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Substantial Spike in Penalties, “Individual Accountability for Corporate Wrongdoing” Memo Shake-up FCA Stakes

Supreme-Court-PillarsFalse Claims Act (“FCA”) penalties will double. Last week, the Department of Justice announced that an obscure agency dubbed the Railroad Retirement Board updated FCA penalties as prescribed by Congress. Under the rule, minimum per-claim penalties will jump to $10,781 from $5,500, and maximum per-claim penalties will rise to $21,563 from $11,000. The development has been expected since May.

The DOJ may choose to pursue a smaller penalty if the full amount due under the FCA will produce “a negative economic impact.” In an unusually terse statement, the DOJ said, without explanation, that it “is not invoking that authority in this rule.” The increase takes effect Aug. 1 and applies to violations after Nov. 2, 2015.

Last week’s regulation also updated penalties in more than 50 other categories affecting a wide range of enterprises. Fines under the Financial Institutions Reform, Recovery and Enforcement Act will soar to $9.5 million from $5.5 million, and penalties related to improper disclosure of bids on government contracts would boost to $1 million from $500,000.

Seasoned False Claims Act attorneys were surprised by the FCA penalty increase. They expected adjustments that would account for inflation since FCA penalties were last updated under a 1996 law. The new penalties are a significant bump from what that correction would be.

The FCA’s most frequent targets —defense contractors, hospitals, medical device manufacturers, and drug makers — may be even less likely to take cases to trial, given the potential public relations and financial risk.

While per-violation dollar amounts may seem paltry, penalty risks are greater in FCA cases. The cases often involve hundreds or thousands of fraudulent claims that are each tacked with a separate penalty.

These heightened penalties are intensified by the DOJ’s new policy directive on prioritizing individual accountability for corporate wrongdoing. In the past, and particularly in False Claims Act / Sarbanes-Oxley (“SOX”) litigation, a corporation hit with an FCA or SOX suit would pay substantial fines and penalties, and the corporate officers responsible for the illegal conduct could (and often can) hide behind their legally-impenetrable corporate veil.

On a practical level, and as the DOJ said in its memo:

“There are many substantial challenges unique to pursuing individuals for corporate misdeeds. In large corporations, where responsibility can be diffuse and decisions are made at various levels, it can be difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt. This is particularly true when determining the culpability of high-level executives, who may be insulated from the day-to-day activity in which the misconduct occurs. As a result, investigators often must reconstruct what happened based on a painstaking review of corporate documents, which can number in the millions, and which may be difficult to collect due to legal restrictions.”

Under the new policy, to be eligible for any “cooperation credit” in a criminal or civil corporate matter, corporations must provide DOJ with all relevant facts about the individuals involved in corporate misconduct. “Companies cannot pick and choose what facts to disclose.” To be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct, regardless of their position, status or position, and provide to the Department all facts relating to the misconduct.

In the directive, the DOJ singles-out False Claims Act violators as defendants who may be ripe for disclosure. “The Department’s position on “full cooperation” under the FCA will be that, at a minimum, all relevant facts about responsible individuals must be provided.” The directive guides DOJ attorneys tasked with FCA litigation to “be proactively investigating individuals (for civil and criminal prosecution) at every step of the process—before, during, and after any corporate cooperation.”

The False Claims Act permits private parties (“whistleblowers” or “relators”) to file suit on behalf of the United States government for false claims. The whistleblower then obtains an often significant portion of the government’s recovery. Reporting fraud is not an easy decision. Discomfort can be minimized by speaking to an experienced False Claims Act attorney.

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