Government agencies may be eager to exercise their enhanced authority to investigate and pursue contractors under provisions in the newly enacted Administrative False Claims Act (AFCA). The two key changes discussed below could increase the number of claims that agencies may find appealing to investigate.
Although these changes affect contractors of any size, small business contractors are likely to find investigations more disruptive if they lack a robust compliance program. But there are ways they can protect themselves by preparing for these changes now.
What the NDAA FY25 Changed
The Program Fraud Civil Remedies Act of 1986 (PFCRA) previously provided agencies with an administrative remedy to deal with false, fictious, or fraudulent claims and statements. But, given the relatively low cap for alleged liability mixed with the high costs associated with administrative proceedings, the PFCRA was underutilized because attention was focused on bigger claims more appropriate for the False Claims Act (FCA).
Now, Section 5203 of the National Defense Authorization Act (NDAA) FY25 aims to revitalize the PFCRA under a new name, the AFCA. The authority’s language has been updated not only to allow agencies to pursue larger dollar amounts but also to reduce the administrative burdens traditionally associated with the use of administrative remedies. The goal is to provide agencies with an efficient, internal avenue to investigate and recover against fraud – one that gives them exclusive authority in whether to settle or compromise with defendants.
Two Key Changes
- Agencies now may pursue claims up to $1 million. This significant jump from the previous cap of $150,000 incentivizes investigators to pursue claims that were beyond their reach before. Inspectors General may delve into contracts that would not have interested them previously, particularly given reviewing official’s “exclusive” settlement authority discussed below.
- Agencies now can recoup the costs of the investigation and prosecution associated with these claims. In an era of tight budgets, this provision further could embolden investigators to search for claims to pursue.
What Remains the Same
These changes augment other aspects of the AFCA that remain the same as the PFCRA. The reviewing officer at the agency retains “exclusive authority to compromise or settle any allegations of liability” under 31 U.S.C. § 3802(j). Agencies could increasingly flex this authority as a means to resolve larger claims under the new cap. While the reviewing official must still seek approval from the Attorney General before referring allegations of liability to a presiding officer, upon receiving that approval, the reviewing official has “exclusive” authority to then enter a settlement or compromise. The only new requirement under the updated AFCA is the reviewing official must simply notify the Attorney General no later than 30 days before doing so.
The AFCA retains the broad scope of covering both claims and written statements made, submitted or presented or caused to be made, submitted or presented to a federal authority or its agent. Liability arises when an individual or entity knew, or should have known, that a claim or written statement was false, fictious or fraudulent. The maximum penalty remains $5,000 per claim or statement and, if the government paid the falsely claimed amount, double that amount falsely claimed. This is different than treble damages under the FCA.
The AFCA also differs from the FCA when it comes to liability provisions because the AFCA extends to false statements in the absence of any claims. Thus, as the Act states, the AFCA covers any false, fictious, or fraudulent statement, “representation, certification, affirmation, document, record, or accounting or bookkeeping entry” made with respect to a claim, contract, bid proposal, grant or a benefit from the government with a certification of accuracy in conjunction with a contract, bid, grant or other kind of presentation to the government. 31 U.S.C. § 3801(9).
A Potential Hurdle
Hanging over this expanded power is SEC v. Jarkesy, 603 U.S. 109 (2024), in which the Supreme Court invalidated the use of administrative procedures, specifically an administrative law judge, to penalize an individual for fraud as violating an individual’s right to jury trial because the suit is “legal in nature.” As a result of the high court’s ruling, the Securities and Exchange Commission must bring a civil penalty action for securities fraud in federal court rather than use administrative procedures. Jarkesy, therefore, may cast doubt on the validity of the AFCA.
How to Prepare
In response to these changes, small business contractors should consider taking stock of their current compliance programs. This is particularly important considering the role of the Inspectors General under the AFCA may intersect with their roles in monitoring mandatory disclosures under FAR 52.203-13. Compliance programs that are proactive and that identify potential vulnerabilities and violations, can permit small business contractors to be better equipped to respond to an increase in investigations under the AFCA.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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