Question: What would you do if you found an extra $1 million in your personal checking account?
The answer to that is easy—you would wait for the bank to correct the error. If it was not corrected, any person with even a little bit of sense would bring the error to the attention of the bank. If the person had no sense at all, they might try to withdraw the $1 million or try to move it to an off-shore account. A quick google search will tell you that people who try this are headed for disaster.
To be certain, the answer is a little more difficult for a government contractor–or for any commercial entity for that matter. Bookkeeping for even the simplest business is considerably more complicated than personal banking.
Historically, FCA liability attached to any person who endorsed and deposited a government check to which they were not entitled, because the act of endorsing and depositing such a check into the person’s bank account constituted the knowing submission of a false claim to the government. For further reading, I suggest U.S. v. Fowler, 282 F.Supp 1 (D.C. N.Y. 1968), which is a classic from this line of cases.
However, for the last eight years or so, executive agencies of the federal government have been required to use electronic commerce to the maximum extent practicable. As a result, most payments from the federal government are now made via wire-transfer. No paper check is ever issued, and no one is required to endorse the instruments and deposit it into a bank account.
As a result, many–and perhaps most–contractors have experienced thephenomenon of receiving random wire-transfers of money from the federal government.Such transfers are usually accompanied by frenzied attemptsby theaccounts receivables/accounts payable departments to find out what happened.
What else happens when a contractor receives a random, unidentified and unexpected EFT in the amount of $1 million? Simply because the contractor did not expect the money does not mean it is not entitled to the money. It is at least possible that the money was correctly transferred. For example, it is possible that the contractor under-billed the government at some point by mistake, and that the government has in fact paid the company the correct amount.
The issue is complicated by the fact that the wire-transfer in our hypothetical is not connected to an invoice, and bears no delivery-order or task-order number. The contractor will literally need to examine every single invoice it has submitted on all of its contracts.
Certainly, one can forgive the contractor for holding onto the money while it checks its records and double checks to find the error in its system.
What happens when the contractor eventually realizes that it has money in its account to which it was not entitled? Does the contractor have any obligation to return this money to the government? Prior to the May 2009 FERA amendments to the FCA, there were several statutes and rules concerning the obligations of a contractor who has been overpaid, and making a failure to return the money unlawful.
As incredible as it may seem to the uninitiated, government overpayment are commonplace in the healthcare and defense procurement contexts. Since healthcare and defense make up the majority of government expenses, government overpayments are therefore commonplace in most federal spending.
(In case a reader has doubts about this problem, please see the GAO/NSIAD-94-245 report entitled “DOD Procurement: Overpayments and Underpayments at Selected Contractors Show Major Problems” (August 1994). This GAO report was ordered after DOD contractors returned $751 million dollars worth of overpayments for a single six-month period ending in April 1993. The GAO study examined nine of the contractors who returned this money and discovered further discrepancies in the amount of $118 million. The archived report is available at http://archive.gao.gov/t2pbat2/152309.pdf . There are numerous other GAO articles on this phenomenon.)
At some point while pondering this extra $1 million bucks, the experienced contractor is going to start doing a little math of its own. In theory, in the procurement context, the government and the contractor will go through a collaborative reconciliation process at some point to ensure that the contractor has not been under or overpaid. In our hypothetical, however, the contractor is clueless (through no fault of his own) as to which contract received the extra $1 million. Therefore, there is no specific contractual reconciliation in which the overpayment should be disclosed.
The experienced contractor will also be aware that the overworked auditors and accountants that supervise this process on the government’s behalf are only able to check the most salient aspects of the reconciliation, and can catch only the most obvious wrongdoing. Certainly, the larger the amount of money at issue, the more likely the government will be to notice the error. But even the most inexperienced contractor knows that agencies like the Defense Contract Audit Association (“DCAA”) find it very difficult to track amounts of money under $50 million in the massive machinery of the federal government.
Our hypothetical contractor also will be keenly aware of the powerful psychological factors at work in government employment: The person or group whose mistake resulted in the overpayment will have a real desire to pretend the whole thing never happened. Indeed, it would be asking too much of human nature to expect a person to bring their own grievous error to the attention of their superiors.
Because the 1986 FCA provided no definition of the word “obligation” it would have been extremely difficult (if not impossible) to prosecute a case under these facts. In the absence of a congressional definition, courts struggled to define the obligations that contractors owed the United States. In American Textile Mfrs. Inst. Inc. v. The Limited, Inc., et al., the Sixth Circuit Court of Appeals held that the term “obligation” included only responsibilities to pay or transmit money to the United States where a party had some form of specific, legal duty to pay the money.
Moreover, the Court held that such a specific requirement must have existed at the time the false statement was made. In other words, the making of a false statement or claim in order to avoid incurring or creating an obligation, was not unlawful. At least one District Court had interpreted the term obligation under the old FCA to mean only overpayments that were “fixed in all particulars.” See United States ex rel. Zelenka v. NFI Industries, Inc., 436 F.Supp.2d. 701 (D.NJ. 2006).
The FERA amendments provide a definition for the word “obligation” and make it clear that an obligation under the FCA includes the retention of an overpayment. This clarity solves the problem from the above hypothetical. An obligation to repay money under the FCA now extends to an overpayment regardless of whether the overpayment is fixed in all particulars.
In 31 U.S.C.3729(a)(1)(G)the amended FCA creates liability for any person who:
knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.
In 31 U.S.C. 3729(a)(1)(D) the revised FCA also makes it unlawful for any person who
has possession, custody, or control of property or money used or to be used by the Government and knowingly delivers ... less than all of the money or property.
These legislative fixes clearly address the issues in this blog post.
Any person with first-hand information about an overpayment is now able to retain counsel and sue on their own behalf, as well as on behalf of the United States, via a qui tam lawsuit. For more information, please visit the main Cook Kitts & Francuzenko website.
