Government Contracting Fraud

In U.S. contract law, a breach of contract does not trigger punitive damages. In the case of government contracts, however, substantive punitive damages can be imposed under the False Claims Act. Unlike private contracts, government contracts are much more difficult to police, and therefore the FCA serves as one way in which the government can deter fraud. For example, government employees and groups in charge of monitoring contract performance often do a poor job, are themselves part of a fraud, or have been influenced by the companies whom they are supposed to be monitoring. Furthermore, many government contracts include terms which have nothing to do with security high quality goods at a low price, such as contracts mandating diversity, labor standards, and environmental regulatory compliance. Finally, since the goods and services are disseminated to the public at large, it is hard to monitor quality. The FCA’s punitive measures, therefore, serve to combat some of these difficulties.

Liability under the False Claims Act extends to false claims made in association with government contracts, including overcharging, substitution of inadequate materials, and false certification of compliance with a contract’s terms. In addition to a contractor’s liability under the False Claims Act, Congress recently amended the statute to specify that liability may also attach to individuals who present a false claim to a “contractor, grantee, or other recipient.”

Government contracts between private corporations and the federal government accounted for $535.9 billion in federal spending for FY 2011. That amounts to one in every six federal dollars spent. Although defense contracting spending accounts for a large portion of overall government contracts, the federal government also spends billions of dollars per year on contracts with non-defense related companies that are subject to fraud. These include:

• Energy Fraud
• Environmental Fraud

Despite the enormous level of spending on government contracts, a 2011 Government Accountability Office (“GAO”) report found that six out of ten executive branch agencies are failing to root out incompetent or fraudulent business from winning new contracts. The report notes that many agency officials do not even consult lists of excluded contractors before awarding contracts. Worse still, most federal branches continue to award contracts to companies they know are involved in currently involved in misconduct.

Example

In one of the most egregious cases of government contracting fraud, the U.S. military concluded in the summer 2011 that U.S. taxpayer money had been indirectly funneled to the Taliban that was part of a $2.16 billion transportation contract to promote Afghan businesses. The Department of Treasury (“DOT”) paid millions of dollars to as many as eight companies, one of which paid a subcontractor who hired other subcontractors to supply trucks. The trucking subcontractors made deposits into an Afghan National Police commander’s account in exchange for safe passage of the convoys. In one instance, U.S. intelligence officials traced $3.3 million which was withdrawn in twenty seven transactions from the commander’s account and transferred to the Taliban in the form of weapons, explosives, and cash. Members of the military asserted that federal contracting rules did not require them to investigate the flow of funds below the level of prime contractors.