The Department of Justice has been clamping down on false certifications in the System for Award Management (“SAM”), in government contracts, and on invoice submissions. New laws are being created, new frameworks are being put into place, and ever more agencies are coming out with penalties for inaccurate or false certifications of compliance. For example, on October 6th, 2021, the Department of Justice announced the creation of the Civil Cyber Fraud Task Force, whose sole duty is to analyze government contractors and pursue those who fail to follow federal cybersecurity standards.[1]
The Costs of Noncompliance
Government Contractors who aren’t compliant with federal standards can face harsh penalties. Under the False Claims Act, a contractor can face exclusion from future government contracts, criminal prosecution, civil penalties, and treble damages, or “three times the amount of damages which the government sustains because of the act.”[2]
This added up to over $2.68 billion in settlements and judgments in the fiscal year ending Sept. 30, 2023,[3] which is the fifteenth year in a row that settlements exceeded $2 billion. Overall, companies have had to pay over $75 billion since 1986.
A claim under the False Claims Act can be brought for different issues, including but not limited to:
- billing for goods or services not provided;
- overcharging the government;
- providing inferior goods or services;
- falsifying records or certifications;
- concealing non-compliance; and
- inaccurate certifications.
For Numet Machining Techniques, LLC, submitting that it was a small business concern was a violation of compliance because stock affiliation with other companies meant they were no longer a “small business concern.” That ended up costing them $5,227,355.28—even though they timely disclosed their affiliation with other companies before the government knew about it.[4]
For Vicki Rice, noncompliance cost her 14 months in federal prison. Vicki Rice owned a corporation with one other person partner who is a service-disabled veteran. Even though Vicki Rice owned 49% of the corporation and the partner owned 51%, Ms. Rice was found to be the actual controller, and thus, the submission as a service-disabled veteran-owned small business was false.[5]
Ignorance is not a defense—if you do not have proper standards in place, you may also be guilty.
The False Claims Act allows the government to sue for any false claims or submissions that a government contractor made “knowingly,” meaning that the contractor knew that the claims were wrong. However, the False Claims Act also covers false submissions where the government contractor was “deliberately ignorant” or “recklessly disregard[ed]” the truth. Ignorance may be bliss, but it is not a defense under the law.
The Supreme Court recently interpreted the scienter requirement to mean that a contractor can be liable if it: (1) “actually knew” that the claim was incorrect, (2) was “aware of a substantial risk” that the claim could be wrong “and intentionally avoided learning” about whether the claim was accurate, or (3) was “aware of such a substantial and unjustifiable risk but submitted the claims anyway.”[6] It is critical to understand your compliance requirements to make sure that your company doesn’t overlook compliance that can cause False Claims Act allegations by the DOJ.
Preparing Your Company and Proving Compliance
In government contracting, written preparation is the cornerstone of demonstrating compliance. There are four aspects that a contractor should focus on:
- Written policies & procedures that meet all the FAR/DFARS and applicable legal requirements;
- Detailed written evidence of compliance actions;
- Annual training plans and retention of records; and
- Regular and routine internal audits.
Written policies and procedures not only ensure the contracting process aligns with federal regulations, but they also serve as proof to show compliance with the regulations.
Meticulously documented evidence of compliance actions is the next step in providing transparency and accountability. A contemporaneously documented trail of compliance actions fosters an environment that complies with government regulations. Documentation of actions taken also serves as an effective defense during an audit, ensuring that the contractor can quickly get past the audit and into new contracts.
Similarly, annual training plans and record retention ensure that employees are well‑versed in compliance requirements and are complying with them, and also serve as paper trails of ongoing education efforts.
Finally, regular internal audits serve as a proactive measure, identifying any areas of noncompliance before they become problematic and minimizing any damages.
Having policies and procedures, written records, annual training plans, and regular audits also all serve to mitigate the “actual knowledge” requirement of a False Claims Act claim—proving that the contractor did not “knowingly” submit false claims, but instead did its best to make sure that the claims were accurate.
Are You Sure Your Company is Compliant? Can it Prove Compliance?
In the fiscal year of 2022, the federal government committed over $694 billion to contracts.[7] That rose by 9.5% to a record $765 billion in the fiscal year of 2023.[8] There is no doubt that working with the federal government can be a highly lucrative business. However, that comes at a cost. Government contracting is one of the most heavily regulated industries, and as discussed above, the government is getting stricter, not more flexible with compliance.
If you faced an audit right now and the Government found that you submitted false claims, could you prove that you were not deliberately ignorant of the fact that they were false? Would you not prefer to know that you have all you need to prove that you are compliant?
[1] https://www.justice.gov/opa/pr/deputy-attorney-general-lisa-o-monaco-announces-new-civil-cyber-fraud-initiative
[2] 31 U.S.C. § 3729(a)(G).
[3] https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-268-billion-fiscal-year-2023
[4] https://www.justice.gov/usao-ct/pr/connecticut-companies-pay-52-million-resolve-allegations-false-claims-act-violations; https://washingtontechnology.com/opinion/2022/06/you-are-never-too-small-draw-dojs-ire/368523/
[5] https://www.justice.gov/usao-id/pr/star-woman-pleads-guilty-false-statement-case-involving-more-11-million-government; https://www.justice.gov/usao-id/pr/star-woman-sentenced-14-months-making-false-statements-obtain-11-million-government
[6] U.S. ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391, 1404, 216 L. Ed. 2d 1 (2023).
[7] https://www.gao.gov/blog/snapshot-government-wide-contracting-fy-2022
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