Trump’s DOJ: Diversity, Equity, and Inclusion Targeted Through the False Claims Act

Company NewsBanking RegulatoryMortgage Regulatory

Jun 30

In an unprecedented move, the Department of Justice (“DOJ”) released a memorandum describing plans to use the False Claims Act (“FCA”) to rid businesses of policies that support or encourage diversity, equity, and inclusion (“DEI”). This new DOJ initiative, known as the Civil Rights Fraud Initiative, focuses on three Executive Orders issued by the President earlier this year that are designed to eliminate DEI programs as “illegal and immoral.”

The most unique aspect of DOJ’s plan is that businesses can be targeted with FCA actions even if they are entirely innocent of any fraudulent conduct relating to the government funding program. The mere fact that a business provided or provides support for DEI is enough. Given this new FCA application, every corporation receiving federal money should evaluate its DEI programs—whether formal or informal—to determine their FCA risk.

In addition, the Trump administration is reminding whistleblowers that significant payouts can be awarded for reporting successful FCA claims, creating huge incentives for employees and other interested parties to report businesses with pro-DEI policies to federal authorities.

There can be little doubt about the far-reaching effects of DOJ’s new policy. When instituting an action, DOJ can seek triple damages (called “treble damages” in the law) for each violation. So, for example, if a defense contractor has three separate contracts with the government to build ships, planes, and helicopters, respectively, for $10 million each, DOJ can institute three separate FCA claims (or bundle all three together in one action), seeking $30 million dollars for each alleged violation. For many companies that receive significant federal funding, the FCA could be used to attack every aspect of their business, creating significant risks, to say the least.

IMPACT AT A GLANCE

DOJ’s FCA enforcement initiative is expected to affect a wide range of federally funded entities, including:

Government Contractors: DOJ is aggressively taking the position that all government contracts either expressly or implicitly require compliance with civil rights laws. Thus, even where a government contract does not mention civil rights laws, DOJ can initiate FCA actions based upon a theory that civil rights laws are implicitly incorporated into all federal contracts.
Healthcare Providers: Hospitals and medical organizations receiving federal grants or reimbursements under federal programs such as Medicaid, Medicare, and Tricare can be targeted for FCA actions if they promote DEI.
Banks and other financial institutions: While banks do not receive traditional federal funding in the form of grants or reimbursements, banks receive other types of government assistance that DOJ could target through FCA actions, including:

(1) Federal Reserve lending and liquidity programs;

(2) federal loan guarantees through programs such as Fannie Mae, Freddie Mac, and Ginnie Mae, which effectively reduce banks’ risk and therefore subsidize lending operations; and

(3) fees and interest earned on federal funds that are administered through programs such as the Covid-19 Paycheck Protection Program (“PPP”).

Mortgage Lenders: Like banks, mortgage lenders also do not typically receive traditional federal funding. However, also like banks, mortgage lenders receive other types of government assistance that DOJ could target through FCA actions, including:

(1) payment guarantees when borrowers default on government loans (i.e., FHA, VA, and USDA loans) and

(2) direct payments for mortgages sold to Fannie Mae and Freddie Mac.

Colleges and Universities: Higher education institutions with DEI initiatives may have student financial aid, research grants, Title III and Title V grants, and other government funding targeted.

LOOKING AHEAD

In light of this DOJ’s new FCA use, companies should:

Reassess their policies to assess potential legal risks. This includes any express or implied certifications made to the federal government and any program components that could be construed as discriminatory by regulators.
Assess reporting structures, policies, and procedures.
Consult with counsel on current compliance expectations.

Mitchell Sandler’s white-collar group of former federal prosecutors, regulators, and seasoned defense counsel stand ready to assist businesses as they face these new and impactful challenges.

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