A large percentage of the United State’s enormous annual spending goes to development and implementation of new weapons systems, facilities, equipment, supplies, and logistical and technical services through the procurement of government contracts. Such government contracts frequently involve military defense contracts such as B-1 Bombers, military tanks and vehicles, military fire power and uniforms, and extends to areas such as computer technology and food services for our troops. Defense contractor fraud remains one of the most prominent areas of false claims litigation under the Federal False Claims Act. In April 2009 TRW Inc.’s efforts to stop a scientist from revealing his research findings about faulty electronic components the company sold to the government for military and intelligence-gathering satellites were the basis for a whistleblower lawsuit that Northrop Grumman Corp. settled for $325 million. It was the largest settlement ever paid by a defense contractor in a whistleblower case and the second largest ever paid involving defense contractor fraud.
The whistleblower was awarded $48.7 million for his work and the work of his attorneys on the case. The Federal False Claims Act requires the government to award whistleblowers 15 to 25 percent of the amount the government recovers as a result of whistleblower cases.
A false certification of regulatory and statutory compliance, necessary to obtain a contract, can render false all claims for payment under that contract. A contractor’s failure to meet contract performance requirements and failure to provide goods and services in conformance with federal statutes and regulations may be sufficient to violate the False Claims Act.
Presentation of a claim to the Government for payment, when the failure to abide by contract requirements has not been disclosed to the Government, is deemed equivalent to false certification of compliance with such laws and regulations. Therefore, if a claim for payment is submitted and the contract requirements have not been fulfilled in all respects, if federal funding is conditioned on compliance, gives rise to a False Claims Act case. Claims may be false, even though goods or services otherwise fulfill contract specifications.
Defense contractor fraud remains one of the most prominent areas of false claims litigation. Billions of dollars have been recovered from defense contractors, mainly as a result of whistleblowers. Some common ways in which defense contractors have tried to defraud the government are as follows:
1. Cross-charging. This occurs when a defense contractor improperly shifts costs and expenses from one defense contract to another in order to boost its profits.
2. Improper Product Substitution. Contracts frequently request the contractor use a specific grade or quality of product or part. There are often requirements that the products be new or made in the United States. Defense contractors often attempt to save costs by substituting cheaper or substandard parts.
3. Improper Cost Allocation. Under this scheme the defense contractor will improperly allocate or shift cost from private businesses or foreign governments onto the cost-plus contracts they have with the United States government.
4. Worthless or Substandard Products or Services. In this case the defense contractor with knowledge or through reckless neglect, delivers products that do not perform as promised.
5. Inflation or Costs and Charges. In a cost-plus contract, the government pays the defense contractor a set price plus a percentage of the contractor’s costs for producing the product. In this scheme the contractor improperly inflates their costs and charges to increase revenue the company earns from the U.S. government.
6. Violations of the Truth-In-Negotiations Act. Weapons systems and equipment can be extremely complex. Much of the time, there is only one company in the world producing a particular weapon system or piece of equipment. The government has no choice but to purchase the particular weapon system or piece of equipment from a single supplier. Because other competitors are not bidding, the government has no way of knowing if it is paying a fair price. The Truth-In-Negotiations Act is designed to prevent this problem by requiring defense contractors to disclose all relevant information about its costs to the government in such situations. Defense contractors may sometimes attempt to inflate their costs and expenses because they have no competitor bidding for the contract.