Recently, due to the Coronavirus outbreak, we have been testimonies of a new situation where new frauds and new laws have been announced. On March 18th, the President of the United States, Donald Trump has issued an Executive Order allowing the Defense Production Act (or DPA) to take action in cases involving the new COVID-19 pandemic. The new Executive Order provides the federal government with the necessary power to compel companies or individuals to produce personal protective equipment and other medical supplies. It also forbids companies and individuals from hoarding such pieces of equipment.
Since the day on which the US President invoked the DPA, many things have changed. From that date, our understanding of the virus and its effect has significantly shifted causing companies throughout the country but also across the world to scramble to meet new demands. The demand for respirators, face masks, face shields, sanitizers, gloves, and other newly essential items is unprecedented. Furthermore, the US DOJ (which is the Department of Justice if you don’t know it yet) has just launched, under the DPA, its first prosecution related to the coronavirus outbreak.
What Federal Prosecutions Fall Under the Defense Production Act?
Because of the nature of the DPA, and the special circumstances under which it has been recently invoked, it can be safe to expect at least two main types of cases being pursued against both businesses but also individuals. The DOJ has already shown that businesses and individuals that are found guilty of hoarding necessary supplies and selling them above their market value will be prosecuted. Additionally, we can expect to see a considerable amount of cases of companies supplying Personal Protective Equipment (also referred to as PPE), ventilators and other essential medical items to be charged with government contract fraud.
What Does “Hoarding and Price Gouging” during this New Coronavirus Outbreak Mean?
The Attorney General William Barr, one of the leaders of the country’s fight against hoarding and price gouging during this COVID-19 crisis, refers to the DOJ’s intervention as one that will prevent bad actors from illicitly profiting from the pandemic. His words are “If you are amassing critical medical equipment to sell it at exorbitant prices, you can expect a federal agent to knock on your door”. And his quote is not an exaggeration. His statement was made in a recent press release in which he announced the first investigation of hoarding and price gouging by the Department Of Justice and Under the DP Act during this new coronavirus outbreak.
The DPA Policy Coordinator, Peter Navarro is also quite serious about the FBI’s involvement to fight these kinds of fraud. The investigation mentioned above is according to Navarro only the first of many that are underway. Not only FBI agents but also other law enforcement agencies are working to track down every tip and any kind of lead they get with the aim of fighting the challenge, also thanks to massive federal resources that have been invested in such efforts. The policy coordinator, is warning the individuals and companies found to hoard critical supplies and selling them above market value to profit from them, to turn them over to local authorities or the federal government if they do not want to risk prompt seizure by the federal government.
That means that the Department of Justice and the FBI, together with other federal and state law enforcement agencies are now active in targeting businesses and individuals suspected of hoarding Personal Protective Equipment and other supplies. In the case authorities discover a case of hoarding, the DOJ will pursue criminal charges and all the supplies will be charged by the government.
The top law enforcement agency of the country has claimed that penalties for such crimes will include up to one year of federal imprisonment, as announced in a subsequent press release following the criminal complaint filed as a result of the first hoarding investigation by the DOJ.
What is also important to note is that individuals accused of price gouging during this new coronavirus pandemic or even hoarding will face charges at the state level. Indeed, there is not a federal statute yet directed to price gouging (which explains why the DOJ is pursuing these cases under the DPA), but many states do have price gouging laws that apply at all times, but specifically during times of national or states emergencies. On top of the DOJ and the FBI, also general attorneys are actively targeting such crimes during this pandemic, while prosecutors at the state level have been given the power to fine or to incarcerate individuals found guilty of the accusations mentioned above.
What Is the Government Contract Under the Defense Protection Act?
Price gouging cases and hoarding are not the only crimes that are pursued by the DOJ. Indeed, the Department of Justice is also pursuing charges for government contract frauds under the Defense Production Act against companies engaging in illegal practices while supplying Personal Protective Equipment, test kits, ventilators, and other essential medical items.
Companies that manage to win contracts with the federal government are indeed subject to rules and regulations that need to be strictly met. The larger companies must have dedicated departments to maintain compliance with the federal contract. Those companies that have little or even no experience with federal government contracting might consider immediately supply products under the DPA a considerable compliance risk, and remember that compliance deficiencies can lead to very serious negative consequences.
Companies must make compliance a priority, even when called to supply the federal government with their products. That results in a need for quick adaptations and to the creation of appropriate policies and procedures to reach federal compliance.
Here are some examples of potential allegations in fraud cases of federal government contracts involving the DPA.
Negotiations Act Violations (TINA)
The Truth-in Negotiation Act provides government contractors with a legal obligation to deliver clear and accurate pricing and cost information. Inaccurate or incomplete information might result in an accusation of contract fraud, which can lead to steep penalties.
Inflating the Cost of Labour or Materials Illegally
Inflating the costs of both material and labor can lead to prosecution as well. Companies must rely on accurate data to calculate the cost of meeting the demands asked for and ensure they can substantiate the figures provided.
Delivering PPE, Tests, Ventilators or other types of essential equipment with low-quality standards
Delivering substandard products can lead to fraud charges, as contractors must adhere to specifications, as sanctioned by federal contracting rules. While such regulations apply in all situations. it is especially important in the manufacturing of PPE, Covid-19 test kits, and other essential medical equipment. Underperforming companies that have committed to meet some specific requirements will face heavy scrutiny when not meeting such requirements.
The Substitution of Inferior Materials in Violation of the Contract
The substitution of materials of inferior quality without an approved change in the order can result in contract fraud allegations. Indeed, with a government contract in place, the contract has to comply with all the terms and specifications agreed on.
Frauds Involving Quality Control
With timelines are compressed during this pandemic, quality is still an essential part of a product. Government contractors are required to company with the quality specifications agreed on, failing to perform quality control or even misrepresenting quality control testing are common frauds that will be prosecuted under federal government law.
Improper Allocation Of Costs to A Government Contract
Companies need to ensure the right allocation of all costs, especially when contracting with the federal government. Costs include all shared costs that must be allocated between private clients and the government. A common practice that usually gets companies into trouble is the allocation of additional costs yo the government as a way to increase the company’s profit margin or to pass on savings to other companies.
Using Foreign Suppliers deemed ineligible under the Defense Production Act
The DPA sets restrictions on the use of foreign suppliers by government contractors. The use of prohibited supplies under a DPA contract is a form of contract fraud that can lead not only to the termination of the contract but also to other penalties and allegations.
You might have noticed that the potential of getting involved with legal hurdles when supplying the government under the DPA is considerable. Even in the case, a company is sure about the ability to supply all the necessary items on time, in case of failure, no company will be immune from prosecution.
Companies or individuals charged with government contract fraud need to have the right strategic defense with the aid of federal defense counselors that can help to mitigate the consequences of any illegal practice, whether intentional or not.
Contact the Defense Attorneys of The Criminal Defense Firm
Individuals or companies targeted by the DOJ or the FBI should take immediate action if they want to avoid steep federal charges. Here at The Criminal Defense Firm, we have the right team of federal defense lawyers and federal agents who, thanks to their experience and record of success in high stake cases, will be able to protect you and your company.
Call us today at 866-603-4540 or contact us online now to discuss your case with our defense team in all confidence and to receive a free case assessment.
Dr. Nick Oberheiden is a national litigation and trial criminal defense attorney who practices exclusively in the area of federal law.