What is the False Claims Act?

Brenda Scott

The False Claims Act is a United States federal law which provides penalties for knowingly cheating the government through fraudulent billing practices, overstating the quantity of goods shipped and billed, or knowingly providing inferior products. The law includes qui tam, or whistleblower provisions, which allow private individuals and attorneys to sue on the behalf of the government if they have knowledge that fraud is being perpetrated. The law provides specific punitive damages and fines for guilty convictions and allows the individual bringing the suit to receive a portion of the money recovered.

President Lincoln signed the False Claims Act to combat profiteering during the Civil War.
President Lincoln signed the False Claims Act to combat profiteering during the Civil War.

The False Claims Act was first signed into law by President Lincoln during the American Civil War as a means of combating war profiteering. The efforts of the Union army were being hampered by massive fraud perpetrated by unscrupulous merchants who shipped rotted food, old blankets, defective weapons and other inferior products in lieu of the goods for which they were contracted and paid. The government did not have the resources to pursue and punish the profiteers, so it passed this act as a way to enlist the general public in the fight against fraud.

Before the False Claims Act, the efforts of the Union Army during the American Civil War were being hampered by massive fraud.
Before the False Claims Act, the efforts of the Union Army during the American Civil War were being hampered by massive fraud.

Under the original law, private citizens could bring a suit against the perpetrator on the behalf of the government. If found guilty, the defendant was charged $2000 US Dollars (USD) per instance and double the amount of the damages incurred. The person bringing the claim, known as the relator, was allowed to keep 50% of the money recovered.

In 1943, the False Claims Act was modified significantly, making it much less attractive. The amount of award was significantly reduced, and in most cases, was eliminated. A provision was added that said if a government official had any knowledge of the fraud, even if he made no effort to investigate or rectify the situation, a whistleblower was not allowed to receive any compensation. Since the initial report by the whistleblower to a government employee was defined as knowledge, the incentive for a private party to risk the financial consequences of pursuing litigation was removed and the law fell out of use.

During the military build up of the 1980s, stories began to surface of overpricing, improper billing and other fraudulent activities being conducted by companies working on Department of Defense contracts. Once again the government decided to enlist the private sector by revamping the False Claims Act to provide whistleblower incentives. Backed by a bipartisan coalition, Senators Grassley and Berman drafted significant revisions to the Act which were signed into law in 1986 by President Reagan.

As currently written, the False Claims Act defines false claims as knowingly presenting a fraudulent bill, using false records to allow an inaccurate bill to be paid, deliberately shipping less property than stated, making a receipt for a shipment without verifying its validity and purchasing government property from an individual who does not have the right to sell that property. Fines ranging from $5,500 USD to $11,000 USD can be charged, in addition to three times the amount of damages sustained by the government. Under this revision, the prosecution is only required to prove that knowledge of the false claim was present, and not that any intent to defraud existed. The provision disallowing suits if any government official had knowledge of the problem was eliminated, providing the government had not initiated an investigation.

To enlist the aid of private individuals or attorneys in pursuing suits under the False Claims Act, the amount of the award under the law was increased to between 15% and 30% of the amount recovered by the government. If the defendant is found guilty, he is also required to pay the attorney’s hourly fees for the person bringing the suit. If the defendant is found innocent, however, the litigator who brought the suit can be forced to pay the legal fees for the defense. This provision was added to prevent an individual or company from being financially devastated through frivolous suits.

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