I want to talk today about the most recent limitations the courts have imposed on the False Claims Act.
The False Claims Act was signed into law by President Abraham Lincoln in 1863, to fight fraud against the Union Army during the Civil War.
Today, it is the government’s most powerful anti-fraud statute.
That’s because amendments that I authored in 1986 empowered whistleblowers to sue fraudsters on the government’s behalf.
Since then, we’ve recovered more than $64 billion in taxpayer money lost to fraud.
Now, when we talk about anti-fraud statutes like the False Claims Act, we use the term “materiality.”
The False Claims Act defines materiality as “having a natural tendency to influence or be capable of influencing the payment or receipt of money or property.”
Basically, if the government could have withheld payment, then it was likely material.
However, based on a 2016 Supreme Court opinion, the federal courts are trying to reshape the Act’s materiality requirement.
In the Supreme Court’s opinion in the Escobar case: “[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material.”
Citing this language, courts have made the government’s payment decision in these cases a deciding factor.
Now, the Justice Department shies away from prosecuting them.
Even when the fraud is obvious, and obviously material.
Recently, the Office of the Special Inspector General for Afghanistan Reconstruction briefed me on a report about a botched Defense Department effort to quickly buy cargo planes from an Italian manufacturer called Alenia.
In 2009, the DoD bought 20 cargo planes from Alenia for $549 million.
These planes were intended to move goods and train Afghan pilots.
The contract required the manufacturer to refurbish 20 retired aircraft and provide enough spare parts for ten years of maintenance.
To seal the deal, the company even took DoD personnel on several warehouse tours to prove they had all these spare parts.
When the planes arrived in Afghanistan, mechanics quickly noted the planes were very poorly refurbished.
Worse, they couldn’t actually fly.
The poor state of the planes and the hazards of the Afghan elements made that impossible.
Alenia also lied about their maintenance commitments.
Those warehouses full of spare parts? They were for the wrong planes.
Despite this blatant fraud, DoD inspectors kept certifying the planes and the government kept making payments.
But here’s the catch.
The inspectors later admitted that many of the documents and manuals they reviewed were in Italian.
None of them spoke Italian.
The final count: Out of 20 aircrafts, 4 never even made it to Afghanistan.
It’s unclear why DoD continued making payments despite such flagrant violations.
But by 2013 it became clear that continuing this program was unfeasible, and the government tried to sell the remaining 16 planes.
Nobody wanted them.
So, the Obama/Biden administration sold them for scrap metal.
To recap: The government bought 20 airplanes for $549 million and in less than five years sold them for $40,257 worth of scrap metal.
The photos next to me show what we bought, compared to what it was actually worth – a literal pile of garbage.
It’s clear that the actual condition of planes and lack of parts were very material components of this contract.
Now, thanks to DoD’s poor judgment, and the courts’ new standard, the Justice Department won’t bring False Claims Act charges against the company.
Materiality is important to protect against parasitic lawsuits.
But we can’t allow defendants to get away with scalping the taxpayer because some government bureaucrats failed to do their jobs.
Government bureaucrats are highly segmented and often unable to make key decisions for their organizations.
The government also typically stops payment only when it has fully investigated and corroborated a claim of fraud.
And, my many years investigating the DoD has taught me that a Pentagon bureaucrat is rarely motivated to stop fraud.
That’s because the money doesn’t come out of their pocket.
This example highlights how the courts’ narrow interpretation of materiality fails to take into account how the government really works.
When the False Claims Act was originally passed, one fraudster boasted, “You can sell anything to the government at almost any price if you’ve got the guts to ask.”
Unfortunately that was true in this case.
I have already made it public that I am working to patch this hole in the taxpayer’s pocket.
This example perfectly illustrates the need for changes.
I plan to introduce legislation to address this issue. I’m in the final stages of negotiating and look forward to putting forward a bipartisan bill in the coming weeks.