Fraud, Waste and Abuse: False Claims in the Era of Deficit Reduction

December 2011

IN THIS ISSUE

— Cleaning Out the System: Fraud in Federal Budgets
— Blowing the Whistle on Whistle-Blowers: Vetting the Claims Made Under the False Claims Act

GREETINGS!

Welcome to the December edition of our newsletter! In this issue we’ll examine how fraud can affect government spending.

CLEANING OUT THE SYSTEM: FRAUD IN FEDERAL BUDGETS

With a clarion call for spending restraint issued in 2010 elections — and a Congress that subsequently can only agree to fund the government nine months at a time — deficit reduction and management of the federal budget have gained new focus. While both parties argue over the size and scope of the government (and thus its spending), a corollary to how the money is spent is how well it is spent — the latter being a far more opaque concept than the former.

In response to unscrupulous actions by government contractors during the U.S. Civil war, in 1863 the U.S. False Claims Act was enacted, allowing the government to recover payments made to vendors if it was proven that their claims were knowingly falsified; and also creating a “qui tam” provision that allowed citizens (non-government employees) to report instances of fraud by vendors, in turn making them eligible for a reward equal to a certain percentage of the funds recovered. Since the federal government was widely reorganized in the wake of the September 11, 2001 terrorist attacks, False Claims Act filings have risen from nearly 400 to, in 2010, nearly 700 such claims, and the amounts recovered have risen from $1.8 billion to $3 billion.

BLOWING THE WHISTLE ON WHISTLE-BLOWERS: VETTING THE CLAIMS MADE UNDER THE FALSE CLAIMS ACT

While many legal scholars and federal officials have pointed the False Claims Act’s value not in real dollar terms but as a deterrent against the commission of such fraud in the first place, the system has some vulnerabilities of its own. The financial inducement given to whistle-blowers (known in legal parlance as “relators”) to make agencies aware of wrong-doing can pose a conflict. In the past, we have investigated persons who had other motivations beyond ensuring transparency or even their own financial gain– in one case, an ex-employee of a hospital that received Medicare funding who was terminated and sought to cause trouble for his former employer. After a thorough background check and review of the ex-employee’s work-issued computer records, it was determined that he had filed numerous such claims against other employers (often not withstanding the scrutiny of U.S. District Courts, where such cases are heard) as a means of retaliation, and had also falsified qualifications of his own to get hired in the first place.

While the False Claims Act protocol is indeed an important firewall against potential fraud, and an effective means of recovery from (and punishment against) actual fraud, it is important that the private-sector parties who work for and deal with the federal government be as vigilant as the government itself. While no defense should be offered for truly false claims — whether they be invoices for non-existent helicopter parts “delivered” by a phony company or medical services that were never performed — due diligence must be exercised by all parties involved, including scrutiny of those making claims as relators to ensure that chasing after one fraud does not lead to falling victim to another.