Wartime Fraud and the False Claims Act: Historic Solutions in Modern Times

by Anna D’Agostino and Laura Twizere

The False Claims Act emerged from Civil War-era fraud stemming from fast-paced government spending. Over 150 years later, those same dynamics of large-scale public funding and rapid deployment, which can increase the risk of fraud, continue to shape modern false claims enforcement and highlight the importance of whistleblowers.

The Origins of the False Claims Act

The False Claims Act (FCA) was signed into law 163 years ago by President Abraham Lincoln. Passed during the Civil War, it was designed to curb wartime fraud by defense contractors who cheated the Union Army by overbilling the government and selling defective goods, such as gunpowder mixed with sawdust and boots made of cardboard. To address this misconduct, the FCA empowered whistleblowers to file lawsuits, often referred to as qui tam actions, reporting fraud in government contracting and sharing in any financial recovery.

Evolution of the False Claims Act

The original version of the FCA aimed to hold contractors accountable for defrauding the government.  Even in 1863, the 37th Congress recognized that insiders, today known as whistleblowers, were uniquely positioned to expose fraudulent activity.  Thus, Congress included a qui tam provision allowing private citizens to sue on behalf of the government.  This feature remains a hallmark of the FCA today.

The original FCA also included provisions such as:

• A possible fine of up to $2,000 per false claim;
• A possible prison sentence of 1–5 years;
• A whistleblower recovery share of 50%; and
• Double damages for the government.

In 1943, Congress revised the FCA to limit both the scope of cases that could be brought under the statute and the financial incentives for whistleblowers.  These amendments were prompted by concerns that private individuals were filing “parasitic” lawsuits based on information the government already knew, rather than coming forward to expose unknown fraud.  Key changes included reducing the whistleblower recovery share to up to 25%, potentially less if the government declined to participate in the suit, and restricting suits when the federal government already had information about the fraud, today known as the “public disclosure bar.”  These revisions created a chilling effect on whistleblowers and led to a dramatic decrease in the number of FCA cases filed.

That trajectory shifted in the 1980s. Spearheaded by Senator Chuck Grassley of Iowa, Congress revitalized the FCA in 1986 amid an influx of military contracts following the Reagan administration’s increase in the defense budget. As contracting expanded, reports of fraud grew as well, famously including claims that the military paid “$7,000 for a coffee pot and $640 for a toilet seat.”

Against this backdrop, the False Claims Amendments Act introduced several major changes, including:

• Protecting whistleblowers from retaliation by their employers;
• Increasing potential fines to up to $5,000 per claim;
• Allowing treble damages for the government;
• Increasing the whistleblower’s share to up to 30% of the total recovery;
• Extending the statute of limitations for qui tam suits to six years from when the fraud was committed; and
• Relaxing the “government knowledge” restriction to apply only in certain instances of public disclosure.

The FCA remains largely the same today, although Congress made additional revisions in 2009 and 2010 to clarify how the statute would apply alongside financial and healthcare reforms enacted at the time. In particular, the 2010 revisions gave federal prosecutors more tools to pursue fraud involving Medicare and Medicaid providers.

Recent Wartime Fraud Recoveries

Military procurement fraud remains a prominent area of FCA enforcement. This past fiscal year, the Department of Justice (DOJ) pursued several cases involving the submission of false or inflated pricing data to the military. Most notably, DOJ reached its second-largest procurement fraud settlement in history with defense contractor Raytheon Company. Raytheon agreed to pay $428 million to resolve allegations that it knowingly provided false cost and pricing data to the Department of Defense for numerous contracts and double-billed on a weapons maintenance contract.

Other notable cases include a settlement with L3 Technologies Inc., which agreed to pay $62 million to resolve allegations that it failed to disclose accurate and complete cost or pricing data related to labor, materials, and other costs for its communications equipment. Similarly, Lockheed Martin Corp. agreed to pay $29.74 million to resolve allegations of defective pricing on contracts for F-35 military aircraft.

The Significance of the False Claims Act Today

The current increase in military spending, driven in part by the war in Iran, raises the risk of fraud. Reported costs of the war in Iran have reached $25 billion, and the government has executed multiple significant contracts with defense contractors for services and supplies. These include multi-year contracts with Lockheed Martin to increase production of Patriot missile interceptors from about 600 per year to roughly 2,000 per year and production of THAAD interceptors from 96 to 400 per year, as well as a contract with Boeing to expand production of missile systems.

Historically, rapid increases in military spending have been followed by more whistleblower filings that play a key role in holding wartime contractors accountable. For example, during Operation Desert Shield in Iraq, a helicopter crash prompted a whistleblower suit alleging that Boeing failed to build the helicopter to contract specifications or properly inspect it, resulting in a $25 million settlement.

During U.S. military operations in Afghanistan, the Swiss company Supreme Foodservice GmbH and the UAE-based company Supreme Foodservice FZE—along with Supreme Group B.V. and several subsidiaries—paid $434 million (including criminal fines) to settle allegations that they inflated food and water prices for troops.  And even more recently, a jury awarded $15 million to the government in a whistleblower case against Fluor Corporation for overbilling for logistics services in Afghanistan, which will automatically be tripled to $45 million under the FCA’s treble damages provision.

Whistleblowers are especially important in military procurement because these matters often involve large contracts and highly technical, nonpublic details. As a result, qui tam enforcement can be one of the most effective ways to deter waste, abuse, and fraud, thus protecting both taxpayers and troops.  As U.S. military activity continues, the FCA is sure to continue to play a key role in holding contractors accountable.

As U.S. military activity continues, the FCA is sure to continue to play a key role in holding contractors accountable. Individuals with knowledge of fraud involving defense contractors, military procurement, or government wartime spending should consider consulting experienced False Claims Act counsel, such as the attorneys at Miller Shah LLP, to better understand their rights and potential protections under federal whistleblower laws.