Six Essential Q&As for Government Contractors on Procurement Fraud and Compliance Risks

In celebration of the recent release of the 6th Edition of the Government Contracts Compliance Handbook (authored by the Seyfarth Government Contracts Group), we’re sharing six essential questions and answers that every government contractor should be prepared to address regarding procurement fraud. This milestone edition dives into the complexities of compliance, criminal and civil penalties, and the administrative sanctions contractors may face. With procurement fraud risks continually evolving, these six questions provide a foundation for understanding major offense types and navigating the serious repercussions of non-compliance. Here’s what government contractors and their legal advisors need to know to stay compliant and protect their operations.

1. What are the most common criminal procurement fraud offenses contractors should be aware of?

Procurement fraud generally encompasses any deceptive conduct related to the procurement of goods or services by a government agency. Criminal statutes applied to procurement fraud cover a wide array of offenses, including:

False Claims Act violations, which can be pursued criminally when fraudulent claims for payment are submitted.
False Statements Act violations, targeting knowingly false or misleading statements made to federal agencies.
Major Fraud Act offenses, focusing on fraud where the contract exceeds $1 million.

The consequences for these criminal offenses are severe and can include fines, probation, and imprisonment for individuals involved, along with reputational damage for the business.

2. What is the civil False Claims Act, and why is it such a powerful tool for the government?

The civil False Claims Act (FCA) is the government’s primary tool for addressing procurement fraud. Unlike criminal statutes, the civil FCA has a lower burden of proof, which enables the government to pursue fraud cases more readily. Importantly, the FCA allows qui tam actions, meaning private individuals—known as “relators”—can file lawsuits on behalf of the government if they uncover evidence of fraudulent activity. Successful relators are entitled to a percentage of the recovered funds, providing a strong incentive for individuals within an organization to report misconduct.

Sanctions under the FCA can result in treble damages and hefty fines, making it essential for contractors to adopt rigorous compliance programs.

3. What are some common procurement fraud schemes that the government scrutinizes?

Government agencies closely monitor a range of contractor activities to detect procurement fraud, including:

Cost and Pricing: Inflated cost estimates or unsupported claims for contract adjustments.
Mischarging: Fraudulently assigning labor or material costs to government contracts.
Non-Conforming Products or Services: Providing products or services that fail to meet contract specifications or standards.
Corruption and Kickbacks: Illegal payments to influence contracting decisions.
Eligibility: Misrepresenting eligibility for special contracting programs (e.g., small business set-asides).

For each of these schemes, the government is prepared to pursue penalties if evidence suggests fraudulent intent. Contractors should implement strong internal checks to prevent and detect any of these activities within their operations.

4. What administrative sanctions can contractors face in procurement fraud cases?

Administrative sanctions, while less severe than criminal or civil penalties, can still impose serious consequences on contractors. These include:

Suspension and Debarment: Contractors found to have engaged in fraudulent activity may be suspended from government contracting for a fixed period or debarred indefinitely, rendering them ineligible for federal contracts.
Exclusion from Programs: Contractors may be barred from participating in specific programs or bidding on future contracts.
Penalties for Non-Compliance: In some cases, agencies may impose fines or require restitution for contract violations.

Administrative sanctions can be financially devastating and damage a contractor's reputation in the government sector, as government buyers tend to avoid contractors with histories of regulatory issues.

5. How does the Major Fraud Act affect contractors engaged in high-value government contracts?

The Major Fraud Act of 1988 was enacted specifically to address significant fraud against the federal government, and it applies to prime or subcontracts valued over $1 million. The act enables the government to prosecute a broad range of fraudulent activities and imposes substantial fines and imprisonment terms on individuals convicted under its provisions. For example, contractors involved in cost misrepresentations or falsified records related to major contracts may face intense scrutiny under this act.

As this statute is triggered by contract value, contractors on high-value federal contracts should be particularly diligent in their compliance practices and ensure they maintain accurate, transparent records.

6. What steps should contractors take to minimize the risk of facing procurement fraud charges?

Preventive measures are crucial for contractors seeking to avoid the high costs and reputational risks associated with procurement fraud charges. Key steps include:

Establishing Compliance Programs: A robust compliance program can detect and mitigate potential violations early, protecting both the organization and its employees.
Training Employees: Regular training ensures employees understand the implications of fraud statutes and the company’s commitment to compliance.
Conducting Internal Audits: Periodic reviews of financial and operational records can detect irregularities before they escalate into major compliance issues.
Engaging Legal Counsel: Experienced government contracts counsel can help contractors navigate complex compliance requirements and respond effectively if issues arise.

Contractors that proactively implement these measures are in a stronger position to manage risks, demonstrating both a commitment to compliance and an understanding of the legal environment in which they operate.

Conclusion

Navigating the landscape of government procurement fraud is complex, but understanding the key issues and potential penalties can empower contractors to adopt preventive measures and maintain compliance. As outlined in the 6th edition of the Government Contracts Compliance Handbook, awareness of these six critical areas provides a solid foundation for mitigating the risks associated with government contracting.