Introduction
The UK Government recently announced that it is considering the case for financially incentivising individuals reporting fraud in economic crime cases by private sector organisations, in an approach much like the US False Claims Act.
In Australia, the recent passage of the Public Interest Disclosure Act 2013 (Cth) signals a shift in focus by the Australian Government towards the prevention of fraud and corruption in the Australian Public Service.
A likely next step here is the introduction of legislation akin to that now being considered by the UK Government, with an expanded focus on fraud and corruption committed by those in the private sector regularly contracting with government. Such a step, coupled with the eventual release of the long-awaited National Anti-Corruption Plan, will be a brave new world for combatting fraud and corruption in this country.
For any organisation contracting with government, the growing interest and inevitability of a False Claims Act in Australia means that they will need to shift their focus to ensure that systems are in place to properly and effectively manage their contracts to ensure there can be no suggestion of fraudulent activity.
At the very least, conversations with risk and compliance officers, contract managers and those with oversight of invoice management need to start now as such areas will be increasingly in the spotlight when it comes to how organisations' contracts are managed. Ensuring that existing contracts are up to date and properly managed will also be key to ensuring that there can be no suggestion of mismanagement. Proper internal audit and compliance systems will be critical to ensure that organisations can demonstrate that all is in good order.
The UK's Serious and Organised Crime Stratgy paper
The "Serious and Organised Crime Strategy" paper released this month by the UK's Secretary of State for the Home Department sets out how that government plans to take action to prevent serious and organised crime and strengthen protections against and responses to it. The paper asserts that serious and organised crime costs the UK more than £24 billion a year.
The Strategy uses the framework developed for counter-terrorist work and has four components: prosecuting and disrupting people engaged in serious and organised crime (Pursue); preventing people from engaging in this activity (Prevent); increasing protection against serious and organised crime (Protect); and reducing the impact of this criminality where it takes place (Prepare).
The Strategy also lists objectives under each of the four areas. In terms of increasing protection against serious and organised crime, the success of that objective will be measured by the reduction in vulnerability to serious and organised crime across government and the private sector. The key objectives include:
- Protecting national and local government from serious and organised crime;
- Improving protective security in the private sector by sharing intelligence on threats from serious and organised crime; and
- Improving anti-corruption systems.
In the context of anti-corruption, the paper acknowledges that there is a need to not only target serious and organised criminals but also support those who seek to help identify and disrupt serious and organised criminality. Three UK agencies (the Department for Business, Innovation & Skills), the Ministry of Justice and the Home Office have been tasked with considering the case for a US-style False Claims Act in the UK. The paper states:
What steps the UK Government now takes in this regard remains to be seen. What is certain, however, is that consideration of over 25 years of US False Claims Act history and caselaw will be critical in determining the efficacy of the legislation in the UK context.
The United States False Claims Act
In the United States, the False Claims Act was introduced in 1863 during the American Civil War to combat the defence contractor fraud rife in both the Union North and Confederate South. Largely dormant and forgotten for hundreds of years, it was revived by major amendments in 1986 which have seen a resurgence in its prominence in the United States.
Contained in § 3729-2733 of the US Code, the Act makes a
person or entity improperly receiving payment from or avoiding
payment to the US Government (other than via tax fraud) liable to
compensate the government. The cornerstone of the US legislation is
its qui tam provisions, which allow a private individual
(the "relator") to bring a claim on behalf of the
government and claim a percentage of the overall amount recovered
if successful – in effect, a reward for whistleblowing. A
qui tam claim is established by section 3730, and allows
the relator to recover 15-25% of a successful claim where the
government regulator decides to join the claim, or 25-30% where the
regulator chooses not to be involved.
According to US Department of Justice statistics on litigation
under the Actfrom October 1987 to September 2012 , over $35 billion
has been recovered through the legislative scheme in the last 25
years. Of that, almost $24 billion was recovered through qui
tam claims.
Weighing up the costs
At least one commentator has criticised the UK Government's consideration of False Claims Act-type rewards by stating that it "presents a serious and insidious threat for UK companies". That threat, it is asserted, arises from the encouragement that some individuals may receive from such financial incentivisation, to perpetuate problems and irregularities in a commercial context that could well have been stopped sooner.
The argument proceeds that the lure of a larger financial payment by allowing problems to develop will potentially jeopardise the employment of fellow employees; subvert good corporate compliance systems that require internal integrity; force companies to make a benchmarked payment to departing and often complicit individuals; and will ultimately subvert the credibility of potential prosecution witnesses. Respectfully, in the context of qui tam claims at least, such arguments bear little resemblance to the actual operation of the False Claims Act in the United States since 1986.
Practically speaking, the US experience demonstrates that, rather than undermining good corporate compliance systems, it promotes greater scrutiny of such systems. Further, under the US False Claims Act, any employee, contractor or agent is entitled to all relief necessary to make them whole if they are discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by them or someone with whom they are associated in furtherance of an action under the Act or to stop one or more violations of section 37291. Additionally, coupled with relevant "proceeds of crime" legislation, complicit individuals are unlikely to receive the benefit of any recovered funds.
Claims under the US False Claims Act are also limited in time. The limitation of liability is the later of either 6 years after the date on which the violation of section 3729 is committed,2 or 3 years from the date when facts material to the right of action are known or reasonably should have been known by the official of the United States with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed.3
Finally, in practice the "first in time" rule often sees claims brought sooner rather than later, for fear of being shut out of any recovery action. US courts will dismiss any action or claim if substantially the same allegations or transactions alleged in the claim have already been publicly disclosed in a Federal criminal, civil or administrative hearing in which the Government or its agent is a party, in a congressional, Government Accountability Office, or other Federal report, hearing, audit or investigation, or by the news media.4
The operation of the False Claims Act in practice
In the past ten years in the US, there have been a considerable number of significant payouts made by large corporations in response to qui tam claims. Many of these claims resulted in settlements or court orders in the hundreds of millions or even billions of dollars and also led to criminal charges.
The majority of large-scale qui tam claims under the US False Claims Act have been taken against large pharmaceutical corporations. According to an article in the New York Times in April 2009, "almost every major drug company has been accused in recent years of giving kickbacks to doctors or short-changing federal programs".5 Among these, claims have been successfully prosecuted or settled for offences such as falsely or fraudulently billing Medicare for durable medical equipment, promoting drugs for uses not approved by the Food and Drug Administration, failing to report key safety data for products, false price reporting practices, Medicare and Medicaid fraud, and paying kickbacks to physicians. Another common use of the qui tam provisions under the Act has been against defence and infrastructure contractors. Technology and manufacturing companies have been forced to pay tens of millions of dollars for fraudulent acts such as knowingly providing defective goods and inflating hours actually spent providing repair services. The more common kinds of fraud engaged in by contractors include inflation of costs and charges, improper cost allocation / cross-charging and improper product substitution.
Other examples of fraud have included contractors misrepresenting the pricing structure in relation to a contract by failing to include details of discounts it received from suppliers, knowingly using out of date cost information, fraudulently cross-charging for materials used in multiple contracts and misrepresenting the progress of building the goods that were contracted for.
When a claim will be considered "false"
The US False Claims Act utilises a variety of mechanisms that imposes liability on persons and companies who defraud the government. In order to establish a claim under the Act, three elements must be satisfied. A person will be liable if:
- they submit a "claim" for payment;
- the claim is false; and
- the claim is made knowingly or in reckless disregard of the truth or falsity of the information set out in the claim.
Claims are defined broadly to include any demand or request to the government for payment of money or property. A demand or request may qualify as a claim under the Act regardless of whether or not the government actually pays it and regardless of whether a contractual relationship exists with the government (for instance, in the case of a sub-contractor's claims passed on to government).
Determining whether or not a claim is false has proved to be a contentious issue. In some cases, the falsity is clear, for example where a contractor seeks payment for a product but it was never delivered or the work never performed. A request for payment will also be false if the work for which the contractor seeks payment for does not comply with contract specifications.
However, there will be other circumstances where the false element is not as clear cut, including a situation involving scientific or engineering judgment and interpretation of technical specifications. Difficulty in establishing the false nature of the claim also may arise when considering laws and regulations that may apply to a contractor's contract performance, such as environmental laws, OHS laws and wage regulations.
What to expect in Australia
The Australian Institute of Criminology (AIC) collects statistics on fraud committed against the Australian Government every financial year by surveying government agencies. The survey takes into account both fraud committed by agency employees (internal fraud) and fraud committed by those outside of the agency (external fraud).
The latest figures released by the AIC show a reported loss of $495,534,658 from external fraud in the 2009-2010 financial year. This compares to a reported loss of $2,039,162 from internal fraud in the same period – less than 1% of that amount. Of that $495 million, only $196 million was reported as recovered.
These reported losses, on their own, are alarming enough. However, they cannot account for the losses that are unquantified, unreported or undetected. According to the AIC, of the 51 agencies that reported having experienced incidents of external fraud in that financial year, only 65% quantified that loss. Further, it is commonly accepted that acts of fraud are often undetected or unreported.
It is obvious that the amount of taxpayer money lost to external fraud in a given year must exceed the reported amount, possibly to a large degree. According to the 2012 Report to the Nations released by the Association of Certified Fraud Examiners, government organisations will typically lose 5% of revenue to fraud every year. If that 5% figure is accurate, even allowing an error margin of several billion dollars, that is a staggering amount of money. It is even more alarming when you compare it to the less than $500 million of reported losses.
The large recoveries made by the US Government under the False Claims Act indicate the potential for similar success in the Australian context. The enactment of legislation akin to the US False Claims Act is the next logical step in the Australian Government's policy shift against fraud and corruption at the Federal level and the lessons learned in the US will be very relevant to any policy development in this area. Watching what the UK does in this regard will also be key.
Footnotes
131 USC 3730(h)(1).
231 USC 3731(b)(1).331 USC 3731(b)(2).
431 USC 3730(e)(4)(A).
5Gardiner Harris, New York Times, 2 September 2009.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
