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November 9, 2016

Best Practices: Civil Versus Criminal Liability for False Claims

by Norman E. Greenspan

At the August 2016 America East Conference for SBA Lenders, a general session was devoted to “Fraud Trends, Risk Factors and Tips on How to Avoid Becoming a Victim.”  Part of this presentation was an overview of the federal False Claims Act, 31 U.S.C. §3729 et seq., and its application to the SBA lending process.  There was also a presentation by the Assistant U.S. Attorney who led the investigation that resulted in the fraud convictions of employees of SBA loan broker Jade Capital.  Coincidentally, less than two weeks before the conference, the SBA and PNC Bank, the Lender for loans brokered by Jade Capital, entered into a settlement agreement whereby PNC agreed to pay the United States $9.5 million to settle claims under the False Claims Act in connection with the issuance of loans brokered by Jade Capital that were guaranteed by the SBA.  This False Claims Act (“FCA”) civil settlement was reached despite the fact that PNC was not criminally charged in the Jade Capital prosecution.  Subsequently, the question has been raised regarding the knowledge and intent required for a person to be liable for the draconian civil penalties provided for under the FCA when a crime has not been committed.

The FCA provides definitions for “knowledge” and “intent”.  The FCA defines “knowing” and “knowingly” as actual knowledge (§3729(b)(1)); deliberate ignorance of the truth or falsity of the information (§3729(b)(2));  or reckless disregard of the truth or falsity of the information (§3729(b)(3)).  This definition can be summed up by saying that a person has knowledge sufficient for FCA liability if they “knew or should have known” the truth.

A person has actual knowledge when they know of the occurrence of an event.  This does not require that the person witnessed the event.  The person need only receive the information in a way that would allow a reasonable person to believe the evidence is true.

Someone acts in deliberate ignorance of the truth or falsity of information, when the person knows the means to determine the truth or falsity is at the person’s disposal, but the person nonetheless fails to avail himself of the information.  For example, after a borrower defaults on a government guaranteed loan, a bank employee requests the SBA to honor the guaranty and signs a certification to the effect that all the requirements under the SOP have been met.  However, if the employee had reviewed the available original loan file, it would be clear that underwriting failed to comply with an SOP requirement.  In a similar scenario, a person acts in reckless disregard of the truth or falsity of information if they fail to inquire as to whether information is available to determine the truth of the certification that all SOPs have been met.

Criminal liability for fraud requires proof of the wrongdoer’s “specific intent.”  However, no proof of “specific intent” to defraud is required for civil liability under the FCA. (§3729(b)(3)).  Moreover, the standard of proof in criminal cases requires each element to be proven “beyond a reasonable doubt”, whereas the standard in civil cases is by a “preponderance of the evidence.”  Consequently, an FCA civil claim will be sustained without evidence of “specific intent”, whereas under the same facts there is no criminal liability.

As the number of FCA cases increases, particularly qui tam cases, so do the number of theories of liability.  Over time, what constitutes knowledge and intent under the FCA seems to be expanding.  Recently, in the case Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989, 195 L. Ed. 2d 348, (2016), the Supreme Court confirmed the application of the theory of “implied” certification in FCA civil cases.  By this theory, when a person submits a claim for payment by the government, by implication the person has certified the existence of all the requirements for payment.  This decision appears to expand the scope of what constitutes a viable FCA claim, and evidences a trend by the courts to read the FCA expansively.

It should come as no surprise that FCA liability depends on the facts of each case.  With the certifications required by the SBA at various steps of the loan process, from origination to the request for loan guaranty payment, SBA lenders need to know and understand the requirements of the SBA SOPs, and seek advice and counsel whenever there is any question.

For more information, contact Norman at 215-390-1025 or you can email him at NGreenspan@starfieldsmith.com.