The U.S. spends hundreds of billions of dollars per year on national defense. Many of those dollars go to private contractors that supply the military with good and services. The False Claims Act (FCA) was enacted during the Civil War to provide a remedy against contractors who were cheating the government by supplying the Union army with defective goods. Unfortunately, fraud by defense contractors has continued since that time. Whistleblowers have helped the government recover billions of taxpayer dollars by bringing qui tam actions under the FCA to expose illegal conduct.
Common Defense Contractor Fraud Schemes
Military contracts are vulnerable to the same sorts of illegal practices as other government contracts. In addition, defense contractors can commit fraud by violating regulations and requirements specific to military contracts. Fraudulent practices by defense contractors can include:
- illegal conduct in securing government contracts (see Bribes, Kickbacks, & Bid-Rigging).
- false statements in obtaining government contracts.
- deceptive pricing or violations of the Truth in Negotiations Act.
- product substitution, i.e. providing goods or services that do not meet the requirements of the contract, including defective products and goods that have not been properly tested.
- mischarging, i.e. submitting inflated bills.
- cross-charging, i.e. shifting labor or material costs from one contract to another.
- falsely representing compliance with legal requirements, such as the Buy American Act, export compliance rules, or U.S. trade agreements.
Successful Defense Contractor Fraud Cases and Awards
It is a high priority for the government to ensure that our military is well-prepared and well-supplied. Accordingly, it is a high priority for the Department of Justice to bring actions against companies that defraud the Department of Defense (DOD). Examples of successful FCA cases in this area include:
- Mischarging for food: Agility Public Warehousing Co. KSCP, a Kuwaiti company under contract with the DOD, was accused of overcharging for food supplied to U.S. soldiers in Kuwait and Iraq by failing to disclose and pass through discounts and rebates it obtained from suppliers. To resolve the FCA allegations, Agility paid $95 million and agreed to forgo administrative claims seeking $249 million in additional payments under its military food contracts.
- Product substitution with defective bulletproof vests: More than $132 million was paid by body armor manufacturers, weavers, and international trading companies including Toyobo Co., Ltd. of Japan and its American subsidiary, Toyobo U.S.A., Inc., to resolve claims that they sold defective Zylon fiber used in bullet-proof vests. Studies found that that over half of the vests could not stop bullets that they had been certified to stop. As a result, vests that the U.S. purchased for federal, state, local, and tribal law enforcement agencies were unfit for use.
- Mischarging for goods and services: Inchcape Shipping Services paid $20 million to resolve allegations of overbilling the U.S. Navy for services to Navy ships at ports in several regions throughout the world, including southwest Asia, Africa, Panama, North America, South America and Mexico. The overbilling included submitting invoices that overstated the quantity of goods and services provided, billing at rates in excess of applicable contract rates, and double-billing for some goods and services.
- False statements regarding eligibility for contract: TrellisWare Technologies, Inc., a communications company, was accused of being ineligible to enter into multiple Small Business Innovation and Research (SBIR) contracts it had with the Navy, Army, and Air Force. The SBIR program is designed to stimulate technological innovation by funding small businesses to engage in federal research and development efforts; however, TrellisWare was a majority-owned subsidiary of a large company at the time it was awarded and performed the contracts. To settle these allegations, TrellisWare paid over $12 million.
- Product substitution with defective combat earplugs: 3M Company paid $9.1 million to settle allegations that it knowingly sold to the U.S. military defective dual-ended Combat Arms Earplugs.
- Mischarging via inflated labor hours: Northrop Grumman Systems Corp. agreed to pay over $27 million to settle the government’s allegations that it overstated the number of hours its employees worked on the Battlefield Airborne Communications Node (BACN) and Dynamic Re-tasking Capability contracts with the U.S. Air Force.
- Product substitution with defective communications systems: Lockheed Martin Corp. agreed to pay $4.4 million for allegedly submitting false statements in the course of providing defective communications systems for the U.S. Coast Guard’s national security cutters. It also agreed to provide the Coast Guard with $2.2 million in repairs to the communications.
- Deceptive pricing via impermissible expenses: Alpha Research & Technology, Inc., a company that provides command and control systems to the U.S. Air Force, agreed to pay $1 million to resolve False Claims Act allegations that the company submitted inflated contract pricing to the Air Force, including by submitting subcontract proposals to prime contractors to DOD that included millions of dollars of personal expenses of its owners, which the company knew were unallowable.
How to Report Defense Contractor Fraud
These are just a few examples of the sort of claims that can be brought under the False Claims Act. A wide variety of misconduct can constitute fraud in the lucrative and complex area of defense contracting. If you believe you have information regarding defense contractor fraud, please contact us for a free, confidential consultation.