Whistleblowers cash in on false claims act.

• Author: Nagel, Chris
• Position: Ethics Corner

One of the more startling trends in defense contracting is the recent rise in payments made by industry to government agencies and whistleblowers under the False Claims Act. The Department of Justice recorded $890 million in 2013 based on procurement fraud claims under the FCA--primarily involving defense contractors.

Out-of-court payments typically ranged from $1 million to $5 million, and contractors often paid the settlements even though the government could not demonstrate a specific intent to defraud the government.

Why would contractors pay seven-figure settlements instead of fighting the FCA claims in court? The answer may be fear of what could happen in court. Last yew; a federal judge ordered a contractor to pay a record $664 million after finding the contractor had violated the FCA in bidding and performing on an Air Force contract.

What is the FCA, and how can defense contractors mitigate its risks? The act imposes civil liability for using false information to seek payment from the government. This means that agencies can file a lawsuit and seek monetary damages from private parties who violate the act.

To find liability, a court must determine that the violator knew that the claim was false, maintained deliberate ignorance of the falsity or demonstrated a reckless disregard for the truth. Thus, courts have considerable latitude to find a party liable even if a contractor's principals had no actual knowledge of the false claim.

If a court finds FCA violations, the penalties can be severe. The government may recover damages three times as great as its actual loss, plus civil penalties of up to $11,000 per claim. Between 1987 and 2012, it recovered nearly $35 billion under the FCA.

One unique feature of the FCA is the empowering of non-government actors to file complaints on the government's behalf It rewards private whistleblowers up to 30 percent of damages the government recovers, if the whistleblower files a complaint alleging violations not previously made public. These private whistleblower actions, brought for the government's benefit, are known as qui tarn cases--which in Latin refers to English monarchs who rewarded private citizens for enforcing the king's laws.

More than 70 percent of all federal government FCA actions are qui tarn cases. Given that successful whistleblower actions entitle the whistleblower to a sizable percentage of the government's recovery the FCA incentivizes contractor employees to file lawsuits...