A Survey of State Practices for Protecting Transportation Agencies Against Construction and Disadvantaged Business Enterprise Fraud Including Use of Contractor Suspension and Debarment Procedures (2007)

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NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES This study is a survey of practices used to protect transportation departments against construction contract and DBE fraud. This study will examine the activities of states and federal agencies in the false claims arena and will identify various forms of DBE fraud and the related scope of remedies used by state and federal governments to prevent and detect it. This study sought information to identify how state and federal governments handle indicted, investigated or convicted contractors (i.e., legal devices, tactics, and techniques). This study, however, is narrow in scope in that it is limited to construction contracts and does not focus on issues such as bid rigging, price fixing and market allocation, antitrust, conspiracies in restraint of trade, honest services act, mail fraud and other similar illegal tools that may be utilized to restrain competition. II. Construction Contract Fraud There are five main types of regulatory schemes used by federal and state government to combat fraudulent activities—the Federal Civil False Claims Act21, the Criminal False Claims Act,22 the Civil and Criminal Racketeer Influenced and Corrupt Organizations Act (RICO),23 False Statements Under Title 18 USC §1001, and state False Claims Acts. To better understand how the federal government and states utilize these measures, we will briefly look at their statutory schemes. A. Federal Civil False Claims Act As mentioned earlier, the federal FCA utilizes the qui tam action as its main mode of enforcement. In compensation for the risk and effort of filing a qui tam case, the citizen “informer”, “whistleblower,” or “relator” may be awarded a portion of the funds recovered, typically between 15 and 25 percent.24 Most states have taken notice of the success of the federal FCA and have adopted their own False Claims Acts. In fact, twenty-three (23) states, along with New York City and Chicago, have their own version of a False Claim Act or some form of a general False Claim Statute. See Appendix A for examples of state False Claim Statutes. 1. Establishing Liability The civil FCA generally holds any person liable who knowingly presents or conspires to present a false or fraudulent claim to the United States for payment or approval or knowingly 21 31USC §§3729-3731. 22 18 USC §287. 23 18 USC §§1961-1968. 24 False Claims Act Amendments of 1986, Pub.L. 99-562, 100 Stat. 3153, (October 27, 1986). See Taxpayers Against Fraud (TAF) Education Funds - What is the False Claims Act?, available at http://www.taf.org/whyfca.htm (lasted visited May 1, 2007). - 4 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES makes or uses a false record or statement to obtain payment or approval of a false or fraudulent claim.25 Other bases for FCA violations include: • possession, custody, or control of property or money used with intent to defraud the government; • willful concealment of property and delivery of less property than the amount for which the person receives a certificate or receipt;26 • authorization to make or deliver a document which certifies receipt of property used by the government with intent to defraud the government, and/or to make or deliver the receipt without completely knowing that the information on the receipt is true;27 • knowingly buy or receive a pledge of an obligation or debt, public property from an officer or employee of the Government, or a member of the Armed Forces, who lawfully may not sell or pledge the property;28 • knowingly make or use a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.29 A critical component of liability under the FCA is a person’s submission of a false claim. A claim is broadly defined as any request or demand, whether under a contract or otherwise, for money or property which is made to a contractor, grantee, or other recipient, if the U.S. government provides any portion of the money or property which is requested or demanded, or if the government will reimburse such contractor, grantee, or other recipient for any portion of the money or property requested or demanded.30 In order for a false statement to be actionable under the FCA, the claim must be false or fraudulent. The FCA attaches liability to the fraudulent claim for payment, rather than the underlying fraudulent activity or the government's wrongful payment.31 The demand or request 25 31 USC § 3729. 26 31 USC § 3729(a)(4). 27 31 USC § 3729(a)(5). 28 31 USC § 3729(a)(6). 29 31 USC § 3729(a)(7). 30 31 USC § 3729(a)(7)(c). In US v. Neifert-White Co., 390 US 228, 88 S. Ct. 959, 19 L.Ed 2d 1061 (1968), the Supreme Court held that the FCA reaches beyond claims which might be legally enforced, to all fraudulent attempts to cause the Government to pay out sums of money. See also Harrison v. Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999) (“The phrase false or fraudulent claim in the FCA should be construed broadly.”); and US v. Incorporated Village of Island Park, 888 F. Supp 419 (E.D.N.Y. 1995). 31 31 U.S.C.A. § 3729 et seq. - 5 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES is sufficient to trigger liability under the definition; the government does not have to have actually paid the sum requested or have directly received the claim.32 Examples of when a false claim is established include: when a contractor seeks payment for a product not delivered or for work not performed;33 when a request for payment is made but the work for which the contractor seeks payment does not comply with the contract specifications; and when there is a failure to meet technical requirements that focus on performance of environmental laws, wage and hour regulations, and Occupational Safety and Health Administration (OSHA) regulations. A contractor can be liable even if the noncompliance results in a product with the same basic performance characteristics as those specified in the contract and the government both inspected and accepted the contractor’s work.34 In addition, liability for an alleged false claim must be material, resulting in a likely impact on the government’s decision to pay. Government knowledge can impact the materiality of the liability for a false claim. If the government knew of the falsity of the claim, but paid the claim, it can signify that the government’s decision to pay was not affected by the falsity of the claim, thus precluding FCA liability.35 However, courts have held that while the Government’s knowledge is relevant, it is not an absolute defense.36 Finally, under the False Claims Act, the government has the burden of proving, by a preponderance of the evidence, that the defendant knowingly presented a false claim to the 32 US v. Killough, 848 F.2d 1523, 1533-34 (11th Cir. 1988); US v. Bornstein, 423 U.S. 303, 308-309, 96 S.Ct. 523, 527-528, 46 L. Ed. 2d 514, 521 (U.S. 1976); See S. Rep. No. 99-345, at 10 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5275 (“a false claim is actionable although the claims or false statements were made to a party other than the government, if the payment thereon would ultimately result in a loss to the United States.”); Pickens v. Kanawha River Towing, 916 F. Supp. 702 (S.D. Ohio 1996); US v. Inc. Village of Island Park, 888 F. Supp. 419(E.D.N.Y. 1995). S. Rep. No. 99-345, at 10 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5286 (“In 1986, Congress lowered the FCA’s scienter requirement to include not only actual knowledge, but also reckless disregard and deliberate indifference, in order to include within the FCA’s scope “what has become known as the ‘ostrich’ type situation where an individual has ‘buried his head in the sand’ and failed to make simple inquiries which would alert him that false claims are being submitted.”); See also US v. NHC Healthcare Corp., 115 F.Supp.2d 1149 (W.D.Mo. 2000). 33 See e.g. US ex rel. Mistick PBT v. Housing Authority of the City of Pittsburgh, 186 F.3d 376 (3rd Cir. 1999); US ex rel. Eberhardt. v. Integrated Design & Construction, Inc., 167 F.3d 861 (4th Cir. 1999); Commercial Contractors, Inc. v. US, 154 F.3d 1357, 1364 ( Fed. Cir.,1998); Stacy & Witbeck, Inc. v. City & County of San Francisco, 47 Cal.App. 4th 1 (1996) (California False Claims Act). 34 US ex. rel. Varljen v. Cleveland Gear Co., 250 F.3d 426, 430 (6th Cir. 2001); Commercial Contractors, 154 F.3d at 1364. 35 US ex rel. Costner v. US, 317 F.3d 883 (8th Cir. 2003); US ex rel Lamers v. City of Green Bay, 168 F.3d 1013 (7th Cir. 1999). 36 US ex rel. Butler v. Hughes Helicopters, Inc., 71 F.3d 321 (9th Cir. 1995); US ex rel. Kreindler & Kreindler v. United Technologies Corp., 985 F.2d 1148 (2d Cir. 1993); US ex rel Hagood v. Sonoma County Water Agency, 929 F.2d 1416 (9th Cir. 1991). - 6 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES government,37 and that the defendant knowingly made a false statement to get a claim he knew was false, paid or approved.38 Liability is established when the contractor has actual knowledge of the information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard of the truth or falsity of the information.39 Liability may also be grounds for debarment from entering into future government contracts.40 2. Types of Fraud Prosecuted Under the FCA The USDOT and state DOTs are seeing a wide variety of fraudulent schemes occurring, ranging from false claims for work never performed, false certification by contractors, kickbacks between contractors, bid-rigging to DBE fraud.41 To assist in identifying fraudulent activity, the Taxpayers Against Fraud Education Fund (TAF) have compiled the following list which provides an outline of the false claims on the Government that have been uncovered to date.42 • Billing for goods and services that were never delivered or rendered. • Billing for marketing, lobbying or other non-contract related corporate activities. • Submitting false service records or samples in order to show better-than-actual performance. • Presenting broken or untested equipment as operational and tested. • Billing for work or tests not performed. • Billing for premium equipment but actually providing inferior equipment. • Defective testing - Certifying that something has passed a test, when in fact it has not. • Double billing - Charging more than once for the same goods or service. • Phantom employees and doctored time slips: Charging for employees that were not actually on the job, or billing for made-up hours in order to maximize reimbursements. • Yield burning - skimming off the profits from the sale of municipal bonds. • Falsifying natural resource production records -- Pumping, mining or harvesting more natural resources from public lands that is actually reported to the government. 37 In U.S. ex rel. Totten v. Bombardier, 380 F.3d 488 (C.A.D.C.,2004), the D.C. Circuit Court of Appeal held that a claim had to be presented to a federal officer or employee, not merely to a federal grantee such as Amtrak, for there to be liability under the False Claims Act (FCA). 38 31 U.S.C. § 3729(a)(1, 2). 39 Id.; U.S.ex rel. Plumbers & Steamfitters, 183 F.3d 1088, 1092. 40 FAR 9.406-2(a)(1) (48 CFR Pt. 9). 41 Remarks of Department of Transportation Inspector General Kenneth M. Mead, National Fraud Awareness Conference: Highway Construction and Surface Transportation, June 8, 2004, available at http://www.oig.dot.gov/StreamFile?file=/data/pdfdocs/2004nfac.pdf. (last visited 6/23/2007) 42 http://www.taf.org/about.html. TAF is a nonprofit public interest organization dedicated to combating fraud against the Federal Government through the promotion and use of the federal False Claims Act and its qui tam provisions. - 7 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES • Being over-paid by the government for sale of a good or service, and then not reporting that overpayment. • Misrepresenting the value of imported goods or their country of origin for tariff purposes. • False certification that a contract falls within certain guidelines (i.e. the contractor is a minority or veteran). • Billing in order to increase revenue instead of billing to reflect actual work performed. • Failing to report known product defects in order to be able to continue to sell or bill the government for the product. • Billing for research that was never conducted; falsifying research data that was paid for by the U.S. government. • Winning a contract through kickbacks or bribes. 3. Defenses to the FCA There are several defenses that can be raised to the FCA. The alleged violator may assert affirmative defenses, including a statute of limitations defense,43 which applies to all FCA actions, and public disclosure or prior action, which applies only to qui tam actions.44 The statute of limitations provision of the FCA bars actions (a) more than six years after the violation is committed or (b) more than three years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.45 Another defense that can be raised to qui tam actions is the public disclosure exception. Under this defense, no court shall have jurisdiction over an action based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or GAO report, hearing, audit, or investigation, or from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.46 The public disclosure exception deprives courts of jurisdiction to hear qui tam actions based upon the public disclosure of the allegations or transactions stated above. FCA actions brought directly by the state or federal government are not barred.47 Additionally, if the relator is the original source of the information, if the relator is an individual who has direct and independent knowledge of the information on which the 43 31 USC §3731(b). 44 31 USC §§ 3730(e)(3), (4). 45 31 USC §3731(b). However, the courts are split over the application of the three year tolling rule to cases brought by Qui Tam relators: US ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211 (9th Cir. 1996); US ex rel. Colunga v. Hercules, Inc., 1998 No. 89-CV-954B (D. Utah March 6,1998). 46 31 USC §3730(e)(4)(A). 47 Id. - 8 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES allegations are based, or if the relator has voluntarily provided the information to the government before filing an action that is based on such information, he is not barred from bringing a qui tam action under the FCA.48 Finally, prior action can be used as an affirmative defense to the FCA. The prior action bar prevents qui tam relators from bringing actions based upon allegations or transactions that are the subjects of a civil suit or an administrative civil money penalty proceeding in which the government is already a party49 or actions based on the facts underlying another pending qui tam action.50 4. Penalty, Costs, and Alternative Remedies Violators of the FCA are subject to penalties and costs associated with fraud committed against the government. A civil penalty of no less than $5,000 and no more than $10,000, plus three (3) times the amount of damages the government sustains because of the act of that person will be the penalty imposed for violation of the FCA.51 A court may lessen the damage award to two (2) times the amount of the damages where the violator either provides all information to officials 30 days after first obtaining such information; cooperates with any government agencies’ investigation of such violation; furnishes the information at a time that no criminal prosecution, civil action, or administrative action had commenced and the violator did not have knowledge of the existence of an investigation into such violation.52 The violator will also be responsible for court costs incurred to recover penalties or damages.53 However, consequential damages, such as lost profits, are not recoverable under the Act, and in most jurisdictions, prejudgment interest is also not recoverable.54 Moreover, a relator is not required to prove that the federal government suffered monetary harm to state a claim under the FCA. The plaintiff may recover the penalty even if no 48 31 USC §3730(e)(4)(A), (B). 49 31 USC §3730(e)(3). 50 31 USC §3730(b)(5). This defense has been narrowly considered by courts where the action is essentially identical to the prior, pending action. US ex rel. S. Prawer & Co. v. Fleet Bank, 24 F.3d 320 (1st Cir. 1994); US ex rel. LaCorte v. SmithKline Beecham Clinical Lab., 149 F.3d 227 (3rd Cir. 1998). 51 31 USC § 3729(a)(7) 52 Id. 53 Id. 54 See BMY-Combat Systems Div. of Harsco Corp. v. US, 44 Fed. Cl. 141 (1999); US v. Aerodex, Inc., 469 F.2d 1003 (5th Cir. 1972); US v. Foster Wheeler Corp., 447 F.2d 100 (2d Cir. 1971). But see US v. Cooperative Grain & Supply Co., 476 F.2d 47 (8th Cir. 1973). - 9 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES damages were caused by the false submission.55 Likewise, the government may elect to pursue alternative remedies available, including suspension and debarment.56 B. Criminal False Claims Act (FCA) In addition to the civil FCA, there is also a criminal FCA. Under the criminal FCA, a person who presents a false claim to the government knowing it to be false may be imprisoned and subject to fines.57 Under the criminal FCA, a person may also be liable and thus subject to criminal penalties for causing an intermediary to submit a false claim.58 Unlike the civil FCA, the required level of proof for violation of the criminal FCA is “beyond a reasonable doubt.” Such violation requires the violator to actually know that the claim is false in order for culpability to be established.59 In turn, only the Department of Justice may bring an action under the criminal FCA. If found liable for criminal false claims, a contractor may be imprisoned for up to five years and fined up to $10,000 per false claim.60 C. Civil and Criminal Racketeer Influenced and Corrupt Organizations (RICO) Actions Similar to the FCA, the civil and criminal Racketeer Influenced and Corrupt Organizations (RICO) Act assists in combating fraud. Although it originated as part of the Organized Crime Control Act of 1970 as a weapon in the fight against organized crime, RICO has become a hybrid statute in which the same misconduct gives rise to both civil and criminal liability in fraud. The civil RICO suit, with its ultra-potent remedies—treble damages and attorney's fees— has dramatically transformed private litigation in many commercial contexts. Section 1961(1) Title 18 U.S.C. specifically enumerates a long list of felonies under both state and federal law constituting "racketeering activity." Every RICO claim must be based upon a violation of one of 55 31 USC 3731(c); US ex rel. Varljen, 250 F.3d 426, 429 (6th Cir. 2001); Bly-Magee v. California, 236 F.3d 1014 (9th Cir. 2001); Harrison v. Westinghouse Savannah River, 176 F.3d 776, 785; Commercial Contractors, Inc. v. US, 154 F.3d 1357 (Fed. Cir. 1998); but see Young-Montenay, Inc. v. US, 15 F.3d 1040 (Fed. Cir.1994); US ex rel. Stinson v. Provident Life & Accident Inc. Co., 721 F. Supp. 1247 (S.D. Fla. 1989); see also Hammond v. Northland Counseling Ctr., Inc., 218 F.3d 886 (8th Cir. 2000); 31 US § 3729 (a). Notwithstanding, under FCA, the US is required to prove all essential elements of the cause of action, including damages. 56 31 USC §3730(c)(5); US ex rel. Barajas v. US, 258 F.3d 1004 (9th Cir. 2001). 57 18 USC §287. 58 US v. Gumbs, 283 F.3d 128 (3rd Cir. 2002). 59 Id., at 131; US v. Catton, 89 F.3d 387 (7th Cir. 1996); US v. Barker, 967 F.2d 1275(9th Cir. 1991). 60 18 USC §287. - 10 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES the crimes listed in 18 U.S.C. § 1961(1).61 While few of these are of concern in the civil arena, the predicate acts of greatest interest are those mentioned in the opening paragraph--mail, wire, and securities fraud, which accounted for 79 percent of the pre-1985 cases surveyed by the American Bar Association (ABA). The far-reaching use of RICO in the civil context is mostly attributable to the addition of mail and wire fraud as predicate acts.62 Because mail, wire and securities fraud can be classified as "racketeering activity," what formerly would have constituted no more than "garden variety fraud," may now become federalized into actionable "racketeering" under the RICO statute. The Supreme Court case of Sedima, S.P.R.L. v. Imrex, Co., Inc.,63 is a clear example of how the view of RICO as a criminal law having little or nothing to do with commercial transactions has been altered. Sedima's federal court suit for breach of contract asserted RICO claims against Imrex and two of its officers, alleging predicate acts of mail and wire fraud,64 The district court dismissed the RICO counts for failure to state a claim, and the Second Circuit affirmed. It held that Sedima's complaint was defective in two ways: it failed to allege a racketeering injury "different in kind from that occurring as a result of the predicate acts themselves . . . ."65 Second, the court held the complaint defective in failing to allege that the defendants had already been criminally convicted of the predicate acts of mail and wire fraud, or of a RICO violation. The U.S. Supreme Court granted certiorari and reversed. In an opinion by Justice White, the Court held that a civil RICO claim did not require the two elements added to the statute by the court of appeals. In the Court's view, neither the language of the statute nor its legislative history could support the restrictive approach of the appeals court. The Supreme Court concluded that RICO should be interpreted broadly. In turn, the Supreme Court confronted the Second Circuit's distress at the "extraordinary, if not outrageous" uses to which civil fraud had been allowed. The Second Circuit argued that instead of being used against mobsters and organized criminals, the Act had become a tool for everyday fraud cases brought against "respected and legitimate enterprises."66 Justice White noted that in enacting the RICO Act, Congress wanted to reach both legitimate and illegitimate enterprises, and the former should not have immunity from its fraudulent actions and the subsequent consequences. 67 Undoubtedly, the Sedima decision opened the floodgates to civil 61 Jeff E. Grell, RICO IN A NUTSHELL, available at http://www.ricoact.com/ricoact/nutshell.asp, (last visited 6/23/2007) 62 Id. 63 473 U.S. 479, 105 S. Ct. 3275, 87 L. Ed. 2d 346 (1985) 64 28 U.S.C. §§ 1341, 1343. 65 Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482, 496 (2d Cir. 1984) 66 Id. at 487. 67 Sedima, v. Imrex, Co., Inc., 473 U.S. 479, 105 S. Ct. 375, 87 L. Ed. 2d 346 (1985). - 11 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES RICO cases.68 Before RICO, U.S. Attorneys were the only ones that could enforce mail and wire fraud statutes. However, when Congress included mail and wire fraud as predicate acts under RICO, every attorney in the country could now utilize the mail and wire fraud statutes. RICO's inclusion of mail and wire fraud federalized state common law claims of fraud in the business context.69 Unfortunately, RICO claims are among the most difficult violations to establish. Every RICO claim must be based on a criminal violation or, as the statute states, an "act of racketeering," listed in section 1961(1) of the RICO Act. For there to be a RICO violation, elements such as racketeering, pattern, enterprise, operation and management, must be proven.70 A civil plaintiff must not only prove that the defendant engaged in acts of racketeering, but must also prove that these acts constituted a "pattern" as well as all of the other elements of a civil RICO claim.71 The burden of proof is by a preponderance of evidence that the defendant violated the RICO Act versus the higher standard of beyond a reasonable doubt for criminal RICO charges. In turn, if a plaintiff succeeds in establishing a civil RICO claim, the monetary damages awarded are three times the actual damages established at trial plus the plaintiff's attorneys' fees and costs. In a criminal RICO claim, the defendant goes to jail.72 While the mail and wire fraud statutes are broad, most federal courts have an aversion toward RICO claims predicated only on mail and wire fraud violations. This often is the main limitation on a plaintiff's ability to convert a common law fraud claim into a RICO claim predicated on the federal mail and wire fraud statutes. Even if the plaintiff has shown a pattern of mail and wire fraud violations, courts may still view the RICO claim as beyond the intended scope of the RICO Act and avoid application of the RICO Act for what they see as a simple claim of common law fraud.73 These limitations may account for why of the states we surveyed (see Table 1 below), only Delaware was found to have a RICO statute and none of the states reported bringing a case in the false claims and fraud context under RICO. 68 Arthur F. Mathews, Andrew B. Weissman, Report of the Ad Hoc Civil Rico Task Force, 1985, A.B.A. SEC. BANKING and BUS. L. 417. 69 Jeff E. Grell, RICO IN A NUTSHELL, , available at http://www.ricoact.com/ricoact/nutshell.asp, (last visited 6/23/2007) 70 Id. 71 Id. 72 Id. 73 Id. - 12 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES D. False Statements Under Title 18 USC §1001 Similar to the FCA, false statements, as opposed to false claims made to the government, may also be prosecuted. False statements are pursued under US Code Title 18 U.S.C. §1001, 74 which provides: Whoever, in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully falsifies, conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statements or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined under this title (not more than $10,000) or imprisoned not more than five years, or both. By its very terms, Title 18 U.S.C. §1001 covers "any" false statements and the courts have consistently construed it in that manner.75 The false statement statute also empowers 74 See also 18 USC § 1346, Definition of “scheme or artifice to defraud”, which states, “For the purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.” See also 18 USC § 1342, Fictitious name or address: Whoever, for the purpose of conducting, promoting, or carrying on by means of the Postal Service, any scheme or device mentioned in section 1341 of this title or any other unlawful business, uses or assumes, or requests to be addressed by, any fictitious, false, or assumed title, name, or address or name other than his own proper name, or takes or receives from any post office or authorized depository of mail matter, any letter, postal card, package, or other mail matter addressed to any such fictitious, false, or assumed title, name, or address, or name other than his own proper name, shall be fined under this title or imprisoned not more than five years, or both. See also 18 USC § 666, Theft or bribery concerning programs receiving Federal funds: Whoever being an agent of an organization, or of a State, local, or Indian tribal government, or any agency thereof embezzles, steals, obtains by fraud, or otherwise without authority knowingly converts to the use of any person other than the rightful owner or intentionally misapplies, property that is valued at $5,000 or more, and is owned by, or is under the care, custody, or control of such organization, government, or agency; or corruptly solicits or demands for the benefit of any person, or accepts or agrees to accept, anything of value from any person, intending to be influenced or rewarded in connection with any business, transaction, or series of transactions of such organization, government, or agency involving any thing of value of $5,000 or more; or corruptly gives, offers, or agrees to give anything of value to any person, with intent to influence or reward an agent of an organization or of a State, local or Indian tribal government, or any agency thereof, in connection with any business, transaction, or series of transactions of such organization, government, or agency involving anything of value of $5,000 or more shall be fined under this title, imprisoned not more than 10 years, or both. The circumstance of this section is that the organization, government, or agency receives, in any one year period, benefits in excess of $10,000 under a Federal program involving a grant, contract, subsidy, loan, guarantee, insurance, or other form of Federal assistance. 75 United States v. Gonzales, 520 U.S. 1, 5, 117 S.Ct. 1032, 1035, 137 L. Ed 2d 132, 138 (1997) - 13 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES governmental agencies with the authority to indict violators for federal felonies and provides for a lower burden of proof.76 Since 1934, the statute has prohibited the making of "any false or fraudulent statements or representations...in any matter within the jurisdiction of any department or agency of the United States or of any corporation in which the United States of America is a stockholder."77 E. State False Claims Law While the federal FCA remains an available tool to combat construction fraud, many states have enacted individual statutory schemes and approaches to combat false claims in their states. A false claim occurs when any person or entity improperly receives from the government money or property through fraudulent means. Most state FCAs prohibit: • Knowingly presenting, or causing to be presented to the Government a false claim for payment; • Knowingly making, using, or causing to be made or used, a false record or statement to get a false claim paid or approved by the government; • Conspiring to defraud the Government by getting a false claim allowed or paid; • Falsely certifying the type or amount of property to be used by the Government; • Certifying receipt of property on a document without completely knowing that the information is true; • Knowingly buying Government property from an unauthorized officer of the Government, and; • Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the Government.78 The most commonly used of these provisions are the making of false claims and the presentation of false records to the states or government in order to get a false claim paid.79 The 1986 amendments to the federal FCA helped to strengthen the Act and provide states 76 See William J. Schwartz , Fairness In Criminal Investigations Under the Federal False Statement Statute, 77 Colum.L.Rev. v.2 316, 325-326 (1977), "Since agents may often expect a suspect to respond falsely to their questions, the statute is a powerful instrument with which to trap a potential defendant. Investigators need only informally approach the suspect and elicit a false reply and they are assured of a conviction with a harsh penalty even if they are unable to prove the underlying substantive crime." 77 Act of June 18, 1934, ch. 587, §35, 48 Stat. 996. Congress separated the false claims from the false statements provisions in the 1948 recodification, see Act of June 25, 1948, §§287, 1001, 62 Stat. 698, 749, and made unrelated substantive changes in 1996, see False Statements Accountability Act of 1996, Pub. L. 104- 292, 110 Stat. 3459. 78 See generally, Taxpayers Against Fraud, Model State False Claims Act, available at, http://www.taf.org/modelstatefca.pdf (last viewed 6/24/2007). 79 Id. - 14 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES with real guidance as to implementing their own false claim statutes. The 1986 amendments provided for: • The elimination of the "government possession of information" bar against qui tam lawsuits; • The establishment of defendant liability for "deliberate ignorance" and "reckless disregard" of the truth; • Restoration of the "preponderance of the evidence" standard for all elements of the claim including damages; • Imposition of treble damages and civil fines of $5,000 to $10,000 per false claim; • Increased rewards for qui tam plaintiffs of between 15-30 percent of the funds recovered from the defendant; • Defendant payment of the successful plaintiff's expenses and attorney's fees, and; • Employment protection for whistleblowers including reinstatement with seniority status, special damages, and double back pay.80 As you will see in the below tables, states differ as to the statutory scheme and approach they utilize to fight fraud. Not every state has adopted a FCA, and those that have do not utilize all the same components as the federal FCA. A False Claim Survey was sent to all fifty states addressing specific questions such as whether their state had implemented a statute for prosecution of false claims in construction projects; had abuse been detected; and had they encompassed procedures to detect and investigate false claims in construction contracts. A copy of the survey is attached as Appendix A. The graph below provides an overview of the laws utilized by the states to detect fraud. 81 Table 1: States with False Claim, False Statement, and Other Fraud Statutes STATES General False Claims Statutes Other False Claims Statutes False Statement RICO Qui Tam Action Criminal Penalties Included in the Statutes Civil Penalties Included in the Statutes Construction Related False Claims Included in the Statutes Alabama X X Alaska X X Arizona X X X Arkansas X (medical) X California X X X X Colorado X X 80 Id. 81 Due to the lack of response by the states, we are unable to draw definitive conclusions as to the extent of false claim construction fraud in the states. However, research suggests that most states do have a mechanism in place to combat fraud, whether through False Claims or False Statement statutes, or other civil or criminal penalties included in statute. The data compiled would suggest that states, while not reporting significant fraud, are concerned with fraudulent activity occurring and have mechanisms in place to combat fraud when it does occur. - 15 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES STATES General False Claims Statutes Other False Claims Statutes False Statement RICO Qui Tam Action Criminal Civil Penalties Included in the Statutes Penalties Construction Included in Related False the Claims Included Statutes in the Statutes Connecticut X (medical) X X Delaware X X X X X D.C. X X X X Florida X X X Georgia X X X X Hawaii X X X Idaho X (wages & other comp.) X X Illinois X X X X Indiana X Iowa X X Kansas X (medical) Kentucky X (advertising) X Louisiana X (medical) X X Maine X X X X Maryland X X Massachusetts X X X Michigan X (medical) X X Minnesota X X(medical) X X Mississippi X X X X X Missouri X(medical) X X Montana X X X Nebraska X(insurance employee) X Nevada X X X X New Hampshire X X X New Jersey X X New Mexico X (medical) X X New York X X X N. Carolina X X N. Dakota X X Ohio X X X Oklahoma X X Oregon X(medical) X Pennsylvania X X Puerto Rico X(insurance) X Rhode Island X X X S. Carolina X X S. Dakota X (theft by deception) X X Tennessee X (medical) X X Texas X (medical) X Utah X X X X - 16 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES STATES General False Claims Statutes Other False Claims Statutes False Statement RICO Qui Tam Action Criminal Civil Penalties Included in the Statutes Penalties Construction Included in Related False the Claims Included Statutes in the Statutes Vermont X X X Virginia X (taxpayer) X X X Washington X X W. Virginia X (taxpayer) X X X Wisconsin X X Wyoming X X TOTALS 23 16 26 1 8 27 32 13 Most states have some type of statutory mechanism in place to address fraud. As stated earlier, twenty-three (23) states have some version of a general false claim statute. (See Appendix B for examples of state false claim statutes). False claim statutes vary significantly from state to state, especially in regard to civil and criminal penalties assessed, who investigates the violation, who can file suit, the standard of proof required, damages awarded, and the statute of limitations. The one common factor among most states is that the violator has to knowingly make, cause, present, or conspire to make false or fraudulent claims or statements. Unfortunately, some states have no FCA enforcement measures in place to combat construction fraud. Additionally, sixteen (16) states have other false claim statutes that refer to medical, insurance or taxpayer fraud. Reports of significant false claims include use of materials that did not meet specifications, use of non-minority crews to perform DBE work, non-minorities claiming DBE compliance rates, and an overall filing of general false claims. Similarly, twenty-six (26) states have false statement statutes. For example, Missouri has indicated that while they do not have a state FCA, false construction claims would have to be prosecuted as stealing by deceit, executing a false affidavit under Sections 575.050, Missouri Revised Statutes, or making a false statement under Section 575.060, Missouri Revised Statutes. Additionally, while they have not filed any state false claims, there have been three federal false claims filed in the last five years. The US Department of Justice has prosecuted cases in Missouri involving federal-aid construction contracts under 32 USC §3729. In addition, one (1) state (Delaware) has a RICO statute that deals with fraud and eight (8) states retain qui tam actions. Thirteen (13) states have false claim statutes that specifically address construction fraud. Finally, most states include some civil or criminal penalty in their fraud statute. Thirty- two (32) states have civil penalties included in their fraud statutes and twenty-seven (27) states have criminal penalties included in their fraud statutes. - 17 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES We did not receive a large response from states as to the internal procedures they utilize to detect fraudulent activities in their state. The responses we did receive are outlined below in Table 2. Table 2: False Claim Survey—Examples of State Responses to False Claim Abuses, Procedures and Legal Tactics to Detect Fraud, and Improvements Needed82 REPORTING STATES Procedures in Place to Detect and Investigate False Claims in Construction Contracts False Claim Abuses that Have Occurred in Construction Contracts in Your State Legal Devices, Tactics, or Techniques Used to Prosecute False Claims in Construction Contracts Improvements to Your Fraud Prevention Protocols Needed and/or Recommended Recommendations to Improve This Area Iowa No formal procedures in place None There have been no known false claims N/A None Maryland N/A No answer No answer Revision of Bid Affidavits to clarify which criminal convictions must be disclosed No answer Missouri When informed of potential false claims, Audits and Investigations opens an investigation and seeks assistance from applicable federal agencies when appropriate Contractors using material that did not meet specifications, contractors using non- minority crews to perform DBE work but claiming contract rates. Through investigation and cooperation with federal agencies. Various items are now under consideration, including discontinuing the practice of making public the plan holders list, requiring prime contractors to declare who their large subcontractors are at the time of bidding; and changing the non-collusion certification in the standard contract to make it more obvious. Missouri DOT is also scheduling fraud awareness training. Strengthen criminal sanctions and make fraud detection training a higher priority. Virginia N/A N/A N/A N/A None West Virginia 1. West Va. Div./Highway Contract Administration and District personnel monitor and refer to Management and Legal Division 2. West Va. Div./Highways Auditing Division also No answer No answer More vigorous auditing None 82 Due to the lack of response to the False Claim Survey, we are unable to draw definitive conclusions as to the extent of false claim construction fraud in the states. - 18 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES REPORTING STATES Procedures in Place to Detect and Investigate False Claims in Construction Contracts Legal Devices, Tactics, or False Claim Abuses that Have Occurred in Construction Contracts in Your State Techniques Improvements to Used to Your Fraud Prosecute False Prevention Claims in Construction Contracts Protocols Needed and/or Recommendations to Recommended Improve This Area reviews project records and performance 3. If fraud appears, there is a referral to the West Va. Dept./Admin.- Purchasing Division and/or to the County Prosecutor and/or to the Legislature’s Commission on Special Investigations 4. If F.A. project, monitoring by and referral to FHWA and OIG 5. After consultation with FHWA and USDOT-OIG, referral to the US District Attorney While the majority of states that responded to the False Claim survey did not provide recommendations on how to improve fraud detection and prevention, Missouri did recommend the need to strengthen criminal sanctions and make fraud detection training a higher priority. Other states such as West Virginia responded to internal improvements needed and recommended more vigorous auditing of construction contracts. Additional research examples of methods to address fraud that were provided by USDOT Inspector General Kenneth Mead at the 2004 National Fraud Awareness Conference uncovered: • The Connecticut DOT has a good model for federal-state cooperation. Its engineering bureau makes timely referrals of irregularities to internal audit, whose probes have become the cornerstone for a successful federal prosecution. • The Illinois DOT has mechanisms to improve project oversight, which include an independent oversight entity. • The Florida DOT has a Dispute Resolution Process, which is designed to promptly resolve contractor disputes to reduce cost overruns and claims. • The Oklahoma DOT has a dedicated investigative unit that is aggressively investigating fraud in partnership with the USDOT and other federal law enforcement agencies. • Maryland and Virginia have taken a proactive approach to oversight of projects on a number of fronts, including periodic audits to ensure invoice changes are valid and reasonable. - 19 -