New DOJ Civil Cyber-Fraud Initiative Pressures Federal Contractors & Grant Recipients To Tighten Cybersecurity Controls, Training & Other Safeguards

October 11, 2021

Federal government contractors and grant recipients should tighten cyber security policies, practices and internal controls to mitigate their exposure to civil False Claims Act claims by the Department of Justice (“DOJ”) under a new DOJ Civil Cyber-Fraud Initiative announced by DOJ last week.  The new initiative adds False Claims Act civil liability to the already substantial civil liability that government contractors and other businesses already face for failing to comply with applicable cyber security and cyber breach notifications under federal and state laws.  In the face of these added liabilities, federal contractors and grant recipients should act quickly to audit their cyber security and cyber breach practices, tighten cyber security and breach detection;  oversight, credentialing and controls over employees, contractors and others with access to facilities and systems and take other appropriate action to prevent and remediate compliance deficiencies and risks.

Federal Government Contractors Bear Cybersecurity Responsibilities 

Federal government contractors can face cyber security and breach responsibilities under a myriad of federal laws, regulations and contracting standards which are incorporated into their government contracts as part of conditions for participation in the applicable contract or program. For example,  businesses that sell products to the U.S. government generally are required to comply with 15 basic safeguarding requirements and procedures to protect systems used to collect, process, maintain, use, share, disseminate, or dispose of Federal Contract Information (FCI) set forth in FAR 52.202.21.  Companies that produce products used by the Department of Defense (DoD) may be required to comply with the minimum cybersecurity standards set by DFARS if those products aren’t commercially available off-the-shelf (COTS)DFARS 252.204-7012 requires contractors with CUI to follow NIST SP 800-171, report cyber incidents, report cybersecurity gaps.  DFARS 252.204-7019 (interim) requires primes and subcontractors to submit self-assessment of NIST 800-171 controls through the Supplier Performance Risk System (SPRS)DFARS 252.204-7020 (interim) requires primes and subcontractors give the DoD access to their infrastructure to verify the self-assessment (via DMCA) and requires contractors roll requirements down to subcontractors.  Meanwhile, DFARS 252.204-7021 (interim) governs the rollout of the Cybersecurity Maturity Model Certification program over 5 years.  These requirements are in addition to any cyber security or cyber breach requirements otherwise applicable to government contractors or grant recipients under laws such as the Fair & Accurate Credit Transactions Act (“FACTA”) that also might apply to other businesses that do not do business with the federal government.

New DOJ Civil Cyber-Fraud Initiative Against Government Contractors Heightens Enforcement & Liability Risks

On October 6, 2021, Deputy Attorney General Lisa O. Monaco announced plans to civilly prosecute federal government contractors that fail to follow required cyber security standards under the False Claims Act under a new Civil Cyber-Fraud Initiative to be led by DOJ’s Civil Division’s Commercial Litigation Branch, Fraud Section.

According to the DOJ announcement, DOJ expects the initiative to:

  • Build broad resiliency against cyber security intrusions across the government, the public sector and key industry partners.
  • Hold contractors and grantees to their commitments to protect government information and infrastructure.
  • Support government experts’ efforts to timely identify, create and publicize patches for vulnerabilities in commonly used information technology products and services.
  • Ensure that companies that follow the rules and invest in meeting cyber security requirements are not at a competitive disadvantage.
  • Reimburse the government and the taxpayers for the losses incurred when companies fail to satisfy their cyber security obligations.
  • Improve overall cyber security practices that will benefit the government, private users and the American public.

Under the Civil Cyber-Fraud Initiative, DOJ plans to use the False Claims Act to prosecute pursue cyber security related fraud by government contractors and grant recipients.  According to DOJ, the initiative will hold accountable entities or individuals that put U.S. information or systems at risk by knowingly providing deficient cyber security products or services, knowingly misrepresenting their cyber security practices or protocols, or knowingly violating obligations to monitor and report cyber security incidents and breaches.

The False Claims Act is the government’s primary civil tool to redress false claims for federal funds and property involving government programs and operations.   The DOJ’s Civil Cyber-Fraud Initiative does not create new cyber security and cyber breach obligations to promote these goals.  Rather, it piggybacks on already existing federal mandates by adding False Claims Act civil liability to the already substantial civil liability that government contractors and grant recipients already risk for failing to maintain and administer their data security and data breach practices in accordance with applicable federal laws. Under the new Civil Cyber-Fraud Initiative, DOJ has signaled it intends to include compliance with applicable cyber security and cyber breach reporting requirements applicable to contractors as part of the obligations of government contractors and grant recipients to comply with applicable law as a condition of eligibility to participate in federal programs and receive federal funds.  Federal contractors and grant recipients submitting claims for federal funds will be considered to have filed a false claim in violation of the False Claims Act if their cyber security and cyber breach practices are not compliant with applicable federal requirements when the payment is requested.

Companies and individuals found to have violated the False Claims Act generally are liable for treble damages plus a penalty that is linked to inflation. In addition to allowing the United States to pursue perpetrators of fraud on its own, the FCA allows private citizens to file suits on behalf of the government (called “qui tam” suits) against those who have defrauded the government.  Private citizens who successfully bring qui tam actions may receive a portion of the government’s recovery.  Many DOJ Fraud Section investigations and lawsuits arise from such qui tam actions and result in often large recoveries by DOJ and the reporting whistleblowers.  As a result of availability of whistleblower recoveries, government contractors should anticipate that disgruntled employees, contractors, or others with whom they do business with knowledge of data breaches or other cybersecurity weaknesses may be incentivized to act as whistleblowers.

Cyber Risks Already Substantial Cyber Risks

The False Claims Act exposure under the new DOJ Civil Cyber-Security initiative adds to the already substantial and mounting risks that government contractors already face under an ever-expanding tapestry of federal, state and in some instances, international statutes, regulations and rulings.

Along with any exposures specifically applicable to it as a government contractor, depending on the nature of the business and the data it collects, the business also likely falls subject to duties to safeguard the confidentiality and security of wide range of electronic or other personal financial, tax and other data under various federal and state laws such as FACTA, the Internal Revenue Code, the Health Insurance Portability & Accountability Act (HIPAA), state identity theft, and a host of other statutes and regulations, contractual agreements, or both.

Due to the nature of their activities and involvements, some of the most significant of these obligations may arise from electronic crime related provisions of the Criminal Code of the United States, which by virtue of their criminal nature trigger potential organizational compliance program responsibilities under the U.S. Sentencing Commission Organizational Guidelines for government contractors and other covered entities such as 18 U.S. Code § 1028 – Fraud and related activity in connection with identification documents, authentication features, and information; 18 U.S.C. § 1029.  Fraud and Related Activity in Connection with Access Devices; and 18 U.S.C. § 1030.  Fraud and Related Activity in Connection with Computers.

However, government contractors also can face cybersecurity responsibilities, breach notification and other obligations and liabilities under a wide range of other civil laws and regulations.  For instance, FACTA generally requires covered entities that collect or use certain personal financial information to conduct due diligence, monitor the security of records and adopt disposal practices that are reasonable and appropriate to prevent the unauthorized access to – or use of – information in a consumer report.  As implemented by the Federal Trade Commission regulations, entities with covered accounts must develop and implement written identity theft prevention programs designed to help identify, detect, and respond to patterns, practices, or specific activities – known as “red flags” – that could indicate identity theft.

Beyond these federal obligations, government contractors, like other businesses, also typically are exposed to liability under a wide variety of cyber security, cyber breach notification and other obligations and liabilities under state laws, regulations and common law. See, e.g. here.  While the particulars vary based on the state, the nature of the business, where and how the business collects and maintains its data and other factors, the applicable state electronic confidentiality and data security requirements in most states and under some federal laws increasingly include express duties to take steps to protect data, to monitor from breaches and other threats, and/or to notify subjects of the breached data and in some cases, regulators and the public within a short period after a breach happens. Businesses operating in multiple states typically faces exposure under the laws of each jurisdiction where it operates with data impacted by the breach.

Because cyber security events increasingly create business and financial losses, investigation and defense costs, penalties and other liabilities and costs, cyber security breaches and other events also increasingly that fuel shareholder disclosure obligations and shareholder lawsuits.  Indeed, former Securities and Exchange Commission  Chair Mary Jo White in May, 2016 characterized cyber security as the biggest risk facing the financial system   See here.  In response to investor risks from cyber security events, the SEC has required regulated entities to make disclosures about these risks to investors since 2011.      See  CF Disclosure Guidance: Topic No. 2 – Cybersecurity.   Given this guidance, it should come as no surprise that the SEC has imposed substantial fines against entities following a breach.  See  e.g. R.T. Jones reaches settlement with SEC in data breach case;  Morgan Stanley Fined $1 Million for Client Data Breach.

Act To Manage Compliance & Risks

In the face of these added liabilities, federal contractors and grant recipients should act quickly to work with qualified legal counsel within the scope of attorney-client privilege to audit the adequacy of their existing cyber security and cyber breach practices under applicable federal statutes and contracts and other relevant laws and regulations as well as to confirm that adequate breach notification has been made for any existing or past breaches. To the extent that the audit uncovers any potential deficiencies in prior breach notification or other compliance, the federal contractor or grant recipient general will want to seek guidance from legal counsel regarding the advisable steps, if any, to take to mitigate and resolve outstanding liabilities, particularly in light of whistleblower liabilities.  In addition to examining past and current compliance risks, government contractors and grant recipients also will want to explore advisable steps and documentation that will position their organizations to demonstrate their appropriate monitoring and maintenance of ongoing compliance or otherwise strengthen their defenses against potential cyber breaches as well as whistleblower and retaliation claims arising from employees or others seeking to use these exposures as leverage for settlements or claims.  Given the potential magnitude of the liability, businesses generally not only need to take well documented steps properly  to safeguard sensitive electronic sensitive  personal information and systems holding or using it as well as be prepared to promptly provide notice in the event of any breach with the short time contemplated by law.

As part of these efforts, businesses and their leaders will want to ensure their compliance efforts include both adoption of all required formal policies, appropriate credentialing of employees, contractors and others accessing systems or facilities, well documented operational compliance and risk audits, documented risk assessment and response, compliance hotline reporting and investigation, suitable up-the-ladder reporting, and other appropriate procedures to facilitate rapid identification of potential concerns and other operational compliance. 

Effective internal and external workforce credentialing, training, management and oversight are key to the success of these efforts, particularly because cyber breaches and other data threats often leverage internal access created by workforce infiltration, susceptibilities created by social engineering or other opportunities created from lax workforce or contractor compliance with security controls or both.  See, e.g., Insider threat: The human element of cyberrisk.

Effective internal monitoring and reporting protocols also are essential to ensure rapid breach identification, investigation and notification.  These protocols also should be developed and implemented to ensure timely disclosure and management of any breaches within required time frames. 

In recognition of the typically high financial and operational costs of breach investigation, notification and defense, organizations also should weigh the advisability of securing and requiring business partners to secure cyber insurance or other protection to help mitigate these costs in the event of a cyber event.

While the conduct of these assessments inevitably will require the involvement of outside consulting services, business leaders also are cautioned to use care to take appropriate steps to protect these interactions by arranging to engage these services pursuant to attorney-client privilege to help shield sensitive information likely to be uncovered through compliance, risk management or investigation activities.  Likewise, given the short time allowed for breach mitigation and notification, businesses should weigh carefully whether to engage regulatory counsel  to assist with the initial breach notification and mitigation, separate and apart from cyber litigation defense counsel that might be available under applicable cyber insurance policies unless the proposed litigation defense counsel has proven cyber and other regulatory knowledge, experience and qualifications handling breach mitigation and notification events.

More Information

We hope this update is helpful. For more information about or assistance with these or other workforce, internal controls and compliance or other legal, management or public policy developments, please contact the author Cynthia Marcotte Stamer via e-mail or via telephone at (214) 452 -8297.  

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About the Author

Recognized by her peers as a Martindale-Hubble “AV-Preeminent” (Top 1%) and “Top Rated Lawyer” with special recognition LexisNexis® Martindale-Hubbell® as “LEGAL LEADER™ Texas Top Rated Lawyer” in Health Care Law and Labor and Employment Law; as among the “Best Lawyers In Dallas” for her work in the fields of “Labor & Employment,” “Tax: ERISA & Employee Benefits,” “Health Care” and “Business and Commercial Law” by D Magazine, Cynthia Marcotte Stamer is a practicing attorney board certified in labor and employment law by the Texas Board of Legal Specialization and management consultant, author, public policy advocate and lecturer widely known for 30+ years of health industry and other management work, public policy leadership and advocacy, coaching, teachings, and publications. As a significant part of her work, Ms. Stamer has worked extensively on pandemic, business and other crisis planning, preparedness and response for more than 30 years.

Scribe for the ABA JCEB Annual Agency Meeting with HHS-OCR, Vice Chair of the ABA International Section Life Sciences Committee, past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group and the ABA RPTE Employee Benefits & Other Compensation Group, Ms. Stamer is most widely recognized for her decades of pragmatic, leading edge work, scholarship and thought leadership on health and other privacy and data security and other health industry legal, public policy and operational concerns.  Ms. Stamer’s work throughout her 30 plus year career has focused heavily on working with health care and managed care, health and other employee benefit plan, insurance and financial services and other public and private organizations and their technology, data, and other service providers and advisors domestically and internationally with legal and operational compliance and risk management, performance and workforce management, regulatory and public policy and other legal and operational concerns.  As a part of this work, she has continuously and extensively worked with domestic and international health plans, their sponsors, fiduciaries, administrators, and insurers; managed care and insurance organizations; hospitals, health care systems, clinics, skilled nursing, long term care, rehabilitation and other health care providers and facilities; medical staff, accreditation, peer review and quality committees and organizations; billing, utilization management, management services organizations, group purchasing organizations; pharmaceutical, pharmacy, and prescription benefit management and organizations; consultants; investors; EHR, claims, payroll and other technology, billing and reimbursement and other services and product vendors; products and solutions consultants and developers; investors; managed care organizations, self-insured health and other employee benefit plans, their sponsors, fiduciaries, administrators and service providers, insurers and other payers, health industry advocacy and other service providers and groups and other health and managed care industry clients as well as federal and state legislative, regulatory, investigatory and enforcement bodies and agencies.  

This  involvement encompasses helping health care systems and organizations, group and individual health care providers, health plans and insurers, health IT, life sciences and other health industry clients prevent, investigate, manage and resolve  sexual assault, abuse, harassment and other organizational, provider and employee misconduct and other performance and behavior; manage Section 1557, Civil Rights Act and other discrimination and accommodation, and other regulatory, contractual and other compliance; vendors and suppliers; contracting and other terms of participation, medical billing, reimbursement, claims administration and coordination, Medicare, Medicaid, CHIP, Medicare/Medicaid Advantage, ERISA and other payers and other provider-payer relations, contracting, compliance and enforcement; Form 990 and other nonprofit and tax-exemption; fundraising, investors, joint venture, and other business partners; quality and other performance measurement, management, discipline and reporting; physician and other workforce recruiting, performance management, peer review and other investigations and discipline, wage and hour, payroll, gain-sharing and other pay-for performance and other compensation, training, outsourcing and other human resources and workforce matters; board, medical staff and other governance; strategic planning, process and quality improvement; meaningful use, EHR, HIPAA and other technology,  data security and breach and other health IT and data; STARK, ant kickback, insurance, and other fraud prevention, investigation, defense and enforcement; audits, investigations, and enforcement actions; trade secrets and other intellectual property; crisis preparedness and response; internal, government and third-party licensure, credentialing, accreditation, HCQIA and other peer review and quality reporting, audits, investigations, enforcement and defense; patient relations and care;  internal controls and regulatory compliance; payer-provider, provider-provider, vendor, patient, governmental and community relations; facilities, practice, products and other sales, mergers, acquisitions and other business and commercial transactions; government procurement and contracting; grants; tax-exemption and not-for-profit; privacy and data security; training; risk and change management; regulatory affairs and public policy; process, product and service improvement, development and innovation, and other legal and operational compliance and risk management, government and regulatory affairs and operations concerns. to establish, administer and defend workforce and staffing, quality, and other compliance, risk management and operational practices, policies and actions; comply with requirements; investigate and respond to Board of Medicine, Health, Nursing, Pharmacy, Chiropractic, and other licensing agencies, Department of Aging & Disability, FDA, Drug Enforcement Agency, OCR Privacy and Civil Rights, Department of Labor, IRS, HHS, DOD, FTC, SEC, CDC and other public health, Department of Justice and state attorneys’ general and other federal and state agencies; JCHO and other accreditation and quality organizations; private litigation and other federal and state health care industry actions: regulatory and public policy advocacy; training and discipline; enforcement;  and other strategic and operational concerns.  

Author of “Privacy and the Pandemic Workshop” for the Association of State and Territorial Health Plans, as well as a multitude of other health industry matters, workforce and health care change and crisis management and other highly regarded publications and presentations, the American Bar Association (ABA) International Section Life Sciences Committee Vice Chair, a Scribe for the ABA Joint Committee on Employee Benefits (JCEB) Annual OCR Agency Meeting and a former Council Representative, Past Chair of the ABA Managed Care & Insurance Interest Group, former Vice President and Executive Director of the North Texas Health Care Compliance Professionals Association, past Board President of Richardson Development Center (now Warren Center) for Children Early Childhood Intervention Agency, past North Texas United Way Long Range Planning Committee Member, and past Board Member and Compliance Chair of the National Kidney Foundation of North Texas, and a Fellow in the American College of Employee Benefit Counsel, the American Bar Foundation and the Texas Bar Foundation, Ms. Stamer also shares her extensive publications and thought leadership as well as leadership involvement in a broad range of other professional and civic organizations. For more information about Ms. Stamer or her health industry and other experience and involvements, see www.cynthiastamer.com or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.  

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