Fraud is defined as “any activity that relies on deception in order to achieve a gain.”[1] According to a 2024 report by the Association of Certified Fraud Examiners (ACFE), the following industries have some of the highest median losses per fraud event:
- Manufacturing ($267,000);
- Construction ($250,000); and
- Government and public administration ($200,000).[2]
In addition to state and local laws governing fraud, contracts with the federal government are subject to the False Claims Act (FCA). When working in manufacturing, construction, or other fields that contract with the federal government, it is important to be aware of the False Claims Act and how fraud against the government can be avoided, detected, and reported.
In this blog post, we examine
(1) the purpose and the scope of False Claims Act;
(2) common fraud schemes against the government; and
(3) requirements for preventing and reporting fraud.
What is the False Claims Act?
The FCA is a federal statute designed to protect the government from acts of fraud. “The FCA provides that any person who knowingly submits, or causes to submit, false claims to the government is liable for three times the government’s damages plus a penalty.”[3]
The FCA defines a “claim” as “any request or demand…for money or property…that (i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government (I) provides or has provided any portion of the money or property requested or demanded; or (II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.”[4]
A key term in the statute is the word “knowingly,” which “mean[s] that a person, with respect to information – (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.”[5] It is important to note that the FCA requires no proof of specific intent to defraud.[6]
The current civil FCA penalty for each false claim is a minimum of $13,946.[7] Additionally, the civil FCA penalty includes treble damages. The FCA also allows individuals, referred to in these cases as relators, to file qui tam suits (i.e., suits on behalf of the government) and to recover a portion of the damages if these cases are successful.[8] In fiscal year (FY) 2023, False Claims Act recoveries exceeded $2.68 billion, over half of which related to healthcare.[9] Most of the recovery amount stemmed from qui tam lawsuits.[10]
Common Fraud Schemes Against the Government
Awareness of common fraud schemes and red flags can be helpful in identifying, mitigating, and implementing fraud detecting controls and avoiding FCA violation allegations. Below are examples of common fraud schemes, including red flags and recent FCA settlements.
Billing Manipulation, Including Labor Mischarging
Examples of billing manipulation include overbilling, invoicing for personal purchases, and submitting fictitious invoices.
Red flags include altered invoices, invoices with amounts just below approval thresholds, employee invoices for personal items, or unusual supplier activity (e.g., unknown suppliers, repeated identical invoice amounts).
Overbilling or fictitious invoices may include issues of labor mischarging (e.g., billing for a labor category with a higher rate or billing for ghost employees). Red flags of labor mischarging can include missing support (e.g., timesheets), transfer of labor costs between contracts, discrepancies between labor hours and actual contract progress, or unjustified overtime.[11]
Recent FCA Settlement Example: In FY 2023, an aerospace and defense company paid $21.8 million related to allegations of double billing costs on a military equipment contract.[12]
Bid Rigging
Bid rigging relates to coordination among bidders in a competitive bidding process.[13] Examples of red flags include fewer bidders than normal, losing bidders hired as subcontractors, or contract awards rotating between bidders.[14] The Procurement Collusion Strike Force (PCSF), consisting of the Antitrust Division of the Department of Justice, multiple U.S. Attorneys’ Offices, the FBI, and multiple agencies’ Inspectors General, was put in place to combat collusion.[15]
Recent FCA Settlement Example: In FY 2023, a telecommunications company paid $40 million related to allegations of inflating its prices and violating competitive bidding regulations in a Federal Communications Commission telecommunications contract.[16]
Cost Mischarging, Including Improper Billing of Indirect Costs
Cost mischarging can include billing at inflated rates or mischarging indirect and direct costs. Red flags include significant inventory write-offs, transfers of costs between contracts (particularly between fixed price and cost type contracts), unusual allocations of indirect costs (e.g., costs not previously allocated to government programs), or reclassification of direct and indirect employees.[17]
Recent FCA Settlement Example: In FY 2023, a consulting firm paid $377 million related to allegations of improperly allocating indirect costs from its non-government contracts to its government contracts.[18]
Failing to Meet Contract Requirements
Examples of failing to meet contract requirements are billing for work that does not pass inspection requirements, failing to deliver goods and services that do not meet contract specifications, or failing to meet cybersecurity requirements. Red flags include missing inspection reports, high volumes of failed tests, or high levels of complaints regarding products or services.[19]
Recent FCA Settlement Examples: In FY 2023, an aerospace company paid $8.1 million related to allegations of billing the government for components that did not meet the contractual manufacturing specifications on a Navy aircraft manufacturing contract. Additionally, a telecommunications company paid $4 million related to allegations of failing to comply with cybersecurity requirements on a General Services Administration (GSA) internet services contract.[20]
Requirements for Preventing and Reporting Fraud
Solicitations and contracts exceeding $6 million and with a period of performance of at least 120 days should include FAR 52.203-13, Contractor Code of Business Ethics and Conduct.[21] This clause requires a contractor to:
(1) Have a written code of ethics and conduct that promotes a culture of ethical conduct and compliance.
(2) “[T]imely disclose, in writing, to the Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed…[a] violation of the civil False Claims Act.”[22]
(3) Have an ethics awareness and compliance program as well as an internal control system.
Fraud can be reported through three main avenues: (1) the Office of the Inspector General for individual agencies; (2) the FBI; or (3) qui tam actions.[23]
These requirements for preventing and reporting fraud are not only contractual requirements but are also critical for management to keep in mind to keep the proper controls in place to avoid potential FCA allegations.
How can VERTEX help?
The VERTEX Forensic team has expertise in the complexities of the FCA, including the implications of this statute for federal construction projects.* Our team has assisted clients with the investigation of alleged FCA, Truthful Cost or Pricing Data (formerly TINA), and Anti-Kickback violations. Our analysts have testified at mediation, arbitration, and in state and federal courts on matters related to fraud allegations. Our experience includes:
- calculating damages and analyzing procurement issues related to GSA schedule contracts, FAR Part 12 commercial item contracts, and FAR part 15 negotiated procurements
- conducting interviews of qui tam relators and other relevant personnel
- analyzing potential overbillings and calculating cost impacts
- performing forensic accounting analyses to calculate costs incurred in response to Civil Investigative Demands
- analyzing internal controls in the wake of FCA or other whistleblower allegations
*To learn more about the FCA specific to the construction industry, click here for a conversation with VERTEX’s Chelsea Cullum, EVP-Forensics and David Suchar of Construction Law Today recorded in April 2024.
To learn more about VERTEX’s Forensic services or to speak with an Expert, call 888.298.5162 or submit an inquiry.
[1] “Fraud 101: What is Fraud?” https://www.acfe.com/fraud-resources/fraud-101-what-is-fraud
[2] “Occupational Fraud 2024: A Report to the Nations.” The Association of Certified Fraud Examiners, 2024.
[3] https://www.justice.gov/civil/false-claims-act
[4] 31 U.S. Code § 3729(b)(2)
[5] 31 U.S. Code § 3729(b)(1)
[6] 31 U.S. Code § 3729(b)(1)
[7] https://www.federalregister.gov/documents/2024/02/12/2024-02829/civil-monetary-penalties-inflation-adjustments-for-2024
[8] https://www.justice.gov/civil/false-claims-act
[9] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[10] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[11] https://www.dodig.mil/resources/fraud-detection-resources/fraud-red-flags/
[12] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[13] https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/dealings-competitors/bid-rigging
[14] https://www.dodig.mil/resources/fraud-detection-resources/fraud-red-flags/
[15] https://www.justice.gov/atr/procurement-collusion-strike-force
[16] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[17] https://www.dodig.mil/resources/fraud-detection-resources/fraud-red-flags/
[18] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[19] https://www.dodig.mil/resources/fraud-detection-resources/fraud-red-flags/
[20] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[21] FAR 3.1004, Contract clauses.
[22] FAR 52.203-13(b), Code of business ethics and conduct.
