What is “Reverse False Claims”?
Reserve false claims is a section of the False Claims Act, America’s first whistleblower law and one of the strongest whistleblower laws in the United States.
Although the False Claims Act (FCA) was originally signed into law in 1863, reverse false claims were not included in the FCA until 1986 when the major reforms under the False Claims Amendments Act were passed.
The updated text reads:
(a)Liability for Certain Acts.—
(1)In general.—Subject to paragraph (2), any person who—
(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,
Reverse false claims cases were further strengthened in 2009, when Congress passed the Fraud Enhancement and Recovery Act (FERA). The Act expanded liability under the False Claims Act. Before the FCA was amended, a relator had to prove that a false statement or record was created. Under the new 2009 amendment, however, a person was now liable not only for an action, but for knowingly concealing and improperly avoiding an obligation to pay or transmit money to the U.S. Government.
The FERA also defined the world “obligation” to include, “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based relationship or similar relationship, from statute or regulation, or from the retention of any overpayment.” This definition expanded the scope of what can be considered a reserve false claim.
The standard process for filing cases under the FCA applies to reverse false claims as well: any individual or non-governmental organization can file a qui tam lawsuit, in U.S. District Courts, on behalf of the United States government when they have knowledge of a defendant committing fraud involving the U.S. government.
Examples of Reverse False Claims Violations
The core principle of reverse false claims is that a wrongdoer has prevented the government from collecting what it is owed. These cases can take multiple forms.
One common example of a reverse false claim is the failure to return an overpayment to the government. Most government funding is tied to specific purposes and comes with requirements to return any unused funding. If an individual or company uses only a portion of the initial funding and doesn’t return what remains, that’s a reverse false claim.
Another common example would be custom violations. When goods are knowingly falsely stated, undeclared, undervalued, or misclassified on a customs form, an entity has kept the government from receiving proper compensation.
Similarly, knowingly making an incorrect statement on an application for a lease, permit, or loan administered by the government also counts as a reverse false claim.
A final example of a reverse false claims case is underpaying royalty payments owed to the government, like in the case of federal mineral leases.
Reverse false claims make it possible for whistleblowers to hold those making false declarations accountable and return proper compensation back into the hands of the U.S. government.
Customs Violations and Reverse False Claims
One of the most common types of reverse false claims center around customs violations. Customs duties are the second largest income source for the U.S. government, behind only the IRS. As a result, enforcement of these duties is a strong priority for the government.
Historically, the government enforced customs laws using the civil penalty provision (s.592) under the Tariff Act of 1930. However, since the FCA was amended in 2009, multiple whistleblowers have filed successful FCA cases exposing violations of customs and import laws.
In 2019 for instance, the U.S. found British womenswear retailer Selective Marketplace Ltd. guilty under reserve false claims for improperly avoiding U.S. customs duties owed on merchandise. Selective purposely split up shipments over $200 into multiple shipments of lesser value in order to avoid applicable duties.
In 2013, Ohio based Basco Manufacturing Co. agreed to pay the U.S. $1.1 million under a reverse false act claim for allegedly making false customs declarations to avoid paying antidumping and countervailing duties on aluminum extrusions. These duties play an important role in protecting the security of the United States economy by keep foreign companies from “dumping” products into the market at a lower price.
These are only two cases of many since the 2009 amendments. Reverse FCA liability has proven to be a powerful tool for the U.S. government. Unlike s.592 of the Tariff Act, the FCA provides powerful incentives for whistleblowers to come forward through its rewards and treble damages provisions. FCA also allows whistleblowers to initiate cases without government action, increasing the likelihood that customs violations will be discovered, and it has a broader reach than s.592 since it extends to U.S. purchasers of imported merchandise.