How False Claims Act Consequences Can Improve Grantee Internal Controls
While most grant managers diligently monitor the federal Office of Inspector General (OIG) websites for program audit trends, they may not be fully aware of the significant surge in actions initiated by the Department of Justice (DOJ) under the False Claims Act (FCA) against recipients of federal financial assistance. DOJ is increasingly using this statute, originally designed to combat waste, fraud and abuse of federal funds, to target not only traditional areas like healthcare and defense, but also to extend enforcement to other sectors, including education, research and infrastructure development.
Over the past decade, DOJ has recovered billions of dollars under the FCA from cases against recipients. In federal fiscal year (FY) 2023 alone, it recovered $2.68 billion, reflecting the government’s escalating use of the FCA to ensure accountability for the misuse of federal grant funds. Notably, there has been a rise in scrutiny from agencies like the National Institutes of Health (NIH) and the Department of Education due to allegations of noncompliance with grant conditions, misuse of funds and fraudulent reporting of research results.
Given the severe nature of these matters, which typically fall under an entity’s counsel offices, it's natural to wonder why grant managers should care about the FCA. However, a more pertinent question might be: What proactive steps can grant managers take to mitigate risks that their entity might be subject to actions taken by the Department of Justice under the False Claims Act?
First, recipients should understand the statute's intent. The FCA was first enacted in 1863 to hold defense contractors who delivered substandard supplies to the Union Army accountable for defrauding the federal government. The law’s purpose remains the same today: to hold individuals and entities civilly accountable for knowingly submitting false claims for payment to the federal government. The FCA’s unique aspect is that it permits private citizens to become whistleblowers and qui tam relators to file lawsuits on behalf of the federal government.
Every grant manager should understand the consequences of unallowable costs. If the grant undergoes an audit and unallowable costs are discovered, the entity is most likely required to reimburse the federal government for the charges made to the award. But what if DOJ takes action against the entity for false claims instead of, or in addition to, an OIG audit?
That leads to the second part of understanding the FCA. Recipients, as well as their subrecipients, should understand the civil test for fraud (under which most cases of the FCA are applied) involves the grantee knowingly or should have known that a false payment claim was being made to the government. Every dollar that is drawdown is subject to the terms and conditions of that grant award and is a claim for payment. Unlike the required repayment for unallowable costs discovered at audit, under the FCA, the repayment involves treble damages. Therefore, the unallowable costs of $100,000 result in damages of $300,000, and for each cost associated with that initial $100,000 drawdown, there is an associated penalty ranging between $12,537 to $27,015.
When you consider internal reporting can lead to a grantee’s claim for reimbursement under federal awards, it becomes crystal clear why entities that have a noncompliant effort reporting system can be subject to huge penalties under the FCA.
Take, for instance, the University of North Texas, which settled a 2018 claim under the FCA for more than $13 million of inaccurate effort reporting on federal grant awards.
Lastly, entities need to understand the components of the FCA that involve the whistleblower’s clause, designed to encourage individuals with knowledge of waste, fraud or abuse of federal funds to make a claim by providing financial incentives. Specifically, the whistleblower is provided legal protections, including filing a lawsuit under seal (which protects their confidentiality from the defendant while the government investigates the claim) and protection against retaliation by their employers. If the claim is successful, they are entitled to 15-30% of the recovered amount, often resulting in substantial payouts. Currently, more than 70% of the FCA cases are initiated by whistleblowers. In most cases, defendants are responsible for paying all governmental legal costs. In FY 2022, whistleblower-initiated cases led to $1.9 billion in recoveries. To that end, the FCA has carved out a particular niche of legal firms that specialize in assisting whistleblowers in bringing their claims.
Recently, a lab assistant (from Duke University) turned whistleblower initiated a $112.5 million settlement. This whistleblower knew the researcher submitted falsified research results to the NIH and EPA to obtain grant funding. As part of the settlement, this whistleblower received $33.75 million.
We must remember that all entities’ reporting from grant proposal to closeout is subject to scrutiny and can be used to determine a claim for payment under the FCA. The cornerstone of our work is a structured system for monitoring and managing financial activities, ensuring compliance with federal regulations, and safeguarding taxpayer money. Concerning the FCA, internal controls act to detect and prevent fraud before it happens, ensure compliance with federal regulations, reduce the waste and abuse of federal funds, and create a culture of ethical behavior that reduces the likelihood of fraudulent or abusive practices within the organization. All these factors mitigate the risk of FCA liability.
As grant managers, we understand the importance of internal controls in mitigating risk. However, we often struggle to secure support from leadership to enhance our work. Perhaps if we remind leadership that behind every grant proposal submission, annual performance report, effort certification, financial supporting documentation, and closeout report, countless employees possess a profound understanding of the integrity behind those claims for payment and that any of these employees can instantly become a whistleblower. Then ask, given the consequences of the FCA, how confident leadership is in the organization’s system of internal controls.
This shift in the federal perspective towards using the False Claims Act can help us gain organizational support to strengthen our controls and take a more active role in risk mitigation rather than just being passive observers of potential legal issues.
For over 20 years, Toni DeMaglio served as a compliance officer at two institutions of higher education, her primary function was to ensure that grants were maintained in the state of audit readiness, advising the institutions on potential risk factors, and developing and improving processes and internal controls to ensure compliance. She previously served as a project director on a variety federal and state grants.
