Infotech and the law: False Claims Act covers Iraq work

Eliza Nagle

The U.S. District Court for the Eastern District of Virginia issued a significant decision in the Custer Battles qui tam False Claims Act case.

Often associated with whistleblower laws, a qui tam lawsuit is initiated by a citizen on behalf of the government and alleges that a citizen or contractor performing a government contract has violated a law or regulation.

Custer Battles addressed a novel question: Does the act applies to Coalition Provisional Authority contracts?

The court concluded that the False Claims Act may apply, depending on the source of the funds used.

Custer Battles is accused by former associates of defrauding CPA of tens of millions of dollars received under two contracts in Iraq. Among other offenses, Custer Battles allegedly inflated invoices and created shell companies to pose as suppliers to increase contract costs.

The court engaged in an intricate analysis to conclude that the False Claims Act could apply to CPA contracts. The court focused on the source of funds used to pay the allegedly false claims. Ultimately, who owned the funds was the deciding factor as to whether the act applied.

The court found that if the funds used to pay Custer Battles came from the U.S. government, False Claims Act liability could apply. It is not enough for the United States to administer the funds. Instead, demand for payment from the United States must result in an economic loss.

The funds used to pay Custer Battles came from three sources: vested funds, seized funds and the Development Fund for Iraq. Vested funds were confiscated Iraqi government property that became U.S. property. Seized funds were money that American and coalition forces in Iraq seized that could be used for U.S. interests. DFI was Iraqi money that CPA administered on behalf of the Iraqi people and that never became U.S. property.

The court concluded that Custer Battles' claims for payment from vested funds or seized funds could invoke the False Claims Act because the money was U.S. property. Custer Battles' claims for payment from DFI would not invoke the act, because the money was not U.S. property and would not result in economic loss to the government.

What does this mean to contractors? For companies that hold CPA contracts, depending on the source of the funding, the False Claims Act could be applicable. This finding could have a ripple effect, resulting in initiation of more qui tam actions.

The court's ruling may come as a surprise to many contractors that, like Custer Battles, entered into CPA contracts unaware of the laws and regulations that might apply. The Custer Battles decision likely will be the first in a long line of such actions that will determine the liabilities of contractors engaged in Iraq.

The Custer Battles ruling also is another example of the increased scrutiny that contracts are receiving. Paul McNulty, U.S. attorney for the Eastern District of Virginia, recently created a procurement-fraud task force comprising investigators from the Pentagon and federal law enforcement. Its goal is to deter procurement fraud by tackling cases early on.

McNulty has said he has seen no evidence of an increased rate of procurement fraud, but government contracts generally are under increased scrutiny because of the swell in contracting since Sept. 11.

As a result, companies working at home and abroad may find themselves subject to more audits and investigations. While always vigilant, contractors should focus greater attention on compliance with the statutes, regulations and policies governing their contracts with Uncle Sam.

Eliza Nagle is an associate in the Government Contracts practice of DLA Piper Rudnick Gray Cary LLP in Washington. Her e-mail address is

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