Show me a government contract, and I will show you fraud!" This was a statement I made frequently (and only half-jokingly) during my tenure as an assistant U.S. attorney in charge of the Affirmative Civil Enforcement taskforce at the U.S. Department of Justice, where we prosecuted the federal False Claims Act, passed by President Abraham Lincoln and reinforced in 1986 by President Ronald Reagan. Originally enacted during the Civil War to fight profiteering by suppliers to the Union Army, the FCA has evolved into a sweeping statute covering nearly every company doing business with the federal government. The law imposes liability on persons who knowingly submit false claims seeking government funds or who knowingly seek to avoid paying amounts owed to the government. Today, the FCA is the government’s most important tool to uncover and punish fraud against the United States. The FCA in intended not only to recover funds, but also deter fraud and encourage ethical corporate behavior.
In the last year, the DOJ took major steps in the enforcement and additional strengthening of the FCA; however, looking at the history of the FCA since 1986, it has proven to be ineffective at preventing fraud and encouraging ethical corporate behavior.
Enforcement: DOJ Recovers More Than $4.7 Billion From FCA cases
Last year was a record year for FCA recoveries. The DOJ recovered more than $4.7 billion in settlements and judgements. It is the third highest annual recovery in FCA history, bringing the fiscal year average to nearly $4 billion since 2009, and the total recovery during that period to $31.3 billion. Of the $4.7 billion recovered, $2.5 billion came from the healthcare industry, including drug companies, medical device companies, hospitals, nursing homes, laboratories, and physicians. The $2.5 billion recovered in fiscal year 2016 reflects only federal losses. In many of these cases, the Department was instrumental in recovering additional millions of dollars for state Medicaid programs. This is the seventh consecutive year the Department’s civil healthcare fraud recoveries exceeded $2 billion.
The next largest recoveries came from the financial industry in the wake of the housing and mortgage fraud crisis. Settlements and judgments involving cases alleging false claims connected to federally insured residential mortgages totaled nearly $1.7 billion in fiscal year 2016 — the second highest annual recovery in this area. Additionally, whistleblowers filed 702 qui tam suits in fiscal year 2016, and the Department recovered $2.9 billion in these and earlier filed suits this past year. The government awarded the whistleblowers $519 million during the same period.
New DOJ Rule Doubles FCA Penalties to More Than $20,000 Per Claim
Last year, the DOJ doubled the statutory penalties under the FCA. Each false claim presented to the government gives rise to a separate civil monetary penalty. As of Aug. 1, 2016, the minimum penalty for each false claim increased from $5,500 to $10,781, and the maximum penalty for each false claim increased from $11,000 to $21,563. This dramatic spike in penalties will expose many defendants to much greater financial risk. The increase will likely have a distinct impact on those in the healthcare, life sciences and other industries that submit hundreds, or even thousands, of separate claims to the government.
A New Approach to Fighting Fraud
Let there be no doubt that the DOJ is doing the best they can in prosecuting the FCA. Notwithstanding successes in prosecution, the FCA has proven to be ineffective at preventing fraud and encouraging ethical corporate behavior. The Government Accountability Office estimates that the U.S. Treasury loses approximately $72 billion to fraud, abuse, and improper payments each year. While, the U.S. Department of Health and Human Services (HHS) estimates that fraud costs the Medicare program $60 billion annually. Looking at the Medicare program alone, simple math suggests that an astounding $600 billion may have been lost to fraud in the past decade. Using the FCA, the government has recovered only $35-40 billion since 1987 — a tiny fraction of the moneys believed to be lost to fraud over that period. Based on these figures, the FCA is not getting the job done. Clearly, DOJ’s hands are tied as it can only prosecute matters that are brought to its attention via internal reporting from various offices of inspector general or qui tam suits.
As someone who has dedicated his practice in this area and worked as a federal prosecutor, corporate defense counsel and now in compliance and investigations, I think it is time to reform the FCA by incorporating a rigorous corporate compliance program to prevent fraud before it happens. Former Deputy Attorney General Larry Thompson said it best, “if you want to deter white-collar crime, the best season is an effective compliance program.” A study by the Ethics Resource Center, a leading nonprofit specializing in corporate ethics, concluded that “When well implanted … ethics and compliance programs reduce misconduct and grow strong ethical cultures.
Although there are some government regulations and guidelines recommending or mandating compliance practices and self-audits for different types of federal contractors and industries, there is no consistent approach from the DOJ that ties in corporate compliance programs with prosecution to incentivize corporations into certified compliance programs. Additionally, assessments of the effectiveness of a given compliance program typically occurs case-by case and often years after the alleged fraud occurred. To add insult to injury, at least three FCA actions have been filed against healthcare entities in which defendants’ use of self-audits were used against the defendants. Specifically, the self-audits were cited as evidence that defendants had “knowledge” of the false claims. These types of actions do not further the goal of preventing fraud. Instead, they truly hurt the cause as the logical reaction from corporations to forego the audits and take their chances.
With 72 billion tax dollars a year lost to fraud, it is unacceptable and taxpayers deserve a more efficient and effective solution. I know it is almost heretical to question the current system, as the trial bar will see this as an attempt to reduce their share of recoveries and corporations are reluctant to open their book and doors to independent auditors, but it is time to consider alternatives beyond just prosecution. For several years now, many practitioners and associations have advocated for a voluntary certified state-of-the-art compliance program. The new system would start with independent entities developing standards for corporate compliance programs in a range of industries doing business with the government. This is not a difficult task as it may sound. For example, the HHS Inspector General Office and Defense Industry Initiative have already developed and issued regulatory guidelines and standards of conduct. Similar standards could be developed for other industries.
Once the standards are set, companies would be required to retain, at their own expense, independent compliance consultants to review and certify their compliance programs. This approach builds on a feature of many government settlements in which the government requires a company to retain an independent monitor as a condition of settlement. As a reward for obtaining and maintaining certification, the government would agree that the FCA damages multiplier would be calibrated to the company’s culpability. Thus, a company would be liable for treble damages only if it acted with specific intent to defraud; double damages if it acted with knowledge, reckless disregard or deliberate ignorance; and a maximum of 1.5 times damages if it made a qualifying disclosure to the government of the conduct.
This is a clear win-win for taxpayers, corporations and the government. In the meantime, corporations should not wait for congress and the DOJ to make these reforms. Companies would be well served to revisit their compliance programs and consider self-audits and compliance programs by third parties. Voluntary ongoing monitoring and handling of employee concerns regarding alleged violations of regulations or government contractual requirements also should be adopted. The financial impact of a FCA case leaves a lasting mark on the company’s public image and financial health. Further, implanting these recommendations can help set a company apart from its competition and give it a significant competitive edge. Thus, devoting the resources needed to stay in compliance is the wisest investment a company case can make.
