The potential for fraud prosecutions and civil actions related to funding under the American Recovery and Reinvestment Act of 2009 (Recovery Act) or the False Claims Act (FCA) has increased significantly with the President's signing of the Fraud Enforcement and Recovery Act (S. 386) (the Act) on May 20, 2009. The Act is focused on improving the tools for prosecution of mortgage fraud and establishes a general economic crisis inquiry commission, but it also includes significant provisions relevant to government contractors.
Section 2(d) of the Act amends the Major Fraud statute, 18 U.S.C. § 1031, to make it applicable to transactions under the Troubled Asset Relief Program (TARP) and the Recovery Act. As amended, the Major Fraud statute:
- Applies to any contract, subcontract, grant or other form of federal assistance, including through TARP or any Government economic stimulus, recovery plan or rescue plan.
- Covers fraud involving contracts over $1 million and can result in fines of $1 million (up to $10 million for multiple counts) and 10 years in prison.
The Act targets fraud under the TARP within the banking industry, but the language used -- "economic stimulus, recovery or rescue plan" -- is substantially broader. The Act also Authorizes (but does not appropriate) additional funding for investigators and prosecutors for mortgage and securities fraud and "other cases involving federal economic assistance" (i.e., economic stimulus or Recovery Act transactions).
Section 4 of the Act amends the FCA in response to recent Court decisions. The Senate Judiciary Committee expressed concern that "[t]he effectiveness of the False Claims Act has recently been undermined by court decisions which limit the scope of the law and, in some cases, allow subcontractors paid with Government money to escape responsibility for proven frauds." S. Rep. No. 110-10 at 4 (2009). The Act addresses these concerns as follows:
- The Act legislatively overrules the Supreme Court's decision in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123, 2128 (2008), which required proof that a defendant "intend[ed] that the Government itself pay the claim'' for liability to attach under FCA § 3729(a)(2) & (3). See Supreme Court Resolves Circuit Split Over Presentment Requirement of the False Claims Act (June 2008). Instead, liability attaches under the Act whenever one "knowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim." S. 386 § 4 (a)(1)(B) (emphasis added).
- It defines the term "material" to mean "having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property." Id. § 4 (b)(4). As a result, an FCA violation FCA would occur whenever a person makes a false statement that has the natural tendency to influence the Government's decision to pay a claim, regardless of intent.
- The Act repudiates the line of cases following United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004) and United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev'd, 562 F.3d 295 (4th Cir. 2009). See Fourth Circuit Holds Contractor Liable for False Claims Submitted to the Coalition Provisional Authority in Iraq (April 2009). Totten held that a claim must be ''presented to an officer or employee of the Government before liability can attach,'' while Custer Battles held that the FCA does not reach a claim for payment of funds over which the United States has neither title nor control. The Act redefines the term "claim" to include "any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property." A "claim" now also includes any request or demand presented to the United States or "made to a contractor, grantee, or other recipient" if (1) "the money . . . is to be spent or used on the Government's behalf or to advance a Government program or interest" and (2) the United States provides the money requested or will reimburse the entity from which the money was requested.
Section 4(c) of the Act also streamlines the ability of the Department of Justice (DOJ) to obtain a civil investigative demand (CID) by permitting the Attorney General to delegate authority to issue a CID. The issuance of a CID permits DOJ to obtain documents, oral testimony, and responses to interrogatories.
The Fraud Enforcement and Recovery Act significantly broadens the reach of the FCA, and will require contractors to make substantial revisions to their compliance programs.