The following is an abbreviated version of a presentation on the False Claims Act (FCA) that Keith Rosten gave to a meeting of the Society of Research Administrators International. BCR partner Bruce Zagaris spoke on the Foreign Agents Registration Act and export controls. This article provides a summary of FCA concerns for government contractors and particularly for university administrators.
There have been a rash of news stories on various constraints under which U.S. universities and other research institutions must labor to cooperate with foreign institutions and academics. This is a hot issue because the life blood of many U.S. institutions is cooperation with foreign institutions. Chinese students are the largest contingent of foreign students at U.S. universities. This topic hits close to home as I was fortunate to be a Fulbright Lecturer in law in Kazakhstan, teaching law and economics.
The U.S. government has been keenly concerned about this cooperation because of the specter of espionage and intellectual property theft. Institutions of higher learning have countered that overzealous government oversight impedes academic freedom.
Prosecutors have various tools to investigate relationships with foreign institutions.
Given this heightened scrutiny, researchers, colleges and universities need to understand the constraints that are imposed in cooperating with foreign institutions and researchers. There are three major laws today that are in the toolkit of prosecutors who are scrutinizing these relationships. These are the Foreign Agents Registration Act; export controls and the FCA.
These are not the exclusive legal framework and indeed there are proposals to expand the breadth of controls. For example, there has been a proposal to include foreign grants under the ambit of The Committee on Foreign Investment in the United States (CFIUS). This blog focuses only on the False Claims Act.
How to run afoul of the FCA
There are numerous ways that an organization may violate the FCA. These are some of the forms through which an organization may run afoul of the FCA:
• False claims–Knowingly presenting false claims
• False statements–Knowingly making a false record or statement material for a false claim
• Conspiracy–Conspiring to commit any violation of the FCA
• Conversion–Possession of government property and knowingly failure to return all of the property to the government
• False receipts–Makes or delivers a receipt of government property without “completely knowing” that the information on the receipt is true
• Unlawful purchase of government property–Knowingly buys public property from government officer who lawfully may not sell the property
• Reverse false claims–Knowingly makes a false record or statement material to an obligation to pay or transmit property to the government
Usually there are two qualifiers for false claim actions. First, the FCA relates only to false or fraudulent claims that are material, or in the words of the FCA statute “having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” Second, in many of these actions, there has to be knowledge, which is broadly construed. If you intentionally misrepresent your business or other matters before the Government, then it is a given that you have knowingly committed a violation. Deliberate ignorance or even reckless disregard of the truth will be deemed to be knowledge.
Activities most subject to scrutiny
In practice, there are certain patterns of activities that are most common subjects of FCA cases.
• False invoices: that should be an easy one when a government contractor falsifies an invoice;
• Inflated material costs: in government contracts, if you have a cost-plus contract, then the government contractor has the incentive to inflate the costs, and some contractors simply cannot resist inflating their material costs to get paid more;
• Non-conforming parts: a government contractor must certify that the parts it provides meet certain specifications; related to this kind of violation is when the contractor provides counterfeit parts to the government;
• False testing records: if a government contractor provides certain test results to the Government, they must be accurate
The majority of claims under FCA have generally fallen into three buckets. The first bucket of claims is related to health care, by far the leading category of FCA claims. Usually these claims involve kickbacks or solicitations of payment to induce the purchase of goods or services paid for by federal health care provider.
The second bucket is procurement fraud. The most common procurement fraud involves a dishonest federal contractor who inflates hours on time sheets or bills for work not actually performed. Another variation of procurement fraud is when the federal contractor does not comply with contract requirements.
The other major category of FCA claims is for other fraud recoveries. For example, one contractor may collude with another to rig the bidding. The Justice Department is actively using the FCA to prosecute recipients of Paycheck Protection Program (PPP) payments, who did not qualify for the Program but nevertheless submitted claims.
Another common circumstance is when a government contractor claims that it qualifies for a specific government program that may be given certain preferences in government contracting. If you are a government contractor, you may be entitled to compete for set asides or sole source based on your qualifying as a woman owned small business, a Hubzone business, 8a, or a service disabled veteran owned business. But if you try to skirt the requirements of these programs, the government may come after you for a violation of the FCA.
Related article: Women Owned Small Businesses: Certification Required
Similarly, as a government contractor, you have to represent to the government your past performance and experience. If you misrepresent your experience, you may have violated the FCA.
FCA relies on whistleblowers to expose offenders
FCA relies heavily on whistleblowers to ferret out the offenders. The Act has extremely generous rewards for these “relators” as they are called in the statute. The whistleblowers may come from various quarters, but the most likely whistleblowers in the context of the FCA are employees of the alleged perpetrator, an erstwhile competitor or a subcontractor.
Grant programs particularly susceptible to government scrutiny
If your academic institute or non-profit applies for government grants, you need to be particularly aware of the constraints on your cooperation with foreign institutions. For example, the National Institutes of Health (NIH) requires grant recipients to disclose “other support, foreign components and financial conflicts of interest.”
“Other Support” is broadly defined as all resources made available to researchers in support of and/or related to all of their research endeavors, regardless of whether such resources have monetary value. Other Support may include high-value materials that are not freely available and selection to foreign talent recruitment programs. NIH requires prior approval if a significant scientific element or segment of an NIH-funded project will be performed outside of the United States.
According to the Justice Department “Foreign Components can include collaborations with foreign researchers who perform experiments in support of an NIH grant, regardless of whether those foreign researchers receive any of the NIH funding.”
Van Andel Research Institute, a nonprofit that bills itself as an “Independent Biomedical Research Institute”, learned the hard way and ended up paying two hefty settlements. Van Andel was a successful recipient of a grant from NIH in June 2017. The research that it was conducting was implemented with the Harbin Institute of Technology. Van Andel failed to disclose the foreign component in its grant application and progress reports to NIH. The Department of Justice prosecuted Van Andel not for fraud in the conduct of the funded research or inappropriate spending of federal funds, but rather for nondisclosure of the foreign component. Van Andel concluded a $5.5 million settlement in December 2019.
And if that were not enough trouble for Van Andel, a month after the settlement, a U.S. Customs and Border Protection officer stopped a former Van Andel researcher and professor at Harbin Institute of Technology and discovered undeclared biological research samples in his luggage. The professor had falsely described the shipment as “documents.” This prompted another investigation that resulted in additional allegations of violation of the FCA.
In this second matter, the Justice Department alleged that Van Andel failed to disclose and unapproved foreign component grant application; Van Andel knew or should have known that the foreign professor was providing biological research samples, synthesized in China, to Van Andel faculty; and that a Van Andel faculty member accepted an invitation from a Chinese university to join an application to a program funded by the Chinese government to recruit foreign scientists to work at “innovation centers” established through Chinese universities, and that Van Andel knew or should have known about the Van Andel’s affiliation with the Chinese program. These second set of allegations caused Van Andel to settle with the government for an additional $1.1 million.
Government contractors and academic institutions must implement programs
Any government contractor can run afoul of these harsh rules. An institution can reduce the risk if it organization actively investigates “red flags” concerning researchers’ relationships and affiliations
1. Review existing policies especially regarding “other support”, conflicts of interest and foreign components—training of faculty
2. Commitment to legal compliance
3. Identify risk areas such as foreign collaborations, visiting scholars vetting, post-doctorates
4. Voluntary self-disclosure
You may want to review your program with a government contracting lawyer. No organization is immune from allegations of violation of FCA but heightened scrutiny and a rigorous program to monitor the organization’s cooperation with foreign researchers and institutions can go along way in reducing the risk of a FCA violation.