DOJ Announces FY 2020 Fraud and FCA Recovery Statistics: What They Mean for 2021

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PilieroMazza PLLCLast week, the Department of Justice (DOJ) announced that it recovered more than $2.2 billion in settlements and judgments from civil cases involving fraud and the False Claims Act (FCA) in Fiscal Year (FY) 2020 (ending September 30, 2020). DOJ’s FY 2020 fraud and FCA recovery statistics report accompanied the announcement. With a global pandemic that often delayed proceedings, the $2.2 billion in recoveries was DOJ’s lowest haul since 2008. Although the announcement and report revealed a significant decline in recoveries relative to FY 2019, DOJ’s 2020 fraud and FCA statistics confirmed that the FCA remains an effective enforcement tool about which government contractors and companies that do business with government contractors should be wary in 2021 and beyond.

Some of the key takeaways from the report are as follows:

The Government Reported A Record Number of New Matters in FY 2020 But Substantially Reduced Monetary Recoveries

In FY 2020, the government identified 922 new matters, representing a 17% increase over FY 2019. FY 2020 also saw the largest ever number of new matters initiated. In terms of dollars recovered, however, FY 2020 brought the lowest recovery since FY 2008. Indeed, the $2.2 million recovered was almost $700,000 less than the amount recovered in any single year in the last decade. Although the actual recoveries during FY 2020 were low, they did not include a number of fraud settlements – totaling over $3 billion – that DOJ reached toward the end of the fiscal year. Those recoveries may be recorded in FY 2021 or in the fiscal year in which they are received.

Key Takeaway: It appears the COVID-19 pandemic had a significant impact on fraud and FCA matters in FY 2020. On one hand, the pandemic likely affected DOJ’s ability to push fraud and FCA matters to resolution at the same pace it could before the pandemic began. And, on the other, it likely generated a surge in new matter reporting. The Paycheck Protection Program (PPP) and other small business loan programs initiated through the Coronavirus Aid, Relief, and Economic Security (CARES) Act created multiple potential fraud and FCA pitfalls for borrowers, as they required a number of certifications related to a borrower’s need and use of funds to obtain a loan and to obtain loan forgiveness. Recently, DOJ announced the first settlement of a PPP loan fraud matter, and we expect many more to follow. We also expect FY 2021 recoveries to substantially outpace FY 2020. If the approximately $3 billion in recoveries negotiated at the end of FY 2020 come to fruition before September 30, 2021, FY 2021 could represent the largest single-year recovery in history (currently $6.157 million in FY 2014).

Government-Initiated Fraud and FCA New Matters Increased Substantially in FY 2020

FCA matters may be initiated either by the government directly or by a whistleblower in what is referred to as a “qui tam” action. If they initiate a qui tam matter, the whistleblower, or “relator,” has an opportunity to share in the government’s monetary recovery. The overwhelming trend since the mid-1990s has been that qui tam matters make up the substantial portion of new fraud and FCA matters initiated in any given year. Indeed, over the last decade, qui tam actions have made up approximately 80% of the new matters identified by the government. FY 2020, however, saw a sharp uptick in government-initiated matters.

Of the new matters identified in FY 2020, 673 were initiated by qui tam relators. The number of qui tam matters increased by approximately 5% over FY 2019 but stayed within the general range of new qui tam matters consistently seen over the last decade. Interestingly, government-initiated matters increased by approximately 69% over FY 2019 to 250 for FY 2020. The number of government-initiated matters was the highest number since 1994.

Key Takeaway: The substantial increase in government-initiated fraud and FCA matters in FY 2020 follows a significant increase in the amount of recoveries from government-initiated matters in FY 2019. Although the number of qui tam matters initiated indicates that whistleblowers have no intention of slowing down in their initiation of new matters, the FY 2020 data reinforces what we predicted a year ago: moving forward, the government may rely more on internal audit procedures and office of inspector general investigations to identify potential fraud against the government.

Relators Received Approximately $309 Million from Qui Tam Matters

Of the $2.2 billion in settlements and judgments reported by the government in FY 2020, over $1.6 billion arose from lawsuits filed under the FCA’s qui tam provisions. As noted above, whistleblowers are incentivized to initiate claims under the FCA because they can obtain a portion of the government’s recovery in a successful suit – often between 15% and 30% depending on the matter. The DOJ report indicates that “the number of lawsuits filed under the qui tam provisions of the FCA has grown significantly since 1986, with 672 qui tam suits filed this past year – an average of nearly 13 new cases a week.” Still, reflective of the overall decline in dollar recovery, relators received only approximately $309 million over the course of FY 2020, the lowest amount in over a decade.

Key Takeaway: Despite the reduced overall payout to relators in FY 2020, the potential economic benefits associated with FCA matters incentivizes “whistleblowers” to initiate new FCA matters against their employers, competitors, and companies with which they do business.

The Defense Industry Saw a Drastic Decrease in Government Recoveries and an Increase in New Matters Initiated

Consistent with the overall data described above, new matters arising out of the defense industry increased in FY 2020, but government recoveries decreased. Specifically, 64 new defense industry matters were initiated in FY 2020, which represents an approximately 20% increase over FY 2019 and the largest number of defense industry new matters since 2013. Government-initiated matters in the defense industry more than doubled over FY 2019 and reached their highest level since 1999. Meanwhile, monetary recoveries in FY 2020 were approximately $75 million in FY 2020, a noticeable decline from the $253 million reported in FY 2019, and the lowest amount since 2014.

Key Takeaway: Although fraud and FCA matters in the healthcare industry will continue to be the primary focus of the government’s fraud-recovery efforts, the defense industry remains a key target for fraud investigations and new matters, particularly those initiated by the government.

DOJ Championed Efforts to Combat Fraud by Federal Contractors

In its press release announcing its annual statistics, DOJ specifically highlighted its efforts to combat procurement fraud during FY 2020. In particular, the government recovered $57 million from a number of contractors based on “allegations that they submitted false claims to the U.S. Department of Energy by charging inflated labor hours and by billing for work not actually performed to construct and maintain the Hanford Waste Treatment Plant” in Mesa, Washington. In another matter, DOJ obtained $37.5 million from a government contractor and its CEO to resolve allegations that the contractor “engag[ed] in a bribery scheme to steer government contracts for training simulators to the company.”

DOJ also disclosed that, during FY 2020, it resolved several cases based on “allegations that government contractors provided goods or services that did not comply with contract requirements.” In one example, DOJ recovered $27 million from a contractor to resolve “allegations that it fraudulently induced the Army and the U.S. Defense Logistics Agency (DLA) to award wartime contracts for food and trucks by falsely certifying compliance with United States sanctions against Iran” and “falsely represented construction progress on a warehouse to induce DLA to award the prime vendor contract to provide food to U.S. troops in Afghanistan.” In a separate matter, DOJ recovered over $10 million from a contractor based on “allegations that it produced and sold substandard steel components for installation on U.S. Navy submarines.”

Key Takeaway: Procurement fraud remains an important aspect of DOJ’s fraud and FCA recovery efforts. We expect DOJ to increase its pursuit of recoveries from federal contractors in FY 2021, particularly with regard to false certifications and providing non-compliant products and services to the government.

The government’s annual announcement and report serve as an important reminder that government contractors should seek to avoid costly and damaging FCA and fraud-related litigation by developing a clear understanding of their obligations, representations, and certifications, with a robust audit procedure to ensure accurate claims for payments are made to the government.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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