How much can you spend on overpriced bananas? Quite a bit, it turns out. Late last week, the government announced a $344-million-dollar settlement in a case filed thirteen years ago under the False Claims Act by a whistleblower alleging that Kuwaiti food contractor Agility was over-charging the military for fresh fruits and vegetables delivered to U.S. troops during the Iraq war. $344 million. I don’t know about you, but that seems like quite a food bill to me.
The Agility False Claims Act
The Agility case was brought under the False Claims Act, as are many of the cases we bring at the Whistleblower Law Collaborative in Boston. One of the many interesting aspects of FCA cases is their scale. Small discrepancies, or seemingly insignificant mark-ups, can in the context of large contracts yield huge dollars in illegal profits. Yes, even for fruit and vegetables. Here, the $344 million reflected $95 million in damages and another $249 million in charges company agreed to withdraw.
In a normal transaction, a 5% mistake, say an extra $2.50 on a $50 dinner bill, is negligible. Depending on one’s attentiveness or neurosis about money, one might choose to ignore it rather than going back to the restaurant to complain or ask for the money back.
However, when you add a bunch of zeroes to the number, things start to look different. A 5% fraud rate on a $100 million contract results in $5 million in single damages. But the False Claims Act contains a multiple damages provision allowing up to $15 million. A 5% fraud rate on a $1 billion contract results in $50 million damages. And again the law can treble that amount. The Iraq War cost several trillion dollars all told. You start to see the nature of the problem.
Government Fraud Cases Can Involve Hundreds of Millions of Dollars
Similarly, during the “Big Dig” highway project here in Boston a few years ago, where the feds agreed to underwrite the sinking of an interstate highway below the city’s streets, the price tag evolved from one billion to two, and then seven, ten, eventually fourteen. How does that happen? The steady drip, drip, drip of contract amendments, change orders, and the like, and next thing you know the taxpayers are paying fourteen times what was agreed to. Whistleblowers eventually came forward to explain the mischief in the project’s finances, which had ballooned out of control.
Another enormous source of FCA fraud are the government health insurance programs, such as Medicaid and Medicare. These are a huge problem for much the same reason (a 90% compliance rate in a trillion-dollar health care economy translates into a $100 billion per year problem). Health care fraud cases constitute the majority of our FCA cases at the Whistleblower Law Collaborative.
Why are these so prevalent? Because federal reimbursement systems are largely based on a type of honor code. The systems allow the contractor to submit claims electronically. As a result, coding manipulations are difficult to detect without a witness coming forward to help the government see what it cannot see on its own. The government typically pays the claims and chases the bad ones after the money’s been paid out, the so-called “pay and chase” model. For people and entities willing to engage in gamesmanship, it’s a lucrative game to manipulate these vulnerable honor systems. Whistleblowers have become the government’s primary weapon for making the lucrative game more risky — and for recovering the money wrongfully obtained.
Contractor Fraud Cases are Prevalent
FCA cases can arise in any number of situations in which the government spends money. The Pentagon’s massive expenditures are certainly fertile ground. As documented in L.A. Times reporter Chris Miller’s 2007 book, Blood Money: Wasted Billions, Lost Lives, and Corporate Greed in Iraq, huge sums of money were lost and fraudulently spent in the Iraq War. This caused the price of that conflict (originally touted as a self-funding enterprise costing the taxpayers nothing) ballooned into the trillions of dollars and turning a national surplus into a national deficit.
As whistleblower lawyers, the frustrating aspect of that situation was knowing that fraud existed but that it would be incredibly hard to get to the facts in sufficient detail to bring legal action. Very little paper existed for the contracts and sub-contracts; witnesses were in Iraq and throughout the Middle East. Traveling to those areas for fact-finding was almost impossible and would involve prohibitively expensive security details and the like. Because of this, the Iraq conflict became known among whistleblower lawyers as a “Free Fraud Zone.”
The money flowed and flowed in Iraq, but the whistleblower cases did not come, at least not right away. Just like the Big Dig, towards the end of the conflict when things had quieted down somewhat, people began to surface to make claims against defense contractors like Blackwater and Halliburton for a variety of over-charging schemes. And thirteen years after it was first filed, the Agility case shows that the money stolen in that conflict is still being recovered.
Taxpayers bear the brunt of these schemes. Whether it’s a city tunnel that cost fourteen times what was originally projected, or up-coded medical bills, or the most expensive bananas in the history of the world, you and I are stuck with the bill.
