Freeing the False Claims Act

Thirty years ago, President Reagan signed the False Claims Amendments Act of 1986, an anti-fraud measure whose extraordinary success is a timely reminder of what’s possible when Washington acts in a focused, bipartisan spirit.

Inspired by reports that contractors were charging the U.S. military $7,600 apiece for coffee makers, among other scandals, the statute gave fresh teeth to the venerable False Claims Act, a law originally signed by Abraham Lincoln to combat fraud by suppliers to the Union Army.

{mosads}Since 1986, according to a Department of Justice tally, the retooled FCA has allowed the federal government to claw back $50 billion wrongfully billed to taxpayers, an astonishing haul that actually understates the law’s effect, because it omits both criminal penalties and the FCA’s deterrent effect.

Yet the FCA remains under perennial assault from corporate interests and ill-informed court opinions. Time and again, Sen. Chuck Grassley (R-Iowa), an author of the 1986 bill, has rallied his colleagues to stave off these attacks. President Obama has signed three separate bills to clarify important aspects of the FCA.

After 30 years of playing defense, it’s time to recognize the FCA’s huge success and build on it. To date, two simple issues have stopped this law from reaching its full potential. Both are easily solved.

The first problem is just an information gap. The FCA works because it offers protection and rewards to whistleblowers who reveal fraud against the federal government in what are called “qui tam” lawsuits. Since 1986, such cases have accounted for more than 70 percent of all money recovered: That’s about $30 billion returned to taxpayers, even after whistleblower rewards are deducted.

Yet the people who are most likely to know about anti-government fraud — employees of federal contractors — often don’t hear about the FCA unless they happen to consult a knowledgeable attorney after being fired for opposing such wrongdoing.

This problem was partly solved — but only partly — by Section 6032 of the Deficit Reduction Act of 2005, a budget measure signed into law by then-President George W. Bush. The DRA was controversial for its cuts to government programs, but Section 6032 was just common sense: It required big recipients of Medicaid money to educate their employees about the FCA and other whistleblower laws, via handbooks and the like, so that they’d be more likely to report fraud.

Since that simple change, taxpayers’ recovery of money from healthcare-related qui tam cases has roughly doubled, to about $2 billion annually. Better-informed employees aren’t the only reason, but they surely account for part of the increase.

The next step is obvious: We should require all large recipients of government money, not just Medicaid providers, to educate their employees about the FCA and other whistleblower laws. Indeed, “How to Blow the Whistle on Fraud” posters should be standard at the workplaces of all government contractors.

The other big problem with today’s FCA is that it carves out “claims, records, or statements made under the Internal Revenue Code” — an exclusion made in deference to the secretary of the Treasury, who oversees the IRS and must authorize all lawsuits to recover taxes.

This is troublesome for two reasons. First, the IRS has been lackadaisical in pursuing its own whistleblower rewards program: Grassley, who also wrote many of that program’s provisions, criticized the IRS last year for “putting up arbitrary legal hurdles at every turn.” By contrast, the FCA works because whistleblowers don’t need to wait for government action.

And second, the tax code doesn’t protect whistleblowers against retaliation by their employers, a necessity for any effective anti-fraud program. A bill currently before the Senate would offer such protection, but the 66-page measure is complex and likely won’t become law.

A simpler solution: Remove the FCA’s so-called tax bar. This would automatically extend the FCA’s anti-retaliation protections to tax whistleblowers, and it would allow qui tam lawsuits to supplement the IRS’s balky enforcement efforts.

Because the Department of Justice already vets every FCA lawsuit, it could get the Treasury secretary’s signoff before becoming involved in tax cases — a mechanism that has already been tested for New York’s version of the FCA.

Other FCA provisions would remain in place, including a requirement for willful wrongdoing, which shields defendants from FCA liability for honest mistakes or following bad advice. And lawmakers could require a high-dollar threshold for tax fraud under the FCA, so that the handling of smaller tax matters remains unchanged. 

In the 30 years since we beefed up the FCA, whistleblowers have proven themselves to be the most effective policers of anti-government fraud. It’s time to remove their remaining restraints.

Burns is acting president of the Taxpayers Against Fraud Educational Fund, a nonprofit dedicated to combating fraud against the government. Oswald is managing principal of The Employment Law Group, P.C., a law firm that protects FCA whistleblowers. Both are based in Washington, D.C.