Throughout our nation’s history, wars have inspired changes to our government contracting system. Given the nature of preparing for and implementing military action and reconstruction efforts, the Government has frequently sought and continues to seek goods and services from private contractors successfully to fulfill its mission. Whether the result of necessity or (as is so often the case in recent years) a response to prevailing public sentiments, the changes to the procurement system that follow resonate through-out the government contracting community.


For instance, the Civil War has been credited with spawning the termination for convenience clause and the original False Claims Act, which was designed to prevent "rampant fraud and corruption in obtaining pay from the government during the civil war" for such succulent treats as “spavined beef” and “sawdust” based coffee. The second World War and the Korean war gave us The Renegotiation Act, which required contractors to renegotiate contractual terms if their profits were deemed excessive. Some of these war-inspired measures have withstood the test of time to become staples of federal procurement, while others have been rescinded, sometimes only later to be reauthorized.


Currently, with the wars in Afghanistan and Iraq still ongoing, the outsourcing of traditional military functions at an all-time high (e.g., approximately $50 billion has been earmarked to private contractors in Iraq for relief and reconstruction efforts), and in response to allegations of widespread fraud and abuse, the most recent reincarnation of wartime government contracting reform has arrived. On October 9, 2007, the House of Representatives, by a resounding vote of 375-3, passed the War Profiteering Prevention Act of 2007 (H.R. 400), which had been introduced by Representative Neil Abercrombie of Hawaii. The bill will now head to the Senate for consideration.


Although Senator Leahy of Vermont introduced a similar version of the Act in 2003, the House removed that Act from the final version of the appropriations bill and, hence, it never became law. Recently, however, there have been renewed calls for increased contractor oversight and accountability during military and reconstruction efforts. The heightened attention stemmed, in part, from Defense Contract Audit Agency testimony before Congress that identified $10 billion in questioned or unsupported costs. The urgency was compounded by the belief that the $10 billion figure may be understated, given that the Special Inspector General for Iraq Reconstruction has yet to conclude 70 open investigations. Attention also has been drawn to ten companies that have paid $300 million in fines and yet continue to be awarded new contracts in Iraq. Lastly, Congress has questioned the adequacy of the current regulatory and statutory regime because of the scant number of prosecutions under the applicable provisions.


The War Profiteering Prevention Act of 2007, as passed by the House, is designed to punish companies that have defrauded the government, or that have overvalued goods or services, in connection with military and reconstruction missions, and to deter such conduct in the future. The Act is targeted specifically toward United States government missions overseas and includes within its reach contracts with provisional authorities (as a direct result of the Custer Battles case, in which the United States District Court for the Eastern District of Virginia dismissed a fraud case, in part, because the alleged fraud was committed against the Coalition Provisional Authority and not the United States government). The salient provisions of the Act are as follows:

  • A fine of not more than $1,000,000, or a prison term of up to 20 years (or both), for (a) knowingly defrauding the government or provisional authority, or (b) materially overvaluing any goods or services with the intent to defraud.
  • A fine of not more than $1,000,000, or a prison term of up to 10 years (or both), for (a) falsifying or concealing a material fact, (b) making a false statement or representation, or (c) using a false writing or document.
  • An extension of federal extraterritorial jurisdiction for any offenses contemplated by the Act.
  • Granting venue in (a) any district where any act in furtherance of the offense took place, or (b) any district where any party to the contract or provider of goods is located.
  • Providing for criminal forfeiture of any proceeds or property derived from the fraudulent transaction.
  • Making a violation of the Act a predicate offense for money laundering and the Racketeer Influenced and Corrupt Organizations Act (RICO).

As justification for the Act, Congress cited the lack of contractor accountability, as well as fraud, waste and abuse. Congress also asserted that the legislation was necessary to fill a void in the government’s enforcement mechanisms. In particular, Congress relied on the absence of any statutory provisions directed specifically toward circumscribing war profiteering. Despite Congress’ purported justifications, even a cursory review of the current procurement regime reveals that there are numerous provisions in place to combat contractor fraud.


The Criminal and Civil False Claims Acts, 18 U.S.C. § 287 and 31 U.S.C. §§ 3729-3732, already provide the government with an aggressive enforcement vehicle. Civil penalties range from treble damages (3 times the amount of damages the government sustained because of the false claim) and penalties of between $5,500 – $11,000 for each false claim to liability to the Government for costs of the civil action brought to recover the penalties or damages. Where a relator is involved, the defendant, if liable, is responsible for the relator’s attorneys fees as well.  The criminal penalties include up to 5 years in prison and/or a fine in an amount equal to the greater of (1) $250,000 ($500,000 if a corporation), or (2) twice the gross gain or gross loss incurred. However, the Criminal and Civil FCAs are not mutually exclusive and a contractor can be found both criminally and civilly liable – exposing the contractor to the possibility of severe monetary damages and individuals to prolonged imprisonment.


Apart from the above-referenced statutory FCA provisions, the government also has numerous other provisions at its disposal. In connection with fraud involving contracts exceeding $1,000,000, the Major Fraud Act of 1988 can provide for penalties up to $5,000,000 and/or imprisonment of up to 10 years. The False Statements Act, 18 U.S.C. § 1001, likewise already provides the government with a tool to prosecute individuals or companies that make false statements in their dealings with the government. Civil and criminal penalties mirror those applicable to the Criminal False Claims Act. See 18 U.S.C. § 3571. Moreover, under the Truth In Negotiations Act, the government may pursue a defective pricing claim and, if successful, would be entitled to a price adjustment where the contractor has submitted data that is not current, complete or accurate.


In addition, the government could invoke potentially the Mail and Wire Fraud Act, 18 U.S.C. §§  1341, 1343, and the Conspiracy statutes, 18 U.S.C. § 286, 371 – both of which could lead to criminal and civil liability. Lastly, the government could seek to either suspend or debar a contractor that engages in inappropriate activities. See FAR 9.4. It, therefore, appears that the current regulatory and statutory landscape provides the government with the more than ample tools for deterring fraud, even though the provisions may not be labeled as anti-profiteering legislation.


Another issue that looms on the horizon is whether the new anti-war profiteering provisions will be any more effective in practice than its general fraud counterparts. As acknowledged by Congress, investigations of certain matters in military theaters pose unique challenges. Without the ability to effectively gather evidence, it may be difficult to satisfy the applicable burdens of proof. This is especially so where the War Profiteering Prevention Act of 2007 appears to contain a similar intent standard to that contained in other fraud provisions. Moreover, there are indications that the DOJ simply was not pursuing allegations of contract fraud as aggressively as in past years, finding healthcare fraud a more lucrative pond in which to cast its hook.


In other words, Congress’ conclusion that the current statutory and regulatory regime is inadequate because there are not enough prosecutions is a non-sequitur. The new legislation may encounter similar hurdles in application, irrespective of the increased civil and criminal liability and the fact that the Act is geared specifically toward war profiteering. Although the House has expanded the Military Extraterritorial Jurisdiction Act (H.R. 2740) and imposed additional investigative responsibilities on the DOJ and FBI, the breadth and effectiveness of their obligations in this context has yet to be proven.


Finally, Congress needs to step back from the political opportunism that underlies this legislation and fairly consider certain facts – work in war zones is dangerous; risk should be rewarded; many of these contractors are performing work that our Government performed in past conflicts but is inadequately staffed to perform at the present time. People are dying in the performance of this work, and if our Government does not want them to earn an increased profit for taking risks the Government itself will not, then the Government should simply forego the acquisition of the goods and services. Finally, there is nothing wrong with earning a profit, even a large one, and if the contractor discharges it obligations under TINA so that the profit margin is disclosed before the agreement on price, then all the Government has to do is “Just say no.” It is duplicitous of Uncle Sam, with full knowledge of the deal and of the anticipated profit, to say “Yes” with his fingers crossed behind its back.


Authored by:

Marko W. Kipa

(202) 772 5302