When Navigating the False Claims Minefield, Have an Ethics and Compliance Program on Board

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1 When Navigating the False Claims Minefield, Have an Ethics and Compliance Program on Board Eugene J. Heady Partner Atlanta, Georgia T: E: Worse than traitors in arms are the men who pretend loyalty to the flag, feast and fatten on the misfortunes of the nation while patriotic blood is crimsoning the plains of the south and their countrymen are moldering in the dust. Abraham Lincoln (Click here to print a PDF of this article.) Violators will be prosecuted. Our government s effort to root out fraud in government contracts dates back to the Civil War. The Federal False Claims Act ( FCA ), for example, was enacted in 1863, at the urging of President Lincoln, because of frauds perpetrated by some unscrupulous defense contractors, including the sale of faulty rifles, faulty ammunition, rancid provisions, and sick horses and mules. During the last fifty years, Congress and the Executive Branch have increasingly emphasized the enforcement of anti-fraud laws and regulations. In 1986, President Ronald Reagan signed into law amendments to the FCA, which strengthened whistleblower provisions and thus ushered in a new era of enforcement. Beginning with California in 1987, a number of states have enacted state FCAs to combat fraud. More recently, many states have amended their state FCAs to strengthen them. In April 2012, for example, Georgia enacted the Georgia Taxpayer Protection False Claims Act, which vastly expanded the state s existing Medicaid False Claims Act beyond Medicaid fraud. The new Georgia law now reaches every industry conducting business within the state, including the construction industry. Not surprisingly, vigorous campaigns to enforce anti-fraud laws and regulations have been bipartisan and efforts to recover money have been robust regardless of which party controlled the Congress and White House. In 1988, the government recovered about $355,000 in cases involving violations of the FCA. Recoveries under the FCA have been rapidly increasing ever since. By 2002, recoveries reached $1.2 billion. In 2011, more than $3 billion was recovered and by mid-year 2012 recoveries reached $3 billion and are steadily climbing. Action on the state level is expected to be equally robust. In recent years there has been a heightened agency and court awareness of fraud specifically related to construction projects. If you are competing for an award or performing a government construction contract, you need to recognize that Congress and government agencies are deeply concerned about fraudulent, inflated, or false claims. Protecting the government purse against wrongdoers is not, and never should be, a partisan issue. Given the whistleblower provisions of federal statutes that are designed to ferret out wrongdoers, if contractors don t work seriously to identify and eliminate misconduct within their own ranks through an internal compliance program, it is likely that someone else will. Once violations are identified, make no mistake; courts will strictly interpret and enforce the various anti-fraud statutes. The current statutory, regulatory and enforcement environment presents a dangerous minefield for contractors and their

2 subcontractors. Violations of anti-fraud statutes may involve several areas including: Claims & change order proposals, Proposal representations, Overpayments, Retention or withholding on subcontractors, Small Business program or set-aside abuses, Buy American Act violations, Davis-Bacon Act violations, E-Verify & undocumented workers, and Self-disclosure obligations. Navigation through the statutory and regulatory minefield is challenging given that the procurement and administration of government construction contracts are governed by multiple statutes and extensive regulations. The public policies underlying these statutes and regulations and particularly the Federal Acquisition Regulation ( FAR ) are reflected in most government contracts. Standard contract clauses contained in the FAR are routinely incorporated into government construction contracts. The FAR requires that contractors conduct themselves with the highest degree of integrity and honesty. The FAR reflects the government s expectation that the contractor will take affirmative steps to ensure ethical conduct and compliance with the law and self-disclose misconduct to the government. Failure to take affirmative steps to identify and report possible wrongdoing may result in the imposition of sanctions, from civil penalties to sanctions as severe as suspension or debarment. To combat fraud, the government may require its contractors to develop and maintain codes of business ethics and conduct and to develop internal control systems such as hotlines to detect and deter wrongdoing. Indeed, the federal government mandates that most of its contractors adopt and provide to each of its employees a written code of business ethics and conduct. The FAR prescribes policies and procedures for the establishment of contractor codes of business ethics and conduct. The Contractor Code of Business Ethics and Conduct is set out in FAR The obligation to comply with FAR is triggered upon receipt of a contract in excess of $5 million and having a duration of more than 120 days. A contractor that is not a small business must also adopt an ongoing compliance program and internal control system to deter and detect wrongdoing. The FAR, however, does not provide a template for an acceptable contractor s code of business ethics and internal control system ( Compliance Program ). As a result, each contractor must carefully review the available resource information and develop a program suitable for the size and complexity of its organization. When developing a Compliance Program there are several key points to consider and discuss with your legal counsel. While the following list is not exhaustive, consider the following: Contractors are required to flow-down federal ethics and compliance program obligations to any construction subcontract or purchase order in excess of $5 million and having a duration in excess of 120 days. Most contractors have an affirmative obligation to provide ongoing education to their employees on their ethics and compliance obligations and on the employees rights if an employee reports a possible ethics violation.

3 Contractors must implement effective Compliance Programs. Anticipate that one or more federal agencies may monitor or audit your Compliance Program. Federal agencies will look for evidence of an ongoing program that demonstrates the contractor s commitment to ethical conduct and to a company culture with the highest degree of integrity and honesty. Once developed and adopted, the Compliance Program must not sit on the shelf forgotten and collecting dust. When monitoring, auditing, or evaluating a contractor s Compliance Program, it is probable that the contracting agency or Defense Contract Audit Agency ( DCAA ) will refer to the Federal Sentencing Guidelines, the Principles of Federal Prosecution of Business Organizations set forth in the United States Attorneys Manual, and the DCAA audit manual for guidance. Each of these documents identifies key attributes of an effective contractor Compliance Program on which a federal agency may focus its review. A contractor should carefully review and study each of these publications and develop a template of attributes or characteristics for its Compliance Program. The contractor should use that template as a basis for developing a Compliance Program checklist. The checklist can then be used to structure, prepare and manage the Compliance Program. The checklist can also be used as a means for the contractor to determine whether it has considered and addressed each key attribute before it is questioned by a representative of a federal agency and to determine if it has available to it the appropriate supporting documentation to demonstrate that the program satisfies the requirements of FAR , Contractor Code of Business Ethics and Conduct. As part of any review of the contractor s system of cost documentation and control, the DCAA will likely review the contractor s Compliance Program when auditing a contractor s proposal, a request for equitable adjustment, or a claim. Therefore, the contractor should study applicable sections of the DCAA audit manual and be prepared to demonstrate how its Compliance Program addresses the issues identified by the DCAA as significant. The contractor should define specific roles and activities in the Compliance Program for senior managers so that it can demonstrate ongoing commitment to the Compliance Program to both the contractor s employees and the government. Designate a Compliance Officer who is completely familiar with the company s operational functions and procedures and who is authorized to report directly to the company s Board of Directors on any compliance issues. The Compliance Program should provide a basic structure and guidance for the Compliance Officer to follow when a compliance issue is identified. Develop subject matter training on topics relevant to each employee s job function and regarding the potential risks for a violation of federal laws and regulations. For example, relevant topics may include training on the Buy American Act, the significance of claim certification, cost and pricing data, prohibited gratuities, etc. Once the Compliance Program is in place, senior management must continually communicate the importance of adherence to the company s code of business ethics and conduct and must stress that the company expects adherence. Establish a system to investigate possible compliance issues. Establish protocols for the receipt of reports of compliance questions or issues as well as protocols for the timely

4 distribution of reports and investigation of any reports or incidents. If a compliance problem is identified, take swift and clear remedial action, including appropriate disciplinary action. Make sure that the company s directors are active participants in the Compliance Program. Make sure that directors receive periodic reports on the program s functions as well as timely reports when a potential compliance issue is identified. Keeping quiet about compliance issues is not beneficial to the contractor or its employees. Make clear to your employees that timely disclosure of compliance issues is expected and that good faith reports of compliance issues will not result in actions adverse to the employee. Make equally clear that any misconduct will result in disciplinary action including possible termination of employment. Take seriously any employee complaints of misconduct. If compliance issues are identified, such as potentially fraudulent conduct or false billing, then take prompt, efficient, and effective action to remedy the issue. Effectively document and routinely evaluate the Compliance Program. As circumstances warrant, modify the Compliance Program so that it remains relevant and effective. Don t assume that misconduct is an insurable risk. It is unlikely that any general liability policy addressing errors and omissions in performance will provide coverage for the defense of a government suit arising from an alleged false claim. Your best defense is to develop, implement, and vigorously enforce a business ethics and compliance program together with developing and implementing the necessary internal control system to help avoid misconduct and to detect and deter FCA violations in the first place. Given the complexity and dynamic nature of federal and state statutes and regulations governing the conduct of construction contractors, all those competing for an award or performing a government construction contract should seek the advice of legal counsel to assist them in the development and implementation of an effective ethics and compliance program in order to avoid violations and ensure smooth sailing through the statutory and regulatory minefield. Smith, Currie & Hancock LLP This article originally appeared in Construction Connection Newsletter. Eugene J. Heady is a Partner in Smith, Currie & Hancock s Atlanta office. Smith, Currie & Hancock is a national law firm focusing on construction law, government contracts, environmental law, and commercial litigation. Gene is a regular contributor to the Construction Connection Newsletter. He has over 30 years of experience as a problem solver in the construction industry. Following a successful career in the construction business, Gene began practicing law in He represents and assists owners, general contractors, builders, subcontractors, suppliers, architects, engineers, designers, sureties, real estate developers, and manufacturers in avoiding and resolving disputes related to construction projects throughout the continental United States, Alaska and the Caribbean. His work involves private, local, state and federal government contracts and commercial, industrial and institutional construction projects. Gene literally grew up in the construction industry; his father was a successful electrical contractor. Unlike most construction attorneys, Gene has hands-on experience. Gene has worked with the tools, at the drafting table and at the helm of a construction company. In 1981, Gene earned a

5 B.S. degree in Engineering from the University of Hartford, majoring in Electrical Contracting. Before law school, he worked in the electrical construction business as a project engineer, project manager, and construction business owner. Gene is a prolific writer and has published numerous works related to the construction industry. He is also a frequent lecturer on construction law topics. Contact Gene at gjheady@smithcurrie.com or directly at