Identification, Prevention, and Remedies for False Claims in Highway Improvement Contracting (2011)

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20 • A copy of the code is to be made available to each employee; • All contractors must exercise due diligence to pre- vent and detect criminal conduct; • All contractors must promote an organizational culture that encourages ethical conduct and compli- ance with the law; and • All contractors must provide timely disclosure to the agency OIG. The FAR requires contractors other than small business concerns to establish a Business Ethics and Awareness Program within 90 days after contract award, unless the Contracting Officer extends the time period.115 Hotline Poster.—The FARs require the display of a hotline poster pursuant to 48 C.F.R. § 52.203-14 unless the contract is for the acquisition of commercial items or performed outside the United States. In addition, the hotline poster is mandatory if the contract exceeds $5 million, or a lesser amount as established by the agency.116 Education.—The new regulations require that the contractor's Business Ethics and Compliance program must provide for reasonable steps to communicate periodically the contractor's standards and procedures, and aspects of its business ethics awareness and com- pliance program, by conducting training and other- wise disseminating the information.117 The training is to be provided to the Contractor's principals, employ- ees, and subcontractors. Discharge Plan.—As noted above, the new regula- tions require contractors to establish an internal con- trol system including procedures for disciplinary action for improper conduct. Audit Program—Full Cooperation.—The new regu- lations require that contractors extend full coopera- tion to any government agencies responsible for au- dits.118 New Grounds for Suspension and Debarment.—The FARs now provide additional grounds for federal sus- pension or debarment: the knowing failure by a princi- pal of the contractor to timely disclose to the Govern- ment in connection with the award, performance, or closeout of the contract or subcontract, up until 3 years after final payment on the contract, credible evidence of:119 • Violations of federal criminal law involving fraud, conflict of interest, bribery, or gratuity; • Violations of the civil FCA; 115 48 C.F.R. § 52.203-13(b). 116 48 C.F.R. § 3.1004 and 48 C.F.R. § 52.203-14. 117 48 C.F.R. § 52.203-13(c)(l)(i). 118 48 C.F.R. § 52.203-13(c)(2)(ii)(G). 119 48 C.F.R. § 3.1003 and 48 C.F.R. § 52.203-13. • Significant overpayments on the contract, other than overpayments resulting from contract financing payments as defined in 32,001.120 The suspension and debarment provisions apply to all contracts and all subcontracts regardless of whether the clause is included in the contract and re- gardless of the contract value or duration.121 SECTION V. DEFINING FALSE CLAIMS A. What Is a Claim? The FCA, 31 U.S.C. § 3729, provides that any person who knowingly presents or causes to be presented a false or fraudulent claim for payment or approval or knowingly makes or uses or causes to be made a false record or statement material to a false or fraudulent claim is liable to the United States Government for a civil penalty of not less than $5,000.00 and not more than $10,000.00 plus three times the amount of dam- ages that the government sustains because of the act of that person. [Emphasis added]. The provisions define “ claim” to mean any request or demand whether under contract or otherwise for money or property that is presented to an officer, em- ployee, or agent of the United States. The FCA sets forth seven grounds for liability. The most often used provisions involve conduct involving knowingly presenting false claims, § 3729(a)(l), and knowingly making or using a false record or state- ments, § 3729(a)(2). A detailed discussion of the seven liability provisions of § 3729 appears in Section VI of this digest. In general terms, for transportation con- struction projects, under the provisions of the FCA, a false "claim" can be defined as any request for pay- ment, final payment, equitable adjustments, and con- tract adjustments of any type. B. Knowingly The FCA, 31 U.S.C. § 3729(b), Definitions, defines "knowingly" to mean that a person, with respect to information, 1) has actual knowledge of the informa- tion, 2) acts in deliberate ignorance of the truth or falsity of the information, or 3) acts in reckless disre- gard to the truth or falsity of the information. Sub- mitting a false claim knowing that the claim is false fits within the definition of "knowingly."122 Reckless disregard and deliberate ignorance stan- dards are not as easily defined, and depend upon an analysis of the specific facts of each case. Congress, in the 1986 amendments to the FCA, de- fined "knowingly" and adopted the reckless standard 120 48 C.F.R. §§ 9.406-2(a)(5)(vi)(C) and 9.407-2(a)(8)(iii). 121 72 Fed. Reg. 67087; 48 C.F.R. § 3.1003. 122 United States v. Advance Tool Co., 902 F. Supp 1011 (W.D. Missouri 1995) (presenting invoices for tools that were reverse engineered rather than brand names as re- quired).

21 instead of the deliberate ignorance standard. The reck- less disregard standard may be considered as an aggre- gated form of "gross" negligence or gross negligence plus.123 The reckless disregard standard is more than mere negligence, and depends on the factual analysis of the situation. As the Senate Committee explained: This language establishes liability for those "who know or have reason to know" that a claim is false. In order to avoid varying interpretation, the committee further de- fines the standard as making liable those who have "ac- tual knowledge that the claim is false, fictitious, or fraudulent or it acts in gross negligence of the duty to make such inquiry as would be reasonable and prudent to conduct under the circumstances to ascertain the true and accurate basis of the claim.124 Congress adopted the reckless disregard standard in its desire to avoid "ostrich" like behavior where contractors hide their head in the sand to insulate themselves from the knowledge a prudent person should have before submitting a claim to the govern- ment.125 Contractors have a duty to make a limited in- quiry so as to be reasonably certain that they are enti- tled to the funds they are seeking.126 A clear example of "knowingly" submission of a false claim is demonstrated in United States v. Advance Tool Company,127 in which the contractor presented invoices to the GSA for payment that the contractor knew at the time of presentation were false. The invoices requested payment for brand name tools outlined in the solicitation that he responded to, yet the contractor did not deliver brand name tools but tools he had reversed engineered and arranged to be manufactured by a small machine shop in Michigan. C. Intent The statute requires no specific intent to defraud.128 D. Presentment Courts have found liability for FCA violation even where contractors did not present claims directly to the United States, as long as federal funds were used to pay the claims. There is little debate for situations where the claim is presented directly to a federal agency. The circuits have been split, how- ever, in those situations in which prime contractors are working on a project funded only in part by federal funds and present claims to a state or local govern- ment or other entity administering the project.129 As 123 UMV Elecs. Co. v. United States, 43 Fed. Cl. 776, 792 n.l5 (1999), aff'd. 249 FJD 1337 (Fed. Cir. 2004). 124 S. REP. NO. 99-345, at 20, 1986 U.S.C.C.A.N. 5266, 5285 (1986); available online at http://www.ballew. com/bob/htm/99-345.htm (last accessed June 12, 2010). 125 Id. 126 Id., 1986 U.S.C.C.A.N. 5266, at 5286. 127 United States v. Advance Tool Co., 902 F. Supp. 1011. 128 31 U.S.C.A. § 3729(b)(l)(B). 129 Cf. United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488, 492–97 (D.C. Cir. 2004), cert. denied, 544 discussed in Section II of this digest, FERA clarifies the presentment requirement. The claim no longer has to be presented to an officer or employee of the United States Government or a member of the Armed Forces of the United States. FERA Section 4(a)(2) rede- fines "claim" to include not only a request or demand presented to a federal employee, officer, or agent, but also one presented to a contractor, grantee, or other recipient if the money or property requested is to be spent or used in the Government's behalf, and if the Government has provided any portion of the money or property, or will reimburse the contractor, grantee, or recipient for any portion of it. E. Materiality Prior to the 2009 FERA amendments, the word ''material" did not appear in the statute. Many courts have ruled that FCA liability applies only "where the contractor's alleged misconduct is material to the gov- ernment's decision to pay the claim."130 This debate has been resolved since FERA provisions now define "material" to mean "having a natural tendency to in- fluence or be capable of influencing, the payment or receipt of money."131 F. Mere Negligence, Honest Mistake, Extreme Carelessness Actual knowledge of the fraud or specific intent to defraud is not required. Mere negligence, honest mis- takes, and inadvertences are not actionable under the FCA. It is often difficult to distinguish whether a false claim results from innocent mistake or culpable con- duct. In situations where a contractor made mathe- matical or scientific errors and there is no evidence of intent to mislead a government, courts tend to find this conduct to be innocent and negligent.132 In United States ex rel. Reuter v. Richard Sparks,133 the court analyzed a false claim involving payment of pre- vailing wages. The contractor admitted that he did not pay prevailing wages for time spent on mainte- nance work, indicating that he thought the mainte- nance hours need not be included on the certified payrolls because the "General Wage decision" did not U.S. 1032 (2005) with United States ex rel. Sanders v. Allison Engine Co., 471 F.3d 610, 616–24 (6th Cir. 2006); for subsequent rulings in Allison, see Allison Engine Co. Inc. v. United States ex rel. Sanders, 553 U.S. 662, 128 S. Ct. 2123, 170 L. Ed. 2d 1030 (2008); on remand, 667 F. Supp. 2d 747 (2009). 130 FALSE CLAIMS IN CONSTRUCTION CONTRACTS, FEDERAL, STATE AND LOCAL 20 (Charles M. Sink & Krista L. Pages, eds., 2007). (Note that an updated version of this publication was released on CD-ROM in 2010.) 131 31 U.S.C. § 3729(b)(4). See also United States ex rel. Longhi v. United States, 575 F.3d 458 (5th Cir. 2009), dis- cussed in § II of this digest, supra. 132 Wang v. FMC Corp., 975 F.2d 1412, 1420–21 (9th Cir. 1992) 133 939 F. Supp. 636 (C.D. Ill. 1999).