The Great Wall of Fraud

One of the most difficult aspects of my job is explaining to people what it is that I do. Once I get past explaining why my practice does not include Edward Snowden, I usually try to come up with potential schemes that someone in their profession might be familiar with. For example, if I'm talking to someone in the medical profession, I would create a hypothetical that they learned that their practice was billing the wrong codes or performing unnecessary procedures.

That, of course, does not work when speaking to larger groups (or anonymous blog readers), but current events can provide a similar exemplary situation. And few events are more current than our new president and his border wall.

The infamous border wall is anticipated to be more than 1,300 miles long, 40 feet high, and contain 19 million tons of concrete. Estimates suggest that the total cost will be between $15 billion and $25 billion. It is nearly inevitable that a project of such magnitude, likely involving hundreds of government contractors and subcontractors, will give rise to fraud and False Claims Act litigation. And some states, like New Mexico, have their own False Claims Acts that may be invoked if state funds become at issue.

What are some examples of fraud that I often see in the case of government contracts?

  • In order to get the contract, the contractor provides an estimate that he knows is artificially low, and then jacks up the costs once the work begins.
  • The contractor pretends to be a small, veteran / minority / woman-owned business to gain preference in the bidding process.
  • A contractor is required by contract to use 1" diameter rebar, but to save on costs, it uses a 0.875" diameter rebar. Or the contract requires a certain grade of concrete, but a lower grade is used instead. Or the contract requires use of steel bars that are "made in America", but the contractor gets a deal on the exact same steel bars that are made in Canada. Seemingly minor "substitutions" have been the basis of the oldest False Claims Act cases. This is so even when the substitutions are equivalent, if they are not disclosed to the government: "The mere fact that the item supplied under contract is as good as the one contracted for does not relieve defendants of liability if it can be shown that they attempted to deceive the government agency." United States v. Aerodex, Inc., 469 F.2d 1003 (5th Cir. 1972).
  • The laborers are instructed to bill for hours they are not actually working or for costs not actually incurred.
  • Some contracts put a limit on how much can be billed, or set a "fixed fee", as a way to prevent out-of-control costs and underbidding. But a single contractor may have more than one contract. Imagine if different sections of the wall are different contracts: if the contractor has maxed out its billing on one section, it might bill the remaining work to a different contract that pays all its costs. This is called "cross-charging."

Of course, this is all assuming that the wall isn't being paid for by Mexico, which does not have its own False Claims Act.