With the end of the high levels of government contract spending during the Great Recession and the advent of sequestration and budget cuts, government contractors are competing for fewer and fewer opportunities. As this is occurring, government contracting officers, inspector generals, third-party contract administrators and law enforcement are significantly increasing their collective investigations of fraud, waste, and abuse and related False Claims Act and other statutory violations. Government contractors must prepare for these issues well in advance and ensure a well-developed plan is in place to investigate, evaluate, possibly report and respond to an investigation related to government contracting activities.
It seems like almost every day the government is either reporting the investigation or the settlement and prosecutions of government contractors and government employees for activities related to the False Claims Act. This statute prohibits government contractors, among others, from obtaining payments from the government based on fraud. To be liable, the government does not have to provide that the government contractor knew it was defrauding the government. Individuals and companies have been held liable or settled False Claims Act cases where the only evidence was that the government contractor had a culture of “deliberate ignorance” or “reckless disregard” for the fraudulent acts. In fact, the government contractor does not even need to have had an economic benefit from the fraudulent act to be liable under the False Claims Act.
The government discovers alleged False Claims Act violations in a variety of ways. Due to specific laws and regulations, such as Federal Acquisition Regulation Clause 52.203-13, actually requiring a contractor to disclose “credible evidence” of a violation, self-disclosures are increasing as one of the main initiators of a False Claims Act investigation. The government is also “data-mining” invoices to determine discrepancies and over-charges. Many agencies are also mandating audits by prime contractors of subcontractors to ensure potential violations are discovered. This is in addition to the traditional law enforcement techniques to root out fraud, waste and abuse.
But, the government is also receiving a significant increase of whistleblower complaints against government contractors via hotlines, disclosures or qui tam lawsuits. These complaints are sometimes made by competitors or subcontractors. However, the majority of reporters are internal employee whistleblowers that are either frustrated by attempts to fix the problem within the company or are disgruntled for a variety of reasons, including being fired or demoted from a position. A national network of whistleblower plaintiffs’ attorneys now exists to assist whistleblowers with qui tam lawsuits and that may result in a quick and lucrative settlement.
A voluntary disclosure by a company before a whistleblower complains or the government discovers the alleged conduct is a very important tool to mitigate risk. But, even when government contractors attempt to voluntary disclose, the government is determining that the voluntary disclosure was inadequate. For example, the government recently announced a $33 million settlement involving Carondelet Health Network in Arizona for False Claims Act violations. The government acknowledged that Carondelet did voluntary disclose the overpayment issues that were the underpinning for the settlement. However, the government determined that Carondelet’s voluntary disclosure was “inadequate, untimely, and not complete.” Since the matter resolved in a settlement, it is unclear exactly what the government meant by this determination and what caused Carondelet to lose out on possibly mitigating the alleged violations.
However, through the Carondelet announcement, other recent settlements, and recent interactions with various government agencies related to voluntary disclosures, a few “best practices” can be gleaned. First, the government contractor must have a policy in place to handle fraud, waste and abuse. If the government contract includes FAR Clause 52.203-13, such a policy is a contract requirement. Regardless, every government contractor should, at the minimum, have an ethics policy in-place and should seriously consider putting in-place a complete program to address fraud, waste and abuse matters, including the use of hotlines. Government contractors should announce (regularly) the policy from senior management to show the highest levels of concern and establish a “culture of compliance.” The government contractor should train its employees and other stakeholders (e.g., subcontractors) about the policy. Finally, the company should regularly audit for potential problems.
If a complaint is raised, even if informally, the government contractors should immediately investigate the matter. Government contractors should have a process in place to handle such investigations. But, recent court opinions have questioned the ability of companies—especially government contractors—to retain a privilege by conducting an investigation with non-lawyers, even when the investigation is at the direction of the government contractor’s legal department. Therefore, government contractors should seriously evaluate the delegating of any investigation to internal employees or external non-lawyer consultants. Retaining knowledgeable outside counsel is often the more prudent decision. The stakes are just too high.
Once the investigation is timely completed, the government contractor will need to decide whether to voluntarily disclose the allegation—regardless of whether the allegation actually has merit. The failure to voluntarily disclose eliminates any potential mitigation. In addition, by voluntarily reporting first, the government contractor is able to set the stage for the government investigation, reference the potential claimant, explain what steps the government contractor took to investigate the allegation, the investigation results and any internal mitigation that was taken to address the allegation. On the other hand, the government may never have discovered the alleged violation and the government contractor would not have suffered the sometimes unbearable scrutiny of a government investigation. The decision to voluntarily disclose should not be taken lightly, and you may want to involve outside counsel in evaluating this decision.
If the government contractor decides to voluntarily disclose, the written disclosure must be complete and adequate. If more time is needed, then this should be requested to allow a supplementation of the initial disclosure. Many governmental agencies have specific regulations or guidelines about how a government contractor should voluntarily disclose. A “data dump” of allegations, speculation, innuendo or gossip is inappropriate. Rather, a well-defined description of the facts should be available from the investigation, which is preferably done by attorneys to maintain necessary privileges. In addition, the information discussed above concerning adequately setting the stage for an investigation must be considered for inclusion. Finally, if the government requests that a form be used or included in the disclosure, the government contractor should comply with the request and then forward the voluntary disclosure to the required and appropriate government representatives. This may include the contracting officer, Office of Inspector General, or other point of contact.
Once a voluntary disclosure is made to the government, the government contractor must be ready to cooperate with any governmental investigation. This may include interviews of employees and requests for records. But, the government contractor should make sure the law is followed in regard to such investigations and ensure that its competitive advantage is not unduly impacted. For example, if a government contractor turns over internal documents to the governmental investigator, the government contractor should make sure that adequate protections against disclosure to others pursuant to the Freedom of Information Act (or similar State laws) are in place. In regard to interviews of employees, the government contractor should ensure that labor laws and union rights are respected. A knowledgeable outside counsel can proactively assist and buffer the government contractor regarding coordination of the investigation and help avoid any unintended miscommunications.
The goal of any voluntary disclosure is to handle the issue at the lowest possible level and before the matter is referred to prosecutors or civil attorneys at the U.S. Attorney’s Office or State Attorney General’s Office. If the voluntary disclosure is done well and the investigative agency believes that the disclosure was adequate and the government contractor took adequate steps to address the allegations, it is possible that the case will be closed without litigation or settlement.
But, if referral for prosecution or civil action does occur, the government contractor is hopefully in a better position through its preparation, well written voluntary disclosure and pro-active cooperation with the government. The government prosecutors and civil litigators actively encourage voluntary disclosures. This is supported by the various governmental agencies. Therefore, voluntary disclosures are likely to become the norm in the future to ensure the government contractor is able to mitigate any allegation (regardless how baseless) and ensure the ability to continue to compete for government contract opportunities. Government contractors should understand these issues and prepare accordingly.