False Claims Act: Defense-Related Enforcement in FY 2023 and on the Horizon

The headlines from the US Department of Justice’s (DOJ’s) recently released fiscal year 2023 civil fraud statistics may, on the surface, seem unremarkable. Indeed, the $2.7 billion topline number—reflecting total recoveries from all False Claims Act (FCA) settlements and judgments during the reporting year—sits at the low end of the range for annual recoveries over the last 10 years. However, digging into the numbers unearths important information for the defense procurement community.

The fiscal year (FY) 2023 report shows a sharp uptick in overall recoveries in what DOJ refers to as US Department of Defense (DOD) fraud statistics. In particular, the $552 million in recoveries from DOD-related FCA matters was the third-highest haul since DOJ started reporting these statistics in 1987. Last year’s total also reflected a more than five-fold increase year-over-year ($104 million in FY 2022). However, this notable uptick in DOD-related recoveries appears to stem from one particular matter.

In an accompanying press release, DOJ mentioned under the category of “procurement fraud” a $377 million settlement with a defense contractor that allegedly improperly billed the government for costs incurred on nongovernment contracts. DOJ attributed nearly $30 million more to settlements with two other military contractors, one involving alleged double-billing and another arising from alleged false statements and claims to the US Navy regarding testing of aircraft components.

These types of allegations against defense contractors have been a staple of FCA investigations and litigation since the late 1980s, when defense procurement fraud was the principal target of FCA enforcement and qui tam actions. In fact, in FY 1987—the first year DOJ began reporting these statistics—257 of the 371 FCA matters were DOD cases. While the ratio of DOD matters to overall FCA matters dropped to roughly 6% in FY 2023, the ratio of recoveries in DOD-related FCA to total FCA recoveries last year—20%—demonstrates that such matters remain an important component of FCA enforcement.

DOJ Stats Don’t Tell Whole Story for Defense Industry

The DOD statistics likely understate overall FCA activity affecting defense contractors, because DOJ categorizes matters as “DOD” only where the US Department of Defense is the primary affected agency. Defense contractors often become entangled in FCA matters through their work for other federal agencies as well.

For instance, many traditional defense companies served as contractors to the US Department of State in connection with the military conflicts in Afghanistan and Iraq, which spawned multiple FCA qui tam and other cases, some of which continue to this day. Defense sector companies also secure contracts with the US Department of Energy.

In addition, aerospace and defense industry companies are susceptible to allegations of FCA reverse false claim violations arising out of the procurement and misclassification of parts under US Customs laws. DOJ does not separately publicize statistics for FCA matters affecting these federal agencies. Instead, in its annual statistics, DOJ reports FCA matters unrelated to DOD or the US Department of Health and Human Services under an omnibus “Other” category. And that “Other” category accounts for 702 of the 1,212 (58%) new FCA matters opened or filed in FY 2023. This number includes 378 affirmative matters—meaning ones not generated by a qui tam relator—which is more than double the 179 affirmative cases initiated in FY 2022 in this category. It remains to be seen how many of these new matters are targeting defense industry businesses, but the increased enforcement activity surely will have an impact in this space.

A Window Into FY 2024 and Beyond for Defense Industry

Indeed, another harbinger of increased fraud enforcement affecting defense companies comes from recent statements from DOD’s Office of Inspector General (DOD-OIG). According to Inspector General Robert Storch’s public remarks earlier this month, defense procurement fraud—ranging from product substitution (use of inferior parts) to cybersecurity—is a major focus of both the DOD-OIG and its Defense Criminal Investigative Service (DCIS). He explained further that about 15% of the close to 1,900 active DCIS investigations are related to FCA matters.

The DOD-OIG focus on cybersecurity compliance is notable, as FCA cases based on alleged violations of cybersecurity regulations and contract provisions have been on the rise, with some notable, high-dollar settlements in recent years. While most of those cybersecurity matters have arisen from alleged misstatements about cybersecurity capabilities and certifications of ongoing compliance, the OIG announced that it currently is investigating matters where the affected company failed to report a cyber incident.

Key Takeaways

DOJ’s FY 2023 fraud statistics reflect a robust FCA enforcement environment. And whether the large increase in Department of Defense-related FCA recoveries this past year is an aberration, defense businesses will continue to be targeted for FCA investigation and litigation, including qui tam actions, based on both “traditional” allegations of procurement fraud and emerging ones, such as cybersecurity compliance.