False Claims Act Allegations Against Surety Professionals Are a Very Real Risk

NASBP identified several years ago a potential threat on the horizon against surety professionals:  Department of Justice (DOJ) investigations and allegations of fraud, pursuant to the False Claims Act (FCA) and other enforcement mechanisms, against surety professionals whose construction contractors had defrauded the government in some manner, particularly by contractors that falsely certified their small business status in order to obtain government contracts. And that prediction has come to fruition.

And while we are not predicting that the sky is falling, we do want surety professionals to understand the risk presented by the growing interest by federal enforcement officials in FCA enforcement against sureties and bonding agencies. Most in the industry likely are aware of United States ex rel. Scollick v. Narula, in which the complaint alleges that numerous contractor defendants falsely certified their status in order fraudulently to obtain government contracts—and that the sureties, the agency, and the bond producer (bond defendants) allegedly knew the construction companies had falsely claimed their small business status. Part of the allegations includes that the bond defendants furthered the fraud by issuing or obtaining issuance of the bonds. In essence, the government’s reasoning comes down to this:  but for the bond being issued by the two sureties through the agency and the producer, the fraudulent bid submissions would not have been awarded.

The Scollick case continues to drag on. The last public intelligence about the case is that the mediation scheduled for mid-March 2020 was postponed due to the Coronavirus pandemic and shelter-in-place orders, with a new mediation date currently scheduled for July 8, 2020. So, the surety world remains anxiously awaiting the outcome of that case. Other such cases have cropped up in the meantime.

For instance, this spring of 2020, two construction companies and their bonding agency and producer agreed to pay more than $4.5 million to resolve fraud allegations involving contracting opportunities for veteran-owned small businesses and businesses operating in historically underutilized business zones (HUBZones). As part of the settlement, the construction companies admitted that “their conduct violated federal regulations designed to encourage contract awards to service-disabled veteran-owned small businesses and small businesses operating in HUBZones.”

A recent press release from the U.S. Attorney’s Office in the Northern District of New York provided, in part, the following:

The settlement with [the agency and bond producer] resolves allegation that those parties knew or should have known that [the construction companies] were affiliated in violation of SBA regulations and that those companies took steps to hide their affiliation from the government to obtain and receive payment on government set-aside contracts. Their decision to help [the contractor] obtain bonding was a critical action in furtherance of [the contractors’] fraud on the government, and served as a substantial factor in causing [the contractor] to submit false claims for payment to the United States.

The federal government has clearly been broadening the reach of the False Claims Act, and it behooves all surety professionals—and their contractors—to take this risk very seriously. Already government actions have been taken, under the FCA, against those companies that have allegedly participated fraudulently in the Paycheck Protection Program. NASBP is dedicated to educating it membership about the very real risks of allegations under the FCA. Everyone may be lulled into thinking: “Oh, that won’t happen to my agency; we’re good players.” But, pursuant to the FCA, the government has chosen to see the bond producer as an indispensable component of their investigations into FCA claims. We urge you to become knowledgeable about ways to mitigate FCA allegation risks. This includes, among other things, education and training, recognition of red flags, asking certain questions of bond principals, and involving knowledgeable legal counsel to guide you through the intricacies of FCA elements.

NASBP has been proactive in producing and disseminating educational offerings on FCA risks to surety professionals, provided in various formats. A partial list of these offerings includes the following:

1. “The Bond Producer’s and Surety Company’s Guide to Mitigating False Claims Act Risk,” in Surety Bond Quarterly, Winter 2019, and Part Two in Surety Bond Quarterly, Spring 2020
2. “Managing Emerging Compliance and False Claims Act Risks for Bond Producers and Sureties,” Virtual Seminar, November 5, 2019.
3. “False Claims Act and Enforcement Risks of the Paycheck Protection Program,” Virtual Seminar, May 7, 2020.
4. “Stimulus Law Paycheck Protection Program and False Claims Act Risk,” Podcast #9, May 5, 2020.
5. “False Claims Act Implications for Surety Professionals,” NASBP Virtual Event: Bonding with Bandwidth, May 18, 2020.
6. “Top Five List for Mitigating Scollick-driven Risk for Surety Industry Professionals,” “False Claims Act and Other Potential Liability for Misuse of Paycheck Protection Loans,” “What Surety Bond Producers and Underwriters Need to Know About False Claims Act and Enforcement Risks of the Paycheck Protection Program,” Blogs.

If you have not already availed yourself of these valuable and timely resources to help you mitigate FCA risks, NASBP cordially invites you to do so now. We will continue to gather, produce, and post resources to help you avert the very real danger of FCA allegations, especially as developments in this risk arena evolve.