of fraud against the government cannot be easily summarized and this list is not complete. Though these categories of fraud are commonly litigated under the False Claims Act, many others exist.

Defense Contractor Fraud

Though overtaken in recent years by healthcare, defense contractor fraud has traditionally been the primary target of False Claims Act litigation. Indeed, the FCA was passed in 1863 for the very purpose of preventing the fraud that had plagued the Union Army throughout the Civil War. With the largest armed forces of any nation in the world and an increasingly privatized defense sector, the U.S. is susceptible to massive fraud by for-profit military contractors. Former Representative Alan Grayson (D-FL) has suggested that fraud accounts for at least 10% and as much as 50% of the total defense spending on the war in Iraq. With such enormous taxpayer losses to fraud, a qui tam whistleblower can potentially claim a huge reward for coming forward and uncovering defense contractor fraud.

Cross-charging occurs when a defense contractor shifts costs from one contract to another more lucrative one to maximize its profits. While some defense contracts have a fixed price, others provide for a fee as a percentage of the total costs (“cost-plus”). This gives companies an incentive to both artificially increase costs for cost-plus contracts and to shift costs associated with a fixed-price contract to a cost-plus contract account. While many costs will be tied to a specific project, some others will relate to a number of different projects a contractor has taken on. Costs should be allocated to customers fairly, but often unscrupulous defense contractors will simply push general costs onto the party paying the higher cost-plus rate—typically the U.S. government—thereby shifting the costs of private contracts onto U.S. taxpayers.

The U.S. government imposes guidelines on all its defense contracts relating to how products must be manufactured, including specifications for the materials and constituent parts to be used and where those parts may or may not be manufactured. It is illegal for contractors to use materials and parts that do not meet the required specifications. The sale of substandard products to the U.S. military was the primary impetus for the passage of the False Claims Act in 1863 and remains a major concern today. Similarly, the services that are provided by defense contractors must also meet certain standards. Security and other services provided to the U.S. military by for-profit companies are implicitly certified as meeting the government’s requirements, and when they fail to meet those standards due to shoddy or inconsistent work, the False Claims Act provides a remedy so that the government can recoup its losses.

Like cross-charging, inflated billing is an unfortunate product of “cost-plus” contracts by which defense contractors receive a fee based on a set percentage of the total costs. This arrangement provides a great incentive to drive up the costs of a contract so that the percentage fee will also be larger. Such fraud is often accomplished by falsifying time sheets and purchase orders, claiming extra time spent on projects, and inflating materials costs. Such inflated costs are difficult for the U.S. government to scrutinize when the defense contractor’s product is unique. Even when costs rise noticeably over expectations, the government may not have the choice of finding an alternate supplier if only one company produces the needed products. The Truth in Negotiations Act requires most defense contractors to supply the government with detailed cost and pricing data before a contract is awarded. Knowingly falsifying such data is a violation of the False Claims Act, and whistleblowers are encouraged to bring private lawsuits against companies seeking to defraud the U.S. government.

Agricultural Subsidies Fraud

The U.S. government pays $20 billion annually in agricultural subsidies to farmers. While the subsidies themselves are widely criticized as wasteful and unnecessary, they are additionally a large source of fraud. Lax oversight of agricultural subsidy awards has allowed many who do not qualify for awards to submit false claims to the USDA and illegally receive taxpayer dollars. Because of lax enforcement it is difficult to know the exact scope of agricultural subsidies fraud, but a representative of the Government Accountability Office has estimated that hundreds of millions of dollars are improperly or fraudulently claimed each year.

A typical strategy used to defraud the government is splitting a single farm operation into different parts and submitting subsidy claims for each part. In one case, a Mississippi cotton farmer created 78 different corporations—three of which were called “Megabucks Farms,” Easy Money Farms,” and “Get Rich Farms”—and bilked the government out of $11 million.

Disaster Relief Fraud

In 2006, the Government Accountability Office estimated that the Federal Emergency Management Authority had lost at least $1 billion the previous year due to lax oversight and fraudulent claims in the wake of Hurricanes Katrina and Rita. FEMA is charged with coordinating disaster response and relief when the scope of a disaster overwhelms local resources. In the past decade, FEMA has responded to hurricanes, terrorist attacks, earthquakes, tsunamis, wildfires, snowstorms, and oil spills. When the government sets aside money for disaster victims, FEMA is responsible for allocating the funds to individuals and businesses with claims for damage they have suffered.

In the chaos following disasters many false claims are submitted to the agency and a great number of undeserving individuals receive large payments. In recent years, the largest source of FEMA-related fraud has undoubtedly been the response to Hurricane Katrina. The Government Accountability Office has reported numerous cases of claims made to individuals listing post office boxes as their residences, claims for damage to houses that never existed, and claims filed under the names and social security numbers of prisoners. The number of false claims submitted to and paid by FEMA after Katrina is extremely large and nearly six years later investigations and prosecutions are ongoing.

Environmental Fraud

The Environmental Protection Agency and the Superfund program identify hazardous waste sites throughout the U.S. and ensure that they are cleaned up according to federal regulatory standards. The budget allocated to Superfund and related environmental cleanup activities is approximately $1.5 billion annually. Much of the cleanup work mandated by the federal government is actually performed by private contractors who bid for individual cleanup contracts. Other contracts not specifically related to cleanup efforts nevertheless require strict environmental compliance with federal regulations. Violations of federal environmental laws can also result in actions under the False Claims Act for falsely certifying that a company is in compliance. As with healthcare and defense contractor fraud, the most common types of false claims associated with environmental cleanup and regulation are for substandard work, incomplete work, overcharging, and falsifying data.

Research Grant Fraud

The U.S. government spends well over $100 billion annually on scientific research in the fields of defense, energy, medicine, agriculture, and basic sciences. Various federal agencies such as the National Institutes of Health and the National Science Foundation distribute a large portion of this money to universities and researchers throughout the U.S. to further promising research programs. In recent years, the False Claims Act has increasingly been used to pursue institutions and individuals who use government research funds inappropriately or falsify research to generate additional funding.

Public Works and Construction Fraud

The federal government funds billions of dollars worth of construction projects each year ranging from office buildings to highways and bridges. The vast majority of federally funded construction work is done by private contractors who bid for contracts. Fraud may occur when contractors enter into illegal agreements with competitors so that they will not compete for a contract (often in exchange for subcontracting work), or it may occur through kickbacks to government officials. Types of fraud typical of healthcare and defense fraud are also common in the construction field: charging for services not performed, inflating prices, falsely certifying compliance with federal regulations, and performing substandard work.

The information provided above is a very general summary of the law of government contract fraud at the time this text was prepared. Because this analysis is subject to change depending upon recent cases and legal developments, you should not rely on this summary as legal advice. As with any important legal question, you should always consult a lawyer licensed to practice in your jurisdiction. Our lawyers are licensed to practice in all state and federal courts in Georgia.