The New Administrative False Claims Act: Key Amendments and Implications

On December 23, 2024, the Servicemember Quality of Life Improvement and National Defense Authorization Act (NDAA) for Fiscal Year 2025 (FY 2025 NDAA) (P.L. 118-159) was signed into law. Among its numerous provisions, the FY 2025 NDAA revitalizes an existing but underutilized fraud enforcement mechanism: the Administrative False Claims Act (AFCA). This act, previously known as the Program Fraud Civil Remedies Act of 1986, offers a streamlined administrative remedy for addressing false claims and statements that the Department of Justice (DOJ) opts not to prosecute. The recent amendments significantly enhance the AFCA's scope and effectiveness, making it a more powerful tool for combating fraud and recovering funds lost to false claims.

Background

The federal False Claims Act, 31 U.S.C. § 3729 et seq is a well-known and widely used tool by the Department of Justice to prosecute fraud primarily in Federal District Court. The lesser known AFCA is an administrative remedy for false claims and false statements cases that the DOJ declines to prosecute, thereby allowing agencies to pursue these false statement and claims in an administrative proceeding. The AFCA aims to resolve small-dollar fraud cases in which the cost of litigation would exceed the damages the Government might recover. The AFCA imposes civil penalties of up to $5,000 for each certified written false statement and false claim, and damages assessment of twice the amount of the false claim in cases where the Government has paid the claim. The Government does not need to show a specific intent to defraud; actual or constructive knowledge of falsity is sufficient.

Agencies designate an investigating official—usually the IG—to conduct investigations into possible AFCA violations. This official has the power to subpoena documents. The investigating official transmits findings to a reviewing official within the agency who independently evaluates the allegations to determine whether there is adequate evidence that a false claim or statement has been made. If so, the reviewing official refers the matter to DOJ which reviews the charges and determines whether to litigate the case. The agency may commence administrative proceedings only with DOJ approval.

The AFCA requires agencies to issue implementing regulations specifying the identity of the investigating and reviewing officials, the procedures for conducting administrative hearings under the Act, and the like. The Government has thus far made limited and infrequent use of the AFCA to combat fraud by Government contractors. That may be about to change.

FY 2025 NDAA Changes To The AFCA

The FY 2025 NDAA makes changes to the AFCA (in addition to changing its name) aimed at enhancing the government’s ability to combat fraud and recover funds lost to false claims. Among these changes to the AFCA include the following:

• the maximum amount for claims under the AFCA has been significantly increased from $150,000 to $1,000,000, to be adjusted for inflation;
• the definition of false claims is expanded to include those made to avoid or decrease an obligation to pay or transmit property, services, or money to the government, i.e. a reverse false claim. This change targets actions that conceal or improperly reduce financial obligations to federal authorities;
• a clear framework for the recovery of costs incurred by federal entities in investigating and prosecuting false claims is implemented. Amounts collected will first reimburse the authority or federal entity for these costs, with any remaining funds deposited into the Treasury;
• a requirement for detailed semiannual reporting on cases under the AFCA. This includes the number of reports submitted, actions taken, pending and resolved cases, average resolution time, and financial recoveries;
• reviewing officials must now notify the Attorney General 30 days before entering into any settlement agreements or referring allegations to a presiding officer;
• the amendments expand the pool of officials who can preside over hearings to include members of the Board of Contract appeals. This change aims to increase the efficiency and availability of qualified presiding officers;
• the statute of limitations for bringing actions under the AFCA has been extended. Claims must now be filed within six years of the violation or three years after the material facts are known, but no more than ten years after the violation;
• the definitions of “material” and “obligation” have been updated to align with those in the False Claims Act, 31 U.S.C. § 3729 et seq.

Federal authorities are required to update their regulations and procedures to implement the amendments within 180 days of the AFCA’s enactment. The amendments to the AFCA represent a substantial strengthening of the government’s tools to combat fraud. By increasing the financial thresholds, expanding the scope of false claims, and enhancing reporting and oversight mechanisms, the government will likely find the statute a more attractive mechanism to pursue low dollar fraud. These changes are expected to have a significant impact on federal agencies and contractors, increasing the scrutiny and potential penalties for false claims. The extended limitations period and updated definitions provide clearer guidelines for enforcement, while the increased dollar amounts and cost recovery provisions ensure that the government can more effectively recoup losses.

Contractors should continue to remain vigilant in strengthening their ethics and compliance programs in the form of establishing strong internal controls and audit mechanisms to detect and prevent false claims, regular training sessions for employees on the importance of accurate reporting and the consequences of false claims, and the importance of maintaining detailed records of all transactions, communications, and claims submitted to the government, in the event contractors find themselves the target of a government enforcement action. Moreover, with the enhanced reporting and oversight mechanisms, contractors should be prepared for increased scrutiny from federal agencies. Being proactive in addressing potential issues and demonstrating a commitment to compliance can help mitigate the risk of investigations and penalties.