Congress passed the False Claims Act in 1863 largely in response to rampant defense contracting fraud. Union soldiers received cardboard boots instead of leather ones, crates filled with sawdust instead of muskets, and other low quality goods during the Civil War. While much has since changed in the area of defense contracting, fraud remains a major problem. The Department of Defense (“DOD”) is the world’s largest employer and it spent $778.57 billion in 2012 on national defense, a figure which accounts for approximately one-fifth of all government spending. A large portion of this spending can be linked to the approximately 235,000 defense contractors with whom the federal government enters into contracts. In FY 2011, the top 100 defense contractors accounted for $236.4 billion in federal spending. The top five largest contractors, Lockheed Martin, Boeing, General Dynamics, Raytheon, and Northrop Grumman, accounted for $102.14 billion alone.
Defense contracting fraud is arguably one of the most damaging types of fraud to the government. This is because it affects not just our national security, but also the safety of members of the U.S. Armed Forces. If soldiers receive defective or unsafe equipment, it can lead to a disaster at home or on the battleground. Moreover, since many defense contracts involve highly complex and classified weapons systems, the government heavily relies upon the contractors themselves to ensure they are safe. In cases where quality control is lacking, the results can be catastrophic.
Although the government has taken efforts to eliminate fraud among defense contractors, government spending in this area remains highly prone to fraud. Therefore, defense contracting fraud remains one of the biggest areas for False Claims Act litigation. Whistleblower lawsuits under the qui tam provisions of the False Claims Act have proven an effective tool at detecting and prosecuting instances of defense contractor fraud.
Types of fraud in this area include:
- Product Substitution
- Cross-Charging/Cost Shifting
- Truth In Negotiations Act Fraud
- Iraq/Overseas Defense Contracting Fraud
Since the United States entered Afghanistan in 2001 and Iraq in 2003, instances of defense contracting fraud have skyrocketed. In its 248 page report to Congress, the bipartisan Commission on Wartime Contracting concluded that the federal government has lost between $31 and $60 billion to defense contracting fraud due to those conflicts.
In 2007, the U.S. military contracted with a private company to pave a sixty four mile mountain road between the Afghan towns of Khost and Gardez. They estimated the cost of the project at $69 million. In the end, the cost swelled to $176 million. Most of the money was spent on security in the form of bribes to a local warlord known as "Arafat." His whereabouts are now unknown. The New York Times subsequently reported that a significant stretch of the highway completed just six months ago was already falling apart and remains treacherous.
In 2007, the U.S. Air Force awarded an $18 million contract to CH2M HILL to construct facilities at Camp Phoenix, a U.S. Army installation in Afghanistan. The contractor subsequently hired a subcontractor who did not pay his workers and fled the country with $2 million. He used that money to build himself a number of villas abroad. His unpaid workers stole a number of generators and other materials from the base. The resulted delays left hundreds of NATO troops without suitable housing for over a year.