Builders and Contractors Exchange
Weekly Bulletin: 23 Mar 2007
Commission-splitting Violates Kickback Act
By: Ethan G. Ostroff
Recently, the Court of Federal Claims (“COFC”) held that a commission-splitting arrangement between a federal construction contractor and a bond brokerage firm was an illegal kickback scheme because the arrangement secretly benefited the contractor and the bond broker while inflating the cost of the construction project. In the first case where the COFC was asked to consider the application of the Copeland “Anti-Kickback” Act (“AKA”) to government contractors, the COFC ruled that, since a kickback under the AKA is an act of fraud, conduct that constitutes an illegal kickback under the AKA also evidences a violation of the False Claims Act.
A “kickback” is defined by the AKA to mean any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided, directly or indirectly, to a contractor, contractor's employee, subcontractor or subcontractor's employee for the purpose of improperly obtaining or rewarding favorable treatment in connection with a contract.
The AKA applies to all contractors and subcontractors performing on any federally funded or assisted contract for the construction, prosecution, completion, or repair of any public building or public work, except contracts for which the only federal assistance is a loan guarantee. The provisions also apply to any contract assisted in whole or in part by loans or grants from the federal government, except those contracts where the only federal assistance is a loan guarantee.
In the case before the COFC, the contractor and the bond broker had fixed-price contracts that existed prior to the government contract at issue and without any cost-analysis or negotiation of costs. Nonetheless, the contractor’s certifications for progress payments regarding the bond costs on the government contract were held to be fraudulent because the claims for reimbursement of bond costs included the undisclosed rebate to the bond broker’s parent company.
With this decision by the COFC in mind, it is imperative that contractors disclose to the Government, upfront and in writing, any rebates to third parties in order to avoid facing the potential of a criminal charge under the AKA.
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.