False claims.

• Author: Boller, Greg
• Position: Tenth Survey of White Collar Crime

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1. INTRODUCTION

   In response to increasingly widespread procurement fraud in Civil War defense contracts,(1) Congress enacted the first False Claims Act in 1863.(2) By doing so, Congress sought to protect both government funds and property from fraudulent claims.(3) Today, False Claims litigation involves alleged violations either of 18 U.S.C. [sections] 287,(4) which imposes criminal liability on violators, or of 31 U.S.C. [subsections] 3729-3733,(5) which impose civil liability.

   The 1986 amendments to the False Claims Act blurred the dividing line separating criminal false claims, as governed by Title 18, and civil false claims, including "qui tam"(6) actions, as governed by Title 31.(7) Accordingly, while this article focuses on 18 U.S.C. [sections] 287, it also discusses relevant provisions and applications of the civil statute.

   1. 31 U.S.C [subsections] 3729-3733

      The most novel characteristic of false claims law is the broad ability of private citizens to bring civil actions on behalf of the United States(8) for violations of section 3720.(9) Such qui tam litigation was designed to enhance enforcement of the False Claims Act.(10) A qui tam plaintiff may recover a maximum of 25% of the government recovery in cases where the government intervenes(11) and a maximum of 30% in cases where the government does not intervene.(12) Qui tam plaintiffs may formally object to any motions to dismiss or any proposed settlements between the government and the defendant.(13) Since defendants may be liable for treble damages(14) under the civil false claims statute, the potential recovery for a qui tam plaintiff can be considerable.(15)

   2. 18 U.S.C [sections] 287

      Under section 287 it is illegal to present a false, fictitious or fraudulent claim to the federal government.(16) The courts have construed section 287 broadly, enabling the government to use it in prosecuting a wide array of false claims,(17) including fraudulent federal tax refunds,(18) Medicare and Medicaid fraud,(19) Social Security fraud,(20) government contract impropriety,(21) fraudulent claims concerning unperformed services under government programs,(22) and numerous other fraudulent claims submitted to the federal government.(23) Also, the government may simultaneously bring both section 287 charges and section 1001 false statement charges(24) under the civil false claims statutes.(25)

2. Elements of the Offense

   To establish a section 287 violation, the prosecution must show that: (1) a defendant presented a claim against the United States or any agency or department of the United States; (2) the claim was false, fictitious, or fraudulent; and (3) the defendant knew the claim was false, fictitious, or fraudulent.(26) In addition, some circuit courts have held that materiality(27) should be considered an essential element of a section 287 violation.(28)

   1. Presentation of a Claim

      The legislature and courts have defined the terms "presentation", "claim" and "department or agency" broadly. Although section 287 does not explicitly define the term "claim,"(29) the language in its civil liability companion states that any request or demand for money or property from the United States can constitute a claim.(30) Yet a direct demand for federal funds is not required to constitute a claim;(31) indirect demands are also sufficient to establish a section 287 violation.(32) In the past, courts disagreed as to whether the submission of a false loan application constitutes a false claim(33) and as to whether fraudulent bids on government contracts adequately establish a section 287 violation.(34) However, the legislative history surrounding the 1986 False Claims Act amendments clearly indicates that collusive bidding falls within the scope of section 287.(35)

      The presentation element requires the government to show that the defendant made an actual physical presentation of the claim. Mere intent to submit a claim is not sufficient.(36) However, a claim need not be honored, or succeed in defrauding the government, for a defendant to be found guilty of violating section 287.(37) In fact, two circuits have held that the proper test for materiality of a false claim is whether the falsification would have a tendency to influence the decision of the government regarding the claim.(38) In addition, "reverse false claims," claims filed to avoid or decrease payments to the government, are incorporated into the definition of false claims.(39) Furthermore a person who causes another to present a false claim to the government may also be liable.(40) Finally, claims submitted for credit are treated as equivalent to those presented for reimbursement.(41)

      Courts have defined "[d]epartment or agency thereof" to include not only specific government entities like the Department of Health and Human Services,(42) the Internal Revenue Service,(43) and the U.S. Army,(44) but also the judiciary,(45) legislature(46) and fully-owned federal corporation.(47) Moreover, the language in Title 18 suggests that the terms "department" and "agency" may include any institution associated with the United States.(48)

   2. False, Fictitious or Fraudulent Claims

      To find a violation of section 287, a claim must be "false, fictitious, or fraudulent.(49) The courts have consistently treated "false, fictitious or fraudulent" as three alternative bases for liability rather than requiring a claim be false, fictitious and fraudulent.(50)

      Courts have applied the falsity element to a wide variety of facts. Individuals have been convicted for submitting false claims for claiming to have "supervised" chemotherapy while out of the country,(51) submitting overinflated labor and equipment charges,(52) and falsely representing oneself as a licensed nurse.(53)

      Defendants regularly assert that their claims were not false. In the area of government contracts, defendants have unsuccessfully argued that falsity does not exist where the contract led the defendant contractor to believe that payment was deserved.(54) Contractors have been equally unsuccessful in arguments that their invoices failed to represent the goods as being of any particular quality, and therefore, they could not be held liable for supplying lower than contract quality products.(55) Similarly, contractors have failed in claims that their construction bids were merely estimates presented to the government for negotiation purposes and did not constitute overinflated labor and equipment charges.(56) The failure of such defenses indicates that courts will, more often than not, look to the circumstances surrounding the presentation of a claim in determining falsity.(57)

   3. Knowledge

      In addition to the section 287 requirement that a presented claim be false, fictitious, or fraudulent, it is necessary for a defendant to have tendered such a claim while "knowing" that it was illegitimate.(58) Courts are divided on the degree of intent necessary to constitute a "knowing" presentation of a false claim. Some courts define the requisite state of mind as "knowledge of falsity."(59) Others require a specific intent to deceived(60) or allow a jury to infer an intent to defraud when the defendant knew the claim was false.(61) Finally, several courts have held that knowledge can be inferred from the defendant's reckless disregard for the truth, as well as a conscious avoidance of the truth.(62)

      Both the Eighth and Tenth Circuits have held that ignorance of federal involvement in a program or project is not a defense to a section 287 violation when the defendant's intent was to present a false claim.(63) The Fifth Circuit, while following the rule that a mistake of law is not an adequate defense, recognizes good faith reliance on a third party's actions as an appropriate defense to a section 287 charge.(64) The Ninth Circuit has held that the knowledge necessary to sustain a section 287 conviction could be imputed to a tax protestor who counseled taxpayers on how to file false tax returns.(65)

3. ENFORCEMENT

   1. Penalties

      Current criminal and civil enforcement mechanisms reflect congressional intent to expand greatly the ability of government and private individuals to recover losses sustained as a result of fraud.(66) Three major enforcement provisions of the law, each initiated by the False Claims Amendments Act of 1986,(67) illustrate this intent.

      First, section 287 mandates both a fine and imprisonment for all convictions.(68) The maximum prison sentence is five years,(69) but the maximum fine has been linked to the general penalty provisions of Title 18.(70) Thus, a criminal defendant may face fines of up to $250,000 for each false claim charge.(71)

      Second, while Rule 11(e)(6) of the Federal Rules of Criminal Procedure(72) provides that a nolo contendere plea shall have no collateral estoppel effect in related civil proceedings,(73) the civil False Claims Act prevents a criminal defendant who enters a nolo contendere plea from denying liability in a later civil false claims action.(74)

      Finally, a provision of the civil statute allows the Justice Department to issue a civil investigative demand ("CID") for information relating to a False Claims Act investigation prior to the initiation of litigation.(75) A CID may require the production of documents, written answers to interrogatories and/or oral testimony. While the statute specifically applies to civil actions, it also allows disclosure of evidence gathered under a CID to other authorized officers of the Department of Justice.(76) In effect, this facilitates information gathering prior to indictment.

   2. Sentencing

      The penalties described in the 1986 amendments for violations of section 287 are determined for each defendant under the "Offenses Involving Fraud and Deceit" provisions of the Federal Sentencing Guidelines.(77) Where the false claim has resulted in a loss of $2,000 or less, the base level sentence of the offense is six.(78) As the monetary loss resulting from the crime...