Defense contracting fraud was the genesis for the creation of the False Claims Act, originally known as “Lincoln's Law,” when passed by Congress in 1863, at the height of the Civil War. It is said that President Lincoln directed that the law be enacted after learning that unethical war profiteers had sold the Union Army “decrepit horses and mules in ill health, faulty rifles and ammunition, and rancid rations and provisions among other unscrupulous actions.”
Defense contracting fraud continues to plague the government in significant amounts since opportunities for fraud are abundant due to the massive amount of spending through the U.S. Department of Defense. Defense-related spending, including Department of Defense, Federal Bureau of Investigation, defense-related Energy Department spending, Veterans Affairs, NASA, and related areas, is approaching $1.5 trillion per fiscal year.
The kinds of fraud that occur within the broad scope of defense contract fraud practically defy categorization. However, some of the more common and notable areas include:
- Violations of the Truth-In-Negotiations Act (“TINA”): When there is only one company capable of making a highly complex weapon or other product, the government cannot simply take bids in order to ensure that it pays a fair price. TINA requires contractors in these situations to disclose all information regarding their costs to the government. If the defense contractor does not truthfully disclose their costs as required by TINA, it could be a violation of the False Claims Act.
- Contract Specifications Fraud: Defense contracts are usually very detailed and require the defense contractor to build a product to certain specifications and perform certain testing procedures in order to ensure that the product works properly. A defense contractor who knowingly fails to build a product according to the specifications or perform testing procedures set out in the contract could be in violation of the False Claims Act.
- Product Substitution: The U.S. government often requires that a defense contractor use products of a certain type or quality and that those products be made in the U.S. If a defense contractor improperly substitutes an inferior or foreign product, it could be a violation of the False Claims Act.
- Cross-Charging: Cross-charging refers to the fraudulent practice of improperly shifting costs and expenses from one contract to another. This situation typically occurs when a defense contractor has a “fixed-price” contract and a “cost-plus” contract. A “fixed price” contract is where the government pays a set amount for a product. In contrast, a “cost-plus” contract is where the government pays a set amount plus a percentage of the defense contractor's costs. If a defense contractor shifts costs that should be a part of a “fixed price” contract to a “cost-plus” contract, it could form the basis of a claim under the False Claims Act.
- Improper Cost Allocation Fraud: Often, defense contractors have contracts not only with the U.S. government but also with private companies and foreign governments. Defense contractors who improperly shift costs from private and foreign government contracts to U.S. government contracts, such as a “cost-plus” contract, violate the False Claims Act.
Some of the largest whistleblower cases on record have arisen in the defense contactor fraud context.
Real World Examples of Recent Defense Contactor Fraud False Claims Act Cases:
- 2010: American Grocers paid $13.2 million to settle a whistleblower suit under the False Claims Act by a former employee alleging that the company shipped the U.S. military troops expired food. The company was accused of buying food near its expiration date, deliberately changing the expiration dates, and then selling the food to the military.
- 2009: Northrop Grumman paid $325 million to resolve a False Claims Act whistleblower lawsuit alleging that the company sold the federal government defective satellite parts as result of the company's failure to provide adequate testing. The whistleblower received a $48.7 million award for bringing the suit.
- 2008: General Dynamics Armament and Technical Products paid over $4 million to resolve a whistleblower lawsuit filed by former employees alleging that the company either defectively manufactured or failed to test parts for Navy aircraft and submarines and sold the parts to the Navy knowing that they did not meet specifications.