Private Attorneys General v. "war Profiteers": Applying the False Claims Act to Private Security Contractors in Iraq

JurisdictionUnited States,Federal
CitationVol. 30 No. 03
Publication year2007



Private Attorneys General v. "War Profiteers": Applying the False Claims Act to Private Security Contractors in Iraq

Bryan Terry(fn*)

I. Introduction

What is the effect and reach of American law in a war zone such as Iraq? A recent case, United States ex rel. DRC, Inc. v. Custer Battles,(fn1) has presented an amalgam of apparently conflicting policies and principles that offers some food for thought on one aspect of this admittedly broad question. The case is a civil qui tam action(fn2) under the False Claims Act (FCA)(fn3) against an American contractor, Custer Battles, Inc. In the early months after the invasion, Custer Battles defrauded the primarily American led and operated Coalition Provisional Authority (CPA)(fn4)-the initial governing body in Iraq after the invasion-of millions of dollars by presenting false or inflated invoices to U.S. government officials and by failing to properly perform contracts.(fn5)

Custer Battles was formed in 1989 and "provide[s] support services to the United States and other governments engaged in wars and conflicts around the globe."(fn6) The company is an "international business risk consultancy" that "provides objective risk management and security consulting services of the highest quality and within an ethical framework."(fn7) According to its website, Custer Battles offers an array of security services, including security details and convoys, as well as explosive detection services.(fn8) The problem in this case, however, is that Custer Battles engaged in fraudulent conduct that cost the CPA millions of dollars for work that was never done.(fn9) With respect to one of its contracts, for example, Custer Battles used shell companies to falsely charge the CPA for costs never incurred; in another, Custer Battles was accused of fraudulently receiving payment for "services and facilities . . . [that were] never provided to the CPA."(fn10)

Prior to trial, where the jury found the defendants liable on one of the two contracts at issue,(fn11) the Custer Battles court faced two novel legal questions via a summary judgment motion.(fn12) First, at the time of Custer Battles' fraudulent activity, was the CPA, in effect, an American agency such that the case would even fall within the reach of the FCA?

Second, even if the CPA were subject to the FCA, must the funds used by the CPA to pay contractors have their origin specifically from the American public fisc for the FCA to apply? This Note focuses on the court's answer to the second question: FCA liability is limited to those circumstances in which the U.S. government itself, as distinct from the CPA, acquired or otherwise held "title" to the funds that the CPA subsequently used to tender payment.(fn13)

In applying that holding, the Custer Battles court first untangled and explained the various sources of funding the CPA had available to pay contractors in Iraq, not all of which were American in origin.(fn14) Next, the court analyzed each particular source of funds the CPA actually used to pay Custer Battles for the two security contracts at issue.(fn15) The court found that two sources of funding used by the CPA to pay Custer Battles came from the U.S. Treasury, while one source's title belonged to the "Iraqi people."(fn16) In limiting liability for fraud under the FCA to only those sources of funding to which the United States could be said to have title, the Custer Battles court relied on precedent that defined "claim" under the FCA as necessarily a drain on the public fisc.(fn17) Thus, the court limited potential liability for any alleged fraud only to the two sources of funds used by the CPA to pay Custer Battles' contracts in which the United States had actually held title. That decision left untouchable roughly $9 million of the $12 million total funds fraudulently received by Custer Battles, as well as any attendant damages available under the FCA to the government or qui tarn plaintiff, because the CPA had substantially used "Iraqi" funds to pay Custer Battles.(fn18)

This Note will explore both the reasoning and ramifications of the court's opinion to base liability under the FCA solely on a traditionally-defined ownership interest of the U.S. government. The court used a formalistic interpretation of precedent to define what represents a claim under the FCA that developed in cases with highly dissimilar factual scenarios to the facts and context of the Custer Battles case.(fn19) The court's reliance on case law that defines "claim" under the FCA does not translate well within the context of post-invasion Iraq, and the court did not acknowledge the reality on the ground when it constrained the meaning of "claim," and thereby unfortunately limited the reach of the FCA.(fn20)

In this unusual case, the court should have looked beyond judicial interpretations of the statutory claim developed from factually dissimilar cases and instead contemplated the policies behind the qui tam provisions of the FCA. The court should have also acknowledged the implications of privatization in the realm of federal agencies and the consequent need for legal accountability in the government's use of private contractors-especially under the chaotic circumstances in Iraq in which government oversight of private contractors is particularly difficult.(fn21) If the Custer Battles court had considered these factors, it would have more broadly interpreted the meaning of "claim" under the FCA, and this broader definition in turn would have facilitated a greater liability for contractors' fraudulent actions in Iraq.

The effect of the court's reasoning is to attach FCA liability in these circumstances only on the pure chance that the CPA happened to use specifically American funds to pay a fraudulent actor, regardless of the CPA's broad possessory discretion to simultaneously and freely spend so-called Iraqi funds.(fn22) The court's approach ignores the reality that Custer Battles' fraudulent activity substantially harmed American military and political objectives in Iraq.(fn23) Further, the court's holding undercuts some policy justifications put forward by proponents of privatization because a central justification for the government's delegation of power to private entities assumes a final accountability by government officials for all forms of government-sponsored action, whether actually performed by public or private entities.(fn24) If the court had applied a broader interpretation, then perhaps other legitimate American interests (for example, government accountability for the actions of private contractors) would allow the FCA to be used to prevent waste and fraud.

In order to provide context for the Custer Battles court's opinion, Part II of this Note generally describes the FCA and the policies behind its qui tarn provision, discusses policy rationales behind the use of private security contractors by the U.S. government, and highlights how security contractors like Custer Battles fit into that picture within the reality of present-day Iraq. Part III examines the reasoning of the Custer Battles court, and Part IV critiques that reasoning and the application of precedent in this case. Part V proposes an alternative to the court's reasoning which more closely aligns with the interests of the American taxpayer in preventing and punishing fraud. Finally, Part VI looks beyond the specifics of this case and briefly suggests congressional approaches to affirm and fortify the reach of the FCA to all activities performed by security contractors in war zones under American control.

II. Qui Tam Provisions Under the FCA and Privatization in the Defense Department

The limited scope of this Note does not allow for a full exposition of the development of the various policies and rationales for the use of private contractors by the U.S. Armed Forces. However, to give some context to the Custer Battles opinion, this Part will first outline the development of the qui tam provision of the FCA. Next, this Part will briefly describe some rationales for "privatization,"(fn25) and how those rationales perhaps ring hollow in the context of foreign U.S. military occupations, as is the case in Iraq. Finally, this Part will conclude with a description of how some security contractors like Custer Battles actually operated during the period in which the CPA retained sovereignty(fn26) over Iraq.

A. The Qui Tam Provision of the False Claims Act

Qui tam actions allow an individual or private entity, called a relator, to sue on behalf of the U.S. government in order to help deter fraud perpetrated against the government.(fn27) Generally, relators provide information to the government without which a contractor's fraudulent claim might not have been detected or successfully prosecuted. Under the FCA, treble damages(fn28) are available from a contractor who is found to have defrauded the government, and the government and the relator each share in a percentage of those damages.(fn29) Thus, relators function as private attorneys general, in that they help civilly prosecute fraudulent activity which the Justice Department may not have the information or resources to combat.(fn30) In the Custer Battles case, relators included both separate contractors working with the company and a former employee of Custer Battles.(fn31)

Qui tam...

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