Chapter 10 Federal Criminal Prosecution

Introduction

In the everyday commercial world of construction contracting, it is not uncommon for contractors to "front load" the milestone payment schedule; to submit "inflated" claims for negotiation purposes; to substitute materials; or change the work and fight about the difference when the project is complete. Although such actions may lead to disputes and civil lawsuits between the parties, they do not have the same civil and criminal liabilities that these very same actions would have in the world of public construction contracting. For the construction lawyer who is unfamiliar with the pitfalls of public construction contracting it is important to know the laws and regulations that govern these contracts, and the broad range of conduct that is potentially actionable under the False Claims Act ("FCA") and other similar anti-fraud statutes.[1]

Recent FCA and other public fraud cases involving construction contractors, and increased emphasis by the Government on compliance, detection, and punishment of fraud in public procurement, led the ABA Forum on the Construction Industry to publish a book for construction lawyers on this topic. False Claims in Construction Contracts: Federal, State, and Local addresses both the civil and criminal false claims statutes, as well as related anti-fraud statutes. The topics covered include:

Chapter 1: A History of Enactment and Significant Amendments to the False Claims Act by Lynn Patton Thompson	Chapter 6: Retaliation Claims Under Section 3730(h) by Brian A. Hill

Chapter 2: Contractor and Subcontractor Liability Under the False Claims Act by Peter B. Hutt, II	Chapter 7: Defending a Civil False Claims Act Case: Practice Considerations by Patrick Greene Jr. and Frank A. Hess

Chapter 3: Owner, Design Professional, and Construction Manager Conduct Giving Rise to Civil False Claims Act Liability by Edmund V. Caplicky, III	Chapter 8: Resolution of False Claims Act Cases by Stephen D. Altman

Chapter 4: Introduction to Damages and Penalties by Peter B. Hutt, II	Chapter 9: Corporate Compliance and Ethics Programs for Construction Enterprises by William W. Thompson, Jr.

Chapter 5: Qui Tam Actions Under the False Claims Act by Claire M. Sylvia	Chapter 10: Federal Criminal Prosecution for False Claims by Howard O'Leary and Krista L. Pages

	Chapter 11: Survey of State False Claim Liability by Deborah S. Ballati and Christopher D. Montez

This plenary session touches generally on some of the topics discussed in detail in False Claims in Construction Contracts: Federal, State, and Local. We have included Chapter 10, Federal Criminal Prosecution for False Claims from the book. The following is a brief overview about the FCA.

Background

A. Grounds for Liability under the Civil False Claims Act

FCA Sections 3729(a)(1) and 3729(a)(2) present the most common grounds of liability faced by construction contractors. These sections concern similar conduct: section (a)(1) imposes liability for knowingly presenting or causing to be presented, false claims; and section (a)(2) imposes liability for knowingly using false records or statements to get false claims paid. It is possible that defendants that have presented false claims often have employed false records or statements in support of these claims so they may be in violation of both sections (a)(1) and (a)(2). The courts in determining if there has been a violation of these sections focus on the following elements: a claim; falsity; "knowing" conduct; and materiality.[2]

B. Defending a Claim under the Civil False Claims Act

Frequently the Government raises false claims allegations as a form of defense or counterclaim. To successfully defend a claim brought by the Government under the FCA, the construction lawyer must address the elements of a proper FCA claim.

In preparing defenses to an alleged violation of the FCA, counsel must determine whether the conduct forming the basis of the alleged fraud was merely negligence or an honest mistake. The FCA and other anti-fraud statutes were not intended to punish contractors for honest mistakes or mere negligence.[3] Fact finding regarding the actions that have led to the fraud allegations is essential. It is important to keep in mind that disclosure and cooperation with the government can make a significant difference in the outcome of an FCA case, especially if both the civil and criminal FCA statutes are pursued.

Defenses to FCA claims and other anti-fraud statutes may also invoke Federal Rule of Civil Procedure 9(b). This rule has been adopted by the United States Court of Federal Claims. This rule requires that in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of the mind of a person may be averred generally.

Other defenses touch on the essential elements of the FCA. Materiality, for example, has been consistently found to be an implied element of a civil FCA action.[4] If the government had knowledge of the relevant facts underlying the alleged fraud then this will negate the element of materiality.[5]

C. Resolution of FCA and Anti-Fraud Cases

The damages the government seeks in pursuing FCA and other anti-fraud cases are often significant. The recent well-publicized case of Daewoo Engineering and Construction Co. v. United States dramatically illustrates this.[6] Under the FCA, violators of the statute are liable to the government for a civil penalty of not less than $5,500 and not more than $11,000, plus three (3) times the amount of damages which the government sustains because of the act of that person.[7] For example in the Daewoo case the contractor forfeited all of its legitimate claims when the judge found it exceeded $13 million.

Disclosure of the violation of the FCA to the government within thirty (30) days after first learning of the violation, cooperation with the government in any ensuing investigation and no prior or ongoing government investigation of the violation may be grounds for the court to reduce liability to not less than two times the amount of damages which the government sustains because of the act of the person.[8]

In addition to paying fines under the FCA for false or fraudulent claims, the contractor may also forfeit its legitimate claims for additional contract compensation under the anti-fraud provisions of the Contract Disputes Act.[9]

In addition to the federal FCA, fourteen (14) states have false claims statutes similar to the FCA. Contractors performing state work in one of these jurisdictions must be careful to follow the state anti-fraud statutes. These statutes are discussed in detail in Chapter 11 of False Claims in Construction Contracts: Federal, State, Local.

CHAPTER 10

FEDERAL CRIMINAL PROSECUTION FOR FALSE CLAIMS

Howard O’Leary and Krista L. Pages

I. Introduction

In addition to the civil False Claims Act (“FCA”), a contractor who presents a false, fictitious, or fraudulent claim to the federal government also may be subject to a criminal FCA action. Title 18 of the United States Code makes it a crime knowingly to make a false claim upon or against the United States or to any department or agency thereof.[10] In addition to a criminal FCA action, prosecutors also may act under several other antifraud statutes including: the False Statements Act,[11] Conspiracy[12], Mail Fraud,[13] or Wire Fraud.[14]

This chapter discusses both the criminal FCA and the False Statements Act and provides examples of cases where the government has indicted contractors for fraud under criminal statutes. Because charges for conspiracy, mail fraud, or wire fraud often are brought with the charges for criminal FCA and the False Statements Act, these statutes also are discussed briefly. This chapter also provides practical advice for the contractor about responding to a criminal FCA or other fraud investigation, what to do in the event of indictment and criminal prosecution, and how to set up a corporate compliance program to prevent criminal indictments.

As discussed in several earlier chapters, the criminal FCA and the false statements statute were covered by just one statute from 1863 to 1948. In 1948, however, Title 18 was revised. The criminal false claims provisions became 18 U.S.C. § 287, and false statements became 18 U.S.C. § 1001. The civil FCA was included in 18 U.S.C. § 3729. See Chapter 1 for a full discussion of the history of the statutory sections.

II. Elements of the Criminal Statutes

When the government believes a contractor has committed fraud in presenting a claim or making a certification to it, the government likely will use more than one of the many antifraud weapons in its arsenal to punish the contractor.[15] The decision as to what criminal indictments will be sought is driven by the facts that can be proven and the elements required. Understanding the elements of any criminal statutes being alleged is important for formulating a defense and a strategy for resolution.

A. Criminal False Claims Statute

The criminal FCA states:

[W]hoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years (check on change to 10 years in 1986 amendment) and shall be subject to a fine in the amount provided in this title.[16]

Under 18 U.S.C. § 287, the prosecution must prove the following elements, beyond a reasonable doubt, to establish a violation: the defendant made or presented a claim to a department or agency of the United States for money or property; the claim was false, fictitious, or fraudulent; and the defendant knew that the claim was false, fictitious, or fraudulent at the time the claim was made.[17] Materiality also represents an essential element in certain circuit courts. [18] The elements are set out below.

1. Presentation of a Claim

The prosecution must prove that the defendant actually presented a false claim to a department or agency of the government. “Claim” is not defined in the criminal FCA, but the civil FCA definition has been followed in criminal prosecutions to mean any “request or demand . . . for money or property” from the United States.[19] In relevant part, the civil FCA states:

‘claim’ includes any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient if the United States government provides any portion of the money or property which is requested or demanded, or if the government will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded.[20]

The statutory language appears to require that the government receive the claim, but it does not require that the defendant present the claim directly to the government.[21] The court in United States v. Blecker,[22] held that presentation of the claim to an intermediary authorized to accept the claim for presentation to the government satisfied the “presentation” requirement of section 287.[23]

The criminal FCA statute does not require that the government pay or honor the claim. Thus, violations of section 287 are chargeable even if the government has not lost money because of the false or fictitious claim.[24]

2. Claim Was False, Fictitious, or Fraudulent

Charges under the criminal FCA may be based on proof that the claim submitted to the government is false, fictitious, or fraudulent.[25] A claim is false or fictitious “if untrue when made, and then known to be untrue by the person making it or causing it to be made.”[26] A claim is fraudulent “if known to be untrue and if made or caused to be made with the intent to deceive the government agency to whom submitted.”[27]

3. Knowledge – Intent – Willfulness

The criminal FCA requires the prosecutor to prove that a false claim against the government was made, “knowing such claim to be false, fictitious or fraudulent.”[28] The government does not have to allege willfulness in the indictment because the term “willfully” is not included in section 287 and the courts have not held that it is an “essential element.”[29] The circuits vary on the proof of intent necessary to convict for a violation of the criminal FCA. For example, the Fourth Circuit approved a jury instruction stating that under section 287, criminal intent “could be proved by either a showing that the defendant was aware he was doing something wrong or that he acted with a specific intent to violate the law.”[30] The Ninth Circuit[31] held that no instruction on “intent to defraud” is necessary where a false claim is charged (because it is not an element of the offense), but it left open whether an “intent to deceive” is an element of a charge of submitting “fraudulent” claims.[32] The Eighth Circuit[33] did not distinguish between false and fraudulent claims, but held without elaboration that section 287 requires proof of criminal intent.

4. Materiality

The criminal FCA does not specifically require that a claim be false as to a “material” matter, but the Circuits are split on whether materiality is an essential element. The Second and Tenth Circuits have held that materiality is not a requirement of section 287 and need not be alleged in an indictment charging a statutory violation.[34] The Fifth and Eighth Circuits have held that, even assuming materiality is an element of the crime, it is an issue “for the trial judge to handle as a question of law.”[35] The Fourth Circuit has stated that materiality is an element of section 287.[36]

The test for materiality, as set out by the circuit courts that have found it to be an element, is “whether the falsification is calculated to induce action or reliance by an agency of the United States, one that could affect or influence the exercise of government functions, a natural tendency to influence or is . . . capable of influencing [an] agency decision.”[37]

B. False Statements Statute

The false statements statute is another popular antifraud statute available to the government and often is included with an indictment under the FCA because the making of a false claim also involves making a false statement. This statute makes it a crime knowingly and willfully to make a false statement to the United States or any department or agency thereof.[38] Section 1001 includes three broad categories of offenses: falsifying, concealing, or otherwise covering up a material fact by any trick, scheme, or device; making materially false, fictitious, or fraudulent statements or representations; and making or using a writing or document with knowledge that such document contains materially false, fictitious, or fraudulent statements.[39]

The government must prove five elements of a false statement offense under section 1001. These elements are: the defendant made a statement or concealment; the statement was false; the statement or concealment was material; the statement or concealment was made “knowingly and willfully”; and the statement or concealment falls within executive, legislative, or judicial branch jurisdiction.[40] Each requirement is discussed below.

1. Statements or Concealments

The False Statements Act covers all statements, whether oral or written, sworn or unsworn, voluntary or required by law.[41] Section 1001 also applies to affirmative acts of concealment even where no actual statement has been made.[42] Affirmative acts include nondisclosures and misrepresentations of material fact as well as the concealment of information with the intent to deceive the government.[43]

2. Falsity

Falsity may be proved by the prosecution through either an affirmative false representation or the concealment of a material fact. To demonstrate this element, the government must show a non-disclosure of a fact through a “trick, scheme, or device.”[44] However, where the defendant makes an affirmative false representation, no trick, scheme, or device need be proved.[45]

3. Materiality

In 1996, Congress amended section 1001 to add a materiality requirement. The language was changed to ensure that defendants would not be held liable for trivial falsifications.[46] Courts have held a statement to be material if it either actually influences a federal agency or has a natural tendency or capacity to influence a decision or function of a federal agency.[47] The government need not have actually believed or even received the false statement for the materiality requirement to be met.[48]

4. Intent

Knowing and willful intent is a necessary requirement for a violation of the False Statements Act to be found. “‘Intent’ under section 1001 encompasses the intent to deceive, mislead, or induce belief in the false information.[49] Intent to defraud need not be proved; “reckless disregard of the truth” will satisfy the intent element.[50] The “defendant can have the requisite intent even if he or she is unaware of the potential consequences of making a false statement.”[51]

5. Jurisdiction

Jurisdiction has a broad definition. The government has jurisdiction to prosecute a false statement when the request for information falls within the general authority of the requesting department or agency from any of the three branches of government. Jurisdiction exists even if the government has not lost money or property as a result of the false statement. False statements to a state agency also may result in a prosecution if the federal government has jurisdiction over the state in that matter. For example, if federal funds are being used by the state for the project. It is not difficult for the government to prove that a statement has been made. The government often uses, for example, the contract certifications, progress payment requests or invoices, statements made to government investigators, submission of test reports, and submission of cost or pricing data to prove the statement on a particular matter.

C. Conspiracy

Conspiracy also may be alleged by the prosecution along with the FCA and False Statements Act. Section 286 of Title 18 provides that:

Whoever enters into any agreement, combination, or conspiracy to defraud the United States, or any department or agency thereof, by obtaining or aiding to obtain the payment or allowance of any false, fictitious or fraudulent claim, shall be fined under this title or imprisoned not more than ten years, or both.[52]

To convict the defendant under the section 286 conspiracy statute, the government must prove beyond a reasonable doubt that: there was an agreement, combination, or conspiracy to defraud the United States and that the defendant sought to obtain or aid another in obtaining the payment of any false, fictitious, or fraudulent claim. The government must show that the defendant agreed to engage in a scheme to defraud the government and knew that the objective of the scheme was illegal. In United States v. Lanier,[53] the court held that the government need not charge or establish an overt act in furtherance of the conspiracy to prove a violation of section 286.

The government also must prove that the conspirators agreed to defraud the government by obtaining the payment of false claims against the government. As with the FCA and false statements statute, the government need not actually have paid the conspirators. No requirement exists that the conspirators actually took steps to obtain payment, it is enough to prove that they agreed to file a false claim.

Prosecutors also may use the general federal conspiracy statute. Section 371 of Title 18 provides that:

If two or more persons conspire either to commit an offense against the United States or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.

Section 371 reaches two separate types of criminal conduct: first, conspiracies to commit offenses that violate specific federal statutes, e.g., conspiring to cause the submission of false statements; and, second, conspiracies to defraud the United States. The prosecution need not show any loss of money or property to the government to establish a conspiracy in violation of the second prong of the statute as long as the purpose of the conspiracy was to impair or obstruct some lawful governmental function. The term “defraud” encompasses much more conduct under section 371 than that which the federal mail and wire fraud statutes reach.[54]

To prove a violation of section 371, the government must show beyond a reasonable doubt that: two or more persons entered into an agreement to pursue an unlawful objective, that each defendant knowingly and willfully “joined” or became a member of the conspiracy, and that one of the conspirators knowingly committed an overt act in furtherance of the conspiracy’s objective.

Although the two statutes overlap because both prohibit agreements to defraud the government, their wording also makes clear several differences that may be important in their application to the facts of a case. Section 286 is narrower; it applies only when the conspirators agree to defraud the government in a specific manner: “by obtaining the payment or allowance of any false, fictitious, or fraudulent claim.”[55] Section 371, by contrast, reaches agreements to defraud the government without regard to the particular means chosen by the conspirators to carry out their agreements.[56] “Perhaps because the submission of false bills is particularly difficult to detect and, therefore, more likely to succeed, Congress has provided a longer maximum prison term under section 286 (ten years) than it has under section 371 (five years).”[57]

D. Mail Fraud

In some cases, the prosecutor in bringing charges for violation of the FCA and/or False Statements Act also may charge the defendant with mail fraud under 18 U.S.C. § 1341. In many cases, the false claims made by the defendant contractor or subcontractor are included in written payment requests or claims mailed to the government. The mailing of such false claims constitutes a violation of the mail fraud statute, which provides in relevant part:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, . . . for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail or such carrier . . . shall be fined under this title or imprisoned not more than 20 years, or both.[58]

The government must prove two elements in mail fraud: having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts) and use of the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).[59]

The government need not prove that the defendant actually mailed or transported anything themselves in furtherance of the scheme, it is sufficient if they simply caused it to be done.[60]

E. Wire Fraud

If the fraud is not carried out through the mail but instead through bank wire or other electronic transfer of funds from the government, the prosecutor may include a count for violation of 18 U.S.C. § 1343. The wire fraud statute provides:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both.

The elements of wire fraud are the same as mail fraud, but require the use of an interstate telephone call or electronic communication made in furtherance of the scheme instead of the mail.[61] The four essential elements of wire fraud are: that the defendant voluntarily and intentionally devised or participated in a scheme to defraud another out of money; that the defendant did so with the intent to defraud; that it was reasonably foreseeable that interstate wire communications would be used; and that interstate wire communications in fact were used.[62]

The government must prove that the defendant knowingly and willfully participated in the scheme to defraud and that the scheme involved the means of interstate commerce. The government need not show that the defendant was the one who carried out the scheme or made misrepresentations to the government.[63]

III. Contractor Conduct Giving Rise to Criminal FCA, False Statement
Act Liability, and Other Criminal Fraud Statutes

Although there are not as many reported cases of violation of the criminal FCA, False Statement Act, and other fraud statutes by construction contractors, as compared to health care providers and defense contractors, the construction cases discussed below give a couple of examples of the circumstances in which contractors are prosecuted for fraud in performing federal projects. In addition, they show that contractors can be subject to both civil and criminal violations. Although there are few reported cases, many criminal investigations of contractors occur each year.[64] Below are some examples.

A. United States v. Montoya[65]

United States v. Montoya demonstrates the long reach of the federal government to prosecute criminal FCA violations even where the fraudulent claim is presented to a state government and even though the contractor does not know that it is performing work on a project whose funding comes in whole or in part from the federal government.[66]

Ricardo Montoya, doing business as the Ram Corporation, contracted with the Governor’s Office of Community Affairs of the State of New Mexico to “weatherize” homes of elderly, low-income residents. Unbeknownst to Montoya, the project was funded by the U.S. Department of Energy. Montoya submitted invoices to the State of New Mexico, but none of the work had actually been completed. The federal government indicted him for criminal violations of the FCA. At his trial, a jury convicted Montoya on six counts of presenting false claims to the federal government, and he was sentenced to five years in prison on each count.

On appeal, Montoya asserted that he did not present a claim to the United States since he had contracted with and received payment from the State of New Mexico. Montoya also argued that his actions, if criminal, were only in violation of state law, since the federal government had not supervised the project. Rejecting both arguments, the Court of Appeals affirmed the conviction on the grounds that the state had received the funds from the federal government and that a “defendant’s awareness that the funds would ultimately be provided by a federal agency” was irrelevant.[67]

B. Ab-Tech Construction, Inc. v. United States[68]

Ab-Tech Construction, Inc. demonstrates how contractors can be convicted under the False Statements Act for misrepresentations regarding small business status.

Ab-Tech was awarded a subcontract by the Small Business Administration (“SBA”) for construction of a facility for the Army Corps of Engineers. Ab-Tech requested an equitable adjustment for its costs for extra work allegedly caused by defective government specifications. The claim was denied and Ab-Tech appealed to the Court of Federal Claims. Court proceedings were stayed while a grand jury investigated Ab-Tech’s business affairs.[69]

The SBA and the Department of Defense Office of Inspector General found that Ab-Tech had not complied with the SBA’s 8(a) minority contracting requirements. In fact, it had a silent partner, Pyramid Construction—not a minority-owned enterprise. Ab-Tech and Pyramid had entered into an “Indemnification Agreement” prior to commencing performance of construction of the Corps of Engineers facility. Ab-Tech had not revealed this relationship to the SBA (although required to do so) and had falsely certified in every pay request that it was in compliance with the 8(a) program requirements.

The investigation resulted in the criminal indictment and conviction of Ab-Tech’s president on two counts of making false statements to the government in violation of the false statement statute. Ab-Tech’s president was sentenced to a term of imprisonment and a fine of $5,000. The government also pursued and won a civil FCA action for every payment voucher submitted with the false certification.

C. Air Power Enterprises, Inc.

In January of 2006, the U.S. Department of Justice (“DOJ”) announced that Nicanor Lotuaco was fined $1 million and “sentenced to five months in jail, followed by five months home detention and three years supervised release” for his involvement in fraud using false asbestos, lead, and hazardous material removal training certificates.[70] James Schaubach, ACS Environmental, Inc., and Air Power Enterprises, Inc. also were each expected to be sentenced. In addition to using false asbestos training certificates, Air Power also falsely certified itself as a small business to qualify as an SBA 8(a) program recipient.

D. Thacker Operating Company

Floyd Gary Thacker, owner of Thacker Operating Company, pled guilty to one count of “conspiracy to engage in dishonest services mail and wire fraud.”[71] Thacker had been providing secret gifts, meals, and payments to garner favorable treatment for his construction company. Thacker was only one of a group of individuals who had been pursuing improper influence and were prosecuted both for wire and mail fraud, showing the overlap of those statutes and the way that they often are linked with other illegal conduct.

IV. Responding to a Criminal False Claims/False Statements Investigation

A. Introduction

Federal criminal investigations of corporations and other business entities that derive a substantial portion of their revenues from doing business with the federal government are different from other criminal investigations because of the collateral consequences of an indictment, much less a conviction. Consequently, it is crucial that the corporation or entity focus its resources on avoiding indictment either by persuading the DOJ attorneys that it did not commit the criminal act under investigation or that even if it did, criminal prosecution of the corporation would not serve the overall public interest.

A corporation is criminally liable for the acts of its employees where the person is acting within the scope of his or her employment and for the ostensible benefit of the corporation. However, if the employee involved in the criminal conduct is a relatively low level manager who violated the company’s compliance program or if there are other extenuating circumstances, it may be possible—despite the entity’s technical legal guilt—to persuade the DOJ to decline criminal prosecution because of the particular facts and circumstances involved.

In January 2003, Larry D. Thompson, then the Deputy Attorney General of the Department of Justice, issued a memorandum entitled “Principles of Federal Prosecution of Business Organizations” (“Thompson Memorandum”) that set forth the factors that federal prosecutors are to consider in determining whether to seek an indictment of a corporation or other business entity.[72] On December 12, 2006, Deputy Attorney General Paul J. McNulty issued a new “Principles of Federal Prosecution of Business Organizations” memorandum (“McNulty Memorandum”),[73] which supersedes and replaces the Thompson Memorandum. When responding to a federal criminal False Claims or False Statements Act investigation the entity and its counsel should seek to act in conformance with those factors in the McNulty Memorandum favoring declination of criminal prosecution to the extent that the facts permit.

If indictment and criminal prosecution can be avoided, any collateral proceedings, such as a DOJ civil False Claims Act (“CFCA”) action and an administrative suspension/debarment proceeding often can be resolved on terms that will enable the corporation or other business entity to survive and continue doing business with the federal government. Depending on the facts and circumstances those terms may or may not involve payment of a monetary payment to resolve the entity’s CFCA liability, an enhanced effective compliance and ethics program (“ECEP”) and some period of debarment.

B. Defenses To Criminal False Claims Act and False Statements Act
Allegations Must Be Asserted Effectively During the Investigation
to Avoid Indictment and Suspension from Being Awarded
Any New Federal Government Contracts

Shortly after an entity doing business with the federal government is indicted for violating the criminal False Claims Act, 18 U.S.C. § 287, or the False Statements Act, 18 U.S.C. § 1001, that entity likely will be suspended from being awarded any new government contracts and subcontracts until the ensuing criminal proceedings, and any appeals, end.[74] Federal Acquisition Regulation (“FAR”) 9.407.2(a), 48 C.F.R. section 9.407-2(a) provides that a contractor may be suspended for adequate evidence of commission of a fraud or criminal offense in connection with performing a public contract or subcontract or for making false statements.[75] An indictment for any such offense “constitutes adequate evidence for suspension.”[76] When a suspension is based upon an indictment, the suspended entity is not entitled to a fact-finding or trial-type hearing to confront its accusers and cross-examine witnesses, but it will instead be limited to an opportunity to submit information and argument in opposition to the suspension.[77]

If the entity derives all or most of its revenues from doing business with the government, a trial of