The False Claims Act: America’s Best Fraud Fighting Tool has Fought Fraud for 150 Years

In the history of the United States, there are few rallying cries more constant and unifying than the call to “Support Our Troops!” Thus, it is only fitting that our nation’s premier fraud-fighting resource was born from a desire to do just that.

More than 150 years ago, the United States was in the throes of the Civil War, and manufacturers and suppliers were adapting their products and capabilities to meet the country’s ever-growing military supply needs. But as patriotic companies rose to the challenge, unscrupulous war profiteers surfaced in great numbers as well. In the worst examples, contractors sold goods to the Union Army that directly compromised their warfighting abilities:

For sugar, [the Army] often got sand; for coffee, rye; for leather, something no better than brown paper; for sound horses and mules, spavined beasts and dying donkeys; and for serviceable muskets and pistols, the experimental failures of sanguine inventors, or the refuse of shops and foreign armories.[1]

The pervasive fraud was so disruptive to the Union Army that President Lincoln realized it could affect the war effort. Lincoln recognized that it would be difficult, expensive, and time-consuming for the Government to root out fraudulent contractors themselves. Instead, he turned to a legal model dating back centuries in Europe which enabled individuals with knowledge of fraud to bring a case on behalf of the Government, and be rewarded for their efforts with a portion of the Government’s recovery.

And so, in 1863, motivated by the need to protect the Union Army from defense contractors willing to sacrifice troop safety for personal profit, the United States’ False Claims Act was born.

In more than a century and a half since its enactment, the False Claims Act – often known colloquially as Lincoln’s Law – has undergone a series of revisions and amendments. The most detrimental came in 1943, following the Supreme Court’s decision in Marcus v. Hess. As World War II raged, the United States was aggressive and vocal about its criminal prosecutions of contractors seeking to capitalize on the country’s tremendous military needs. Some profiteers filed False Claims Act lawsuits to piggyback on those criminal prosecutions to get a share of the recovery, despite having no knowledge of their own about the fraud. The Supreme Court determined that such lawsuits were permissible, and if Congress didn’t want it that way, it would need to amend the FCA.

Congress moved swiftly and there was a strong push to eliminate the False Claims Act completely. In a last-minute shift, Congress opted to keep the Act, but significantly reduced the share awarded to those who brought the cases and put in strict language that said that no one could bring an FCA suit if the government already knew about the conduct. But the language was written so strictly that a suit would be prohibited if anyone in the government knew about the conduct, regardless of whether the employee recognized the conduct to be fraud or even had the capacity to act upon it if they did recognize as much.

The 1943 amendments left the FCA nearly toothless. The Act sat largely unused for the next four decades until another war and another kind of fraud began depleting taxpayer dollars allocated to defense.

By the 1980s, defense spending related to the Cold War was steadily rising, and the United States faced rampant fraud. The public began pressuring their representatives to come up with other ways to curb government spending. Thus, with no immediate end to the Cold War in sight, Senator Charles Grassley (R-Iowa) and Congressman Howard Berman (D-Cal) made a bipartisan proposal of sweeping amendments which would breathe new life into the False Claims Act. The amendments focused on incentivizing whistleblowers to come forward because, as Sen. Grassley would describe years later, “Going after waste, fraud, and abuse without whistleblowers is about as useful as harvesting acres of corn with a pair of rusty old scissors.” A 1986 Senate Judiciary Report highlighted that 45 of the 100 largest defense contractors were under investigation for fraud (including 9 of the top 10) and that as much as one of every 10 dollars of the entire Federal budget was being lost to fraud every year.

So with markedly similar motivation to that which brought about the original 1863 False Claims Act, the 1986 Amendments to the FCA were passed, kicking off the modern era of fraud fighting and deterrence.

Growing from its roots in protecting the military, the FCA has expanded into every corner of government spending and more than half of its $70 billion in recoveries over the past 35 years have been related to Medicare and Medicaid healthcare spending. And although the law is under constant attack by industries or corporations who would rather not be held accountable by the Act’s treble damages and civil penalties, the FCA remains the country’s most efficient and effective fraud-fighting tool. The Act’s unique ability to protect our troops and civilians alike will be especially critical as we defend against a new type of war: cyber warfare.

Written by Jillian Estes of Morgan Verkamp

[1] F. Shannon, The Organization and Administration of the Union Army 1861-1865, at 54-56 (Peter Smith Press 1965)