Defense & Homeland Security Contract Fraud

The False Claims Act had its origins in war profiteering during the Civil War and is sometimes called the Lincoln Law because it was President Lincoln who signed the bill into law. The Act was strengthened by Congress in 1986 largely because of scandals involving fraud and waste in Defense Department contracting. In recent years, fraud in defense contracting has been somewhat overshadowed by health care fraud as the primary focus of qui tam whistleblower litigation. Even though the opportunities for fraud in defense contracting have been diminished somewhat by serious compliance efforts by many of the largest defense contractors in response to the False Claims Act, a number of factors continue to contribute to waste and abuse in the defense sector:

• No-bid contracts issued to major defense contractors in the Iraq and Afghanistan wars
• Privatization and outsourcing of foreign war operations to contractors of all sizes and levels of sophistication
• Huge domestic expenditures for antiterrorism and homeland security following the World Trade Center disaster of September 11, 2001

The Truth in Negotiations Act requires government contractors to provide cost and pricing data that is accurate, current, and complete in:

• Negotiating the price to be paid under fixed-price contracts
• Establishing overhead reimbursement rates under cost-plus contracts

TINA imposes an affirmative duty of full disclosure upon potential government contractors when it comes to matters of cost and price. Violations of TINA can be prosecuted by qui tam whistleblowers under the False Claims Act, although there have been relatively few reported cases involving this theory of liability.

Defense and homeland security contracts are frequently cost-plus contracts that provide for the reimbursement of the contractor’s actual direct costs and a percentage of its corporate overhead costs, plus a profit factor. The Cost Accounting Standards and Federal Acquisition Regulations govern the types of direct and indirect (overhead) costs that may be reimbursed to the contractor and how those costs must be accounted for. False Claims Act violations giving rise to whistleblower claims may occur when a contractor:

• Knowingly bills direct costs for nongovernmental projects to cost pools for federal projects
• Knowingly bills the government for materials that have not been supplied or for materials that are defective and do not meet government specifications
• Bills unallowable costs to indirect cost pools used to bill overhead costs to government projects

Supplying defective parts for aircraft and armaments can endanger the lives of troops and are a matter of great concern to Defense Department investigators — but other less obvious False Claims Act violations can involve things like billing Homeland Security for translators used in counterterrorism who are not fluent in the designated language, or overbilling for information technology services in the government’s vast technology and information infrastructure.