The False Claims Act and the Energy Industry: Compliance Tips

The False Claims Act and the Energy Industry: Compliance Tips

The False Claims Act is an important law that energy companies need to understand and comply with. This law allows the government and whistleblowers to file lawsuits against companies that commit fraud against the government. There are big penalties for violating the False Claims Act, so energy companies need to make sure they have good compliance programs.

What is the False Claims Act?

The False Claims Act (FCA) is a federal law that imposes liability on persons and companies who defraud the government. The law includes charges for:

• Knowingly presenting a false claim for payment
• Knowingly making or using a false record or statement to get a false claim paid
• Conspiring to violate the FCA
• Knowingly concealing or improperly avoiding an obligation to pay the government

The FCA allows private citizens to file qui tam lawsuits on behalf of the government against companies they believe are committing fraud against the government. These private citizens are called “whistleblowers” or “relators.” The government may choose to join the whistleblower’s qui tam lawsuit.

If a company is found liable under the False Claims Act, it faces treble damages (triple the amount of the government’s losses) plus penalties between $5,500 and $11,000 per false claim. So the potential liability can add up quickly.

Common Types of Energy Fraud

Some common types of fraud that energy companies commit related to government contracts, grants, royalties, and regulations include:

• Overcharging on energy contracts
• Misusing federal grant funds for energy research projects
• Underpaying royalties owed for drilling on federal lands
• Falsely certifying compliance with environmental regulations to avoid fines
• Manipulating renewable fuel standards compliance
• Theft of oil or gas from pipelines (also called “tap” fraud)

For example, an energy company might report that it complied with all regulations for drilling offshore, when in reality it violated safety or environmental rules to cut costs. Or a biofuel producer might falsify lab test results to make it look like its fuel meets renewable standards when it does not.

Compliance Tips for Energy Companies

Here are some tips for energy companies to avoid False Claims Act liability:

1. Train employees on FCA compliance, monitoring for red flags, and duty to report misconduct
2. Perform thorough due diligence before signing government contracts or accepting grants
3. Implement rigorous auditing and testing to verify compliance and accuracy of reporting
4. Stay on top of changing regulations and adjust procedures accordingly
5. Encourage internal reporting by making it easy and safe for employees to speak up
6. Respond promptly to whistleblower complaints and government inquiries; investigate allegations
7. Impose consequences for violations and false statements
8. Consider self-disclosure if violations occur; DOJ may award credit for cooperation

Having strong ethics, compliance, and audit programs is the best way for energy companies to prevent and detect fraud. They should also make sure they have robust record-keeping practices.

Possible Defenses for Energy Companies

If an energy company gets sued under the False Claims Act, here are some potential defenses its lawyers may use:

• The company acted in “good faith” and tried to comply
• A contractor or subsidiary committed the fraud without management’s knowledge
• Regulations were ambiguous so any errors were unintentional
• The whistleblower’s allegations are speculative or lack evidence
• The government already knew the facts but still paid claims anyway

Companies can argue they did their best to follow complex rules. They may try to pin blame on a “bad apple” employee or shift responsibility to a subcontractor. But for these defenses to work, the company must show it had a reasonable and effective compliance program in place.

Penalties for Violating the False Claims Act

If an energy company is found liable for defrauding the government under the False Claims Act, it faces severe financial penalties including:

• Treble damages – Three times the amount of money the government lost due to the company’s fraud
• Civil penalties – Between $5,500 and $11,000 for each false claim made to the government
• Whistleblower rewards – The whistleblower who brought the FCA lawsuit may receive 15% to 30% of the total recovery
• Payment of legal fees – The company pays the legal fees for the whistleblower’s attorneys

In addition, guilty verdicts under the False Claims Act often spur other consequences like suspension/debarment from government contracting or negative publicity that could hurt the business.

Relevant Legal Cases

Here are a few recent legal cases where energy companies faced False Claims Act liability:

• Duke Energy paid $1.25 million to settle allegations it claimed renewable energy tax credits for ineligible solar facilities
• Gulf Interstate Field Services paid $85 million to resolve alleged royalty underpayments for natural gas produced on federal lands
• Colonial Pipeline paid $40 million to settle claims it misrepresented the amount of ethanol blended into its gasoline

As these cases show, False Claims Act enforcement against energy companies is common and may involve huge financial penalties.

Helpful Resources

Here are some helpful resources to learn more about the False Claims Act and energy industry compliance:

• DOJ False Claims Act Information
• False Claims Act Law Firm
• Whistleblower Law Firm
• False Claims Act Overview
• Fraud Management in the Energy Industry

Companies in the energy industry should consult with legal counsel to ensure they have effective False Claims Act compliance programs. The potential penalties for violations are severe.