Since 1986, the False Claims Act has been the leviathan force behind combating waste, fraud, and abuse in federal spending. On January 15, 2025, the Department of Justice (DOJ) announced that the federal government obtained $2.9 billion in FCA recovering in 2024, a larger share than the previous year. The Department of Justice has historically used the FCA to target large-scale fraud (this past year, for example, DOJ secured a $345 million settlement from a healthcare network for its illegal scheme to recruit physicians for the purpose of capturing their lucrative downstream referrals). However, because of the lengthy and costly process, FCA actions focus on cases that involve large and systematic fraud against the government, and the FCA’s wide net, in recent times, has not been suitable to catch the smaller fish…until now.
On December 23, 2024, the narrower net to catch fraud arrived in the form of the long-contemplated Administrative False Claims Act (AFCA). President Biden signed the “Servicemember Quality of Life Improvement and National Defense Authorization Act for Fiscal Year 2025,” with Section 5203 of the Act revitalizing an old and dormant mechanism, the Program Fraud Civil Remedies Act of 1986 (PFCRA), 31 U.S.C. § 3801, et seq, for combating smaller fraud cases at the administrative level.
AFCA now allows federal agencies to pursue smaller False Claims Act cases at the administrative stage. Instead of committing to the costly and lengthy process of litigating the action in the federal courts, the agencies may instead impose civil penalties and assessments after proceeding before administrative law judges. While this power was previously limited to false claims of $150,000 or less, under AFCA, agencies may now pursue actions for up to $1 million administratively.
Other changes are noteworthy: for example, while a false statement by itself does not create an FCA cause of action when that false statement did not result in the submission of a false claim, AFCA extends to false statements in the absence of any claim. See 13 CFR § 142.2.
Equally as important, AFCA expands the resources the DOJ can dedicate to pursuing smaller false claims. This includes expanding the number of DOJ officials who can review claims but also, critically, providing a mechanism for the agency to recoup the costs of investigating the claims!
In a typical AFCA claim, the agency’s inspector general would initiate an investigation and would have the power to issue subpoenas for records to aid the investigation. The investigation will culminate in a report that is submitted to the general counsel of the agency. Should the general counsel find the allegations viable, the matter is then referred to the DOJ so that the Department can consider authorizing the agency to commence an action under AFCA. At this stage, the agency general counsel will issue notice of the allegations to the accused party who can normally request a hearing within 30 days, but to make ACFA investigations even more cost-friendly for the agencies, the Act also allows the agencies, at this stage, to compromise and settle the allegations under 31 U.S.C. § 3802(j).
If a settlement is not reached, the agency’s administrative law judge (or another presiding official authorized by the Act) will decide if the allegations are supported by preponderance of the evidence standard. AFCA then allows the maximum damages of $5,000 per claim or false statement but, the government can recoup double that amount if the government paid the falsely claimed amount. The ALJ’s decisions can be appealed to the head of the agency, and then to a U.S. district court.
AFCA’s passage highlights the need for contractors and grantees to become familiar with the administrative proceedings that each relevant agency has adopted to pursue its AFCA authority, and to stay abreast of any new regulations the agencies might adopt to streamline their unique AFCA procedures. See 32 C.F.R. 277 (covering DoD components); 22 C.F.R. 35 (covering the Department of State); 6 C.F.R 13 (covering the Department of Homeland Security). For example, agencies have adopted unique procedures and limitations for how to file a motion before the ALJs. Compare 32 C.F.R. 277(BB)(6) (noting that failure to raise defenses before a hearing may constitute waiver) with 22 C.F.R. 35.28 (no waiver rule) and 6 C.F.R 13.28 (no waiver rule). Contractors should also seek counsel on the panoply of defenses available against agencies’ investigative overreach; as an example, AFCA’s enforcement must be reconciled with the Supreme Court’s recement decision in SEC v. Jarkesy, 603 U.S. 109 (2024) where the Court curtailed the Securities and Exchange Commission’s practice of relying on administrative law judge in penalizing fraud. The Court found that administrative law judges lack the power to impose such penalties which jeopardize an individual’s right to jury trial in proceedings that while administrative are really “legal in nature.” Id. at 110. In many cases, contractors may not want to wait until the agency reaches its final decision to seek judicial review and can instead challenge the scope of any administrative subpoenas as unduly burdensomeness or seeking irrelevant information.
Companies should be cognizant to consult counsel at the first sign of an AFCA action or inquiry. Fluet’s Government Contracts Team will continue to monitor the shifting landscape of administrative false claims investigations and advise clients throughout this development on how to stay compliant, mitigate risk, and how to navigate potential investigations.
