The False Claims Act (FCA) was passed by Congress during the Civil War to punish defense contractors for fraud. Under the FCA, a government contractor who submits fraudulent invoices or induces the government to grant a contract through fraud may face substantial monetary damages.

The FCA poses a challenge for businesses that perform work or supply goods to the U.S. government. These government contractors must implement internal controls and conduct periodic investigations to identify potential fraudulent claims. This obligation, of course, increases both the cost and risk of acting as a government contractor.

When a firm becomes a government contractor, it faces a host of regulations. From labor standards to environmental rules, government contractors step into a virtual minefield of legislation, many of which are designed to carry a potential penalty if they are not upheld.

The FCA prohibits a contractor from “knowingly” committing a prohibited act. Under the act, “knowingly” means that the contractor:

• Knew the claim was false;
• Deliberately remained ignorant of the claim’s falsehood; or
• Recklessly disregarded the truth or falsehood of the claim

The actions prohibited by the FCA can include:

• Presenting a false claim for payment or approval;
• Creating or using a false record or statement material to a false claim;
• Delivering less than all of the money or property due to the government;
• Delivering a receipt to the government without verifying it;
• Buying government property from someone who is not authorized to sell it;
• Making or using a false record or statement material to an obligation to deliver money or property to the government;
• Concealing, avoiding, or decreasing an obligation to deliver money or property to the government;
• Conspiring to do any of the above.

A government contractor must implement internal controls and audits to detect these activities—or risk penalties under the FCA.

Actions Under the False Claims Act

Under the FCA, a government contractor can face a lawsuit by the U.S. government or a private citizen acting on behalf of the U.S. government. A lawsuit initiated by a private person is known as a qui tam action.

The FCA incentivizes qui tam actions by providing the private person with a share of the damages awarded in the lawsuit. The share ranges from 10% to 30%, depending on whether the government chose to become a party to the lawsuit or left the private party to carry out the lawsuit alone.

Qui tam lawsuits usually come from whistleblowers. This can provide whistleblowers with additional actions beyond typical labor claims.

In addition to retaliation, breach of contract, or whistleblower protection claims, a whistleblower who discovers fraud by a government contractor can file a qui tam lawsuit.

False Claims Act Penalties and Damages

A contractor can face substantial penalties for violating the FCA—penalties that are designed to discourage contractor fraud.

When a government contractor loses an FCA action, the court can award treble damages to the government, plus a civil penalty of $5,000 to $10,000 per false claim. Thus, for example, a contractor who submits five false invoices totaling $100,000 could face damages of up to $300,000, plus penalties of up to $50,000.

A government contractor can attempt to reduce the damages. When a government contractor self-reports an FCA violation and cooperates with the government, the FCA caps the damages at two times the amount of the fraud.

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