Investigation, interpretation and enforcement: FCA in the COVID-19 era

May 2021  |  FEATURE  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

May 2021 Issue

The False Claims Act (FCA) is the federal government’s primary litigation tool in combatting fraud against the US, typically perpetrated by federal contractors that defraud governmental programmes. Its efficacy is substantiated by the billions of dollars that have been clawed back from miscreants.

“The FCA is America’s first and most effective whistleblower law,” says David I. Kelch, a senior associate at Porter Wright Morris & Arthur LLP. “It was signed into law in 1863 by Abraham Lincoln during the American Civil War as it had become clear that wartime suppliers were providing substandard goods and services to Union troops. The FCA was passed to target fraud in government contracting.”

In the many years since, and particularly during the last three decades, the FCA has been prolific. Between 1987 and 2020, almost $65bn has been recovered from government contractors that have perpetrated fraud. Moreover, last year there was a substantial increase in the total number of new FCA cases filed, from 786 in 2019 to 922 in 2020.

Similar to previous years, the majority of new claims in 2020 were filed under the FCA’s whistleblower provisions, also known as the qui tam provision – a mechanism that allows individuals to file lawsuits alleging false claims on behalf of the government and share in any recovery (typically between 15 and 30 percent of the total recovered).

Furthermore, qui tam cases remain the leading source of FCA recoveries, with approximately $1.69bn – approximately 76 percent of the $2.2bn total obtained by the Department of Justice (DOJ) – recovered in 2020. Awards to qui tam whistleblowers amounted to more than $309m.

“The FCA is a powerful weapon in the government’s arsenal because it has very broad applicability and its penalties are severe,” says Jonathan M. Phillips, a partner at Gibson Dunn. “The Supreme Court has said broadly that the statute reaches ‘all fraudulent attempts to cause the government to pay out sums of money’. Thus, the FCA has been used to recover funds in a wide variety of government programmes, such as healthcare, defence, for-profit education and housing.

“The FCA also imposes treble damages and per-violation civil penalties, which make the potential financial consequences of litigating cases through to judgment very severe,” he continues. “Companies that submit hundreds or thousands of invoices to government may face tens of millions of dollars in civil penalties, on top of trebled compensatory damages. Moreover, some government programmes debar companies from doing future business with the government.”

Generally, fraud against the US government occurs across all federally-funded programmes and is often undetectable. “The FCA covers that gap,” insists Megan Mocho Jeschke, a partner at Holland & Knight. “It empowers whistleblowers to report fraudulent conduct and enables the government to recover for that fraud threefold. Both are cornerstone aspects, but it is the whistleblower provisions that make the FCA such a progenitive anti-fraud tool.”

Pandemic impacts

The introduction of coronavirus (COVID-19) relief programmes such as the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as $1.9 trillion in more recent loans and stimulus, has inevitably led to a surge in people and entities looking to exploit the pandemic.

Moreover, due to the sweeping nature of the pandemic, much of this exploitation goes beyond industries typically associated with the FCA, such as healthcare, defence and financial services, to encompass many others – all potentially subject to investigations and prosecutions over fraudulently receiving funds and using them for improper purposes.

“We are seeing heightened enforcement activity in connection with inaccurate certifications or representations, non-compliance with terms and conditions, and the retention of relief funds by the unentitled,” says Daniel C. Fundakowski, senior counsel at Epstein Becker & Green. “Indeed, the DOJ recently announced the first civil settlement resolving allegations of fraud relating to CARES Act funds. It also stated that pandemic-related fraud will remain a priority for years to come.”

In fact, swollen by COVID-19-related allegations, the DOJ opened a record number of new FCA investigations in 2020. “The government’s pandemic-related stimulus activities have expanded to include the Paycheck Protection Program (PPP) and Healthcare Provider Relief Funds,” observes Mr Phillips. “As a result, so too have the potential theories and circumstances in which the government may pursue FCA cases to recover funds it believes should not have been spent.

“The first settlement resolution of CARES Act-related fraud involved an allegation that the defendant made false statements to federally insured banks that it was not in bankruptcy in order to obtain a PPP loan,” he continues. “The government has also brought criminal charges against some defendants who made false statements to obtain PPP funds for which they did not meet the eligibility criteria. We will surely see more such cases brought in 2021.”

Judicial interpretation

When FCA cases reach the courtroom – the vast majority of which begin as qui tam matters filed by individual whistleblowers – there are a number of issues that need to be considered, such as interpreting materiality and causation standards and the application of the Granston memo, among many others.

One case that particularly highlighted such issues was Universal Health Services v. U.S. ex rel. Escobar, wherein the Supreme Court emphasised that courts must evaluate the FCA’s knowledge and materiality requirements as “rigorous” and “demanding” standards.

“The Supreme Court’s aim was to avoid allegations of garden-variety regulatory compliance issues being bootstrapped unfairly into claims of fraud,” explains Mr Phillips. “The court instructed that lower courts should look holistically at the materiality requirement, taking into consideration the allegations and different types of evidence, including whether the government pays the challenged claims in the ‘mine run of cases’ despite having knowledge of the alleged non-compliance.

“As the Granston memo recognised, whistleblowers sometimes bring claims under the FCA’s qui tam provisions that are not in the government’s interest to pursue, for a variety of reasons,” he continues. “Sometimes that is because the allegations facially lack merit, but the government has a variety of other considerations as well, including whether public litigation of the case would be an inefficient use of government resources or would impair national security interests.”

Recent statements made at the Federal Bar Association Qui Tam conference by senator Chuck Grassley confirmed that legislation is being drafted that will curb what he believes is the government’s incorrect interpretation that the DOJ has unrestrained authority to dismiss qui tam lawsuits brought by relators.

Apparently referencing the Supreme Court’s landmark Universal Health Services v. U.S. ex rel. Escobar decision, senator Grassley also asserted that courts have weakened the statute by dismissing cases based on a misapplication of the FCA’s materiality requirement – an area he believes is particularly overdue for Congressional intervention.

“Courts have given the DOJ a wide berth to dismiss qui tam cases, and rightly so,” continues Mr Phillips. “The FCA claim is the government’s claim, over which it may exercise prosecutorial discretion, and that discretion has been recognised historically as a primary reason that the qui tam provisions survive constitutional scrutiny.”

Deliberation and documentation

Given that pandemic-related funding decisions have been made swiftly and generally without diligent deliberation or adequate documentation, persons and entities securing funds need robust compliance, self-evaluation and corrective action strategies to avoid contemporaneous or retrospective accusations of financial impropriety.

“The importance of thorough documentation cannot be overstated,” affirms Mr Fundakowski. “Steps taken to comply with government requirements should all be memorialised in case there are later questions. Regular audits should also be conducted specific to these funds to ensure deployment for an approved purpose. Moreover, any and all complaints or allegations of wrongdoing should be investigated, elevated as appropriate, properly addressed, and, of course, documented.”

Going forward, as the initial, furious period of COVID-19 fund relief relaxes, the next stage will be a heightened scrutiny of applications. Even if applicants were not proactive about preparing and collecting documentation to support their funding requests, they should be looking to retrospectively collect and organise available files in preparation for a potential audit request.

“A robust compliance programme that includes a self-auditing function is a fundamental baseline for any company participating in federal programmes,” concurs Ms Jeschke. “If such audits uncover non-compliances, companies should strongly consider self-disclosure. Cooperation credit under the FCA comes in its greatest form when companies self-disclose. A knowing failure to come forward might also lead to additional liability under the reverse false claims provision.”

In the view of Mr Kelch, the government will not provide a ‘get out of jail free card’ to persons and entities that have received COVID-19-related relief funds but claim to have been overwhelmed by an array of new rules and regulations. “Simply put, companies must diligently ensure compliance with applicable laws and regulatory requirements and should document their efforts at doing so,” he suggests. “If a need for increased compliance staffing or expertise is identified, that need should be met.”

Future pursuit

With the amount of fraud investigated under the FCA in 2021 likely to match, if not exceed, that seen in 2020, DOJ fraud investigation, interpretation and enforcement activity will remain extensive, with a potential for additional provisions in a post-pandemic environment.

“Whenever large amounts of federal funds are disbursed in a short period of time, the number of FCA cases increases and large settlements emerge in the years that follow,” says Ms Jeschke. “This will be the case here and will be compounded by the sheer number of loans and grants awarded during the pandemic, the government’s increased fidelity to datamining and exposure to non-traditional whistleblowers. FCA filings could increase further by employing an FCA-awareness campaign.”

At the same time, despite the expected increase in FCA-related fraud for the foreseeable future, Mr Kelch sees no requirement for additional FCA provisions. “The FCA leverages the investigative power of the federal government and provides a substantial incentive for private persons to share in recovery,” he contends. “As budget pressures increase in the near term, the Biden administration may direct the DOJ to increase FCA-related investigations and recovery to help close the budget gap.”

“To this end, the DOJ will focus on compliance with the CARES Act Provider Relief Fund’s terms and conditions, fraud related to the Paycheck Protection Program and fraud related to eligibility for the Federal Reserve’s Main Street New Loan Facility for small and medium sized businesses,” he continues. “The agency is also likely to focus on private investors engaged in fraudulent activity related to the CARES Act and other stimulus programmes.”

For the moment, as the number and reach of US government spending programmes escalates, so does the wider application of the FCA – its potency, undiminished. “The FCA is an incredibly powerful tool,” concludes Mr Phillips. “With the government’s FCA activity reaching new record highs during the pandemic, and the government’s interest in stimulus spending continuing, FCA enforcement is sure to stay very active for the foreseeable future.”

© Financier Worldwide

BY

Fraser Tennant