Procurement Fraud

The original False Claims Act was passed in 1863 to combat cheating in the Civil War by Union Army war suppliers. In recent years, fraud by defense contractors and other government suppliers continues to be one of the biggest and most important areas of False Claims Act litigation. The attorneys at Vogel, Slade and Goldstein have represented whistleblowers and the Government in procurement fraud cases that have led to recoveries to the Government of over $300 million and to rewards to whistleblowers of over $55 million.

While contractor fraud may be committed in an infinite variety of ways, some of the more common schemes are:

Product Substitution: In these cases, a contractor provides a product to the Government that is different from the one specified in its contract. Frequently, the contractor cheats the Government by using unapproved, “old” or refurbished or otherwise inferior parts in manufacturing the product, contrary to contract requirements. Many contracts require that parts be purchased from American companies; contractors who use parts from foreign sources without the Government’s permission may be liable for fraud under the False Claims Act.

Mischarging and Cross-Charging: In these cases, a contractor submits bills containing false charges. Sometimes, the contractor “cross-charges” by charging work performed on one contract to a different contract. In other instances, the contractor improperly allocates overhead costs among contracts so that the Government ends up paying for more than its fair share of the overhead costs. Mischarging also can occur when a contractor inflates its bill to the Government by charging for labor, parts or other costs that are greater than those the contractor actually incurred.

Failure to Test or Inspect Products: Government contracts often provide that the contractor must perform certain tests on a product or inspect it in a certain way to insure that the product will function properly. A contractor that does not perform required tests or inspections or falsifies the results may be liable for fraud under the False Claims Act.

Bribes or Kickbacks paid to Government Officials: These schemes involve payments of money or other things of value to government contract or program officials who are involved in deciding the corporations with which the U.S. government will do business. If a government contracting decision is improperly influenced by bribes or kickbacks, the contract is considered invalid, and it has been successfully argued that every invoice submitted under the contract is a false claim.

Multiple Award Schedule Fraud: The General Services Administration and other agencies often publish lists of pre-selected vendors who have agreed to provide certain designated commercially-available items to the government at their lowest available prices. In such situations, the vendors have an obligation to provide the government with the benefit of the lowest discounts and other price concessions available to commercial customers in comparable situations. When companies selling products on the Multiple Award Schedule or a comparable government schedule fail to disclose the best prices they have given commercial customers, they often run afoul of the False Claims Act.

Fraud on the Foreign Military Sales Program: Pursuant to the Foreign Military Sales (FMS) Program, the United States Department of Defense purchases military items from U.S. companies for allied foreign countries. The U.S. funds are either given to the foreign nations as grants or loans, or subject to reimbursement by the foreign nation. When U.S. contractors paid with FMS funds violate the conditions of their participation in the FMS program, divert FMS funds to unapproved purposes (such as payments to foreign officials), or otherwise fail to deliver the promised goods, they violate the False Claims Act.

Bid-rigging: When contractors secretly agree to fix prices so that an agreed-upon contractor will win the bid for a government contract, they preclude the government from obtaining a competitive price. As with contracts obtained through bribery and kickbacks, it has been successfully argued in False Claims Act cases that a rigged bid renders the resulting contract invalid, with every invoice submitted under the contract also rendered false .

Violations of the Truth-in-Negotiations Act (TINA): In some instances, a contractor may be required to disclose cost information to the Government in negotiating a fair price with the Government for its product and services. Contractors may be found liable for fraud under the False Claims Act if they deliberately withhold or distort such information.