Biting the Hand

Few large corporations are as dependent on public sector clients as the consulting giant Booz Allen Hamilton. During its last fiscal year, 97 percent of its $9 billion in revenue came from the federal government, thanks to thousands of contracts with the Pentagon, the intelligence agencies and a wide range of civilian departments.

Given this close relationship, Booz Allen should be on its best behavior in dealing with Uncle Sam. Instead, it has been biting the hand that feeds it.

The Justice Department recently announced that the company has agreed to pay $377 million to resolve allegations that it violated the False Claims Act (FCA) by improperly billing federal agencies for costs relating to its limited amount of non-governmental work. The case was initiated by a whistleblower lawsuit filed by a former employee.

The DOJ announcement is unusual in its lack of specificity. Although it calls the case “one of the largest procurement fraud settlements in history,” the press release does not mention individual federal contracts that were overcharged or even the number that were affected by the company’s illicit practices. This may be because Booz Allen works on many classified matters, but the vagueness also suggests that the misconduct has been widespread and not an isolated lapse.

This is problematic for a firm that touts its integrity and highlights its inclusion in the Ethisphere list of the World’s Most Ethical Companies. This is despite the fact that Booz Allen faced a previous FCA case in 2006, when it paid over $3 million to resolve allegations that it and other consulting firms improperly billed the federal government for travel expenses.

Booz Allen’s new case also raises questions about the FCA itself. The law, enacted in the 1860s to deal with unscrupulous federal contractors during the Civil War, is used by the Justice Department to deal with a wide range of fraudulent behavior linked to government programs.

In Violation Tracker there are more than 2,400 federal FCA cases dating back to 2000 with total penalties of $47 billion. Booz Allen is hardly the only company with more than one entry in this category. Boeing, Lockheed Martin and Northrop Grumman have each paid FCA penalties more than a dozen times. Numerous large healthcare companies, both for-profit and non-profit, are also repeat FCA offenders.

This high degree of recidivism suggests that the FCA is not serving a very effective deterrent role. This may relate to the fact that FCA cases are all civil rather than criminal cases, and the penalties are usually quite affordable for the companies involved. Even the name of the law may be an issue: the phrase “false claims” gives the impression these cases involve nothing more than accounting discrepancies. In fact, what is involved is a form of fraud.

Contractors might be more inclined to deal honestly with federal agencies if they faced the prospect of being charged under something called the Fraudulent Contractor Act. Beyond that, federal prosecutors should look for ways to bring more FCA cases that also include criminal charges under other statutes.

DOJ does this from time to time—there have been 19 hybrid settlements in the past five years. The problem is that in many of these cases the defendant is offered a deferred or non-prosecution agreement, which largely nullifies the impact of the criminal charge.

The time has come for prosecutors to deal more aggressively with corporations that cheat federal agencies and thus the public.