18 U.S.C. § 1031, the Major Fraud Act, makes it a federal crime to knowingly execute or attempt to execute a scheme to defraud the United States or to obtain federal money or property through false or fraudulent representations in a qualifying federal contract, subcontract, or procurement valued at $1 million or more.
For defense contractors, DOJ procurement-fraud investigations can involve contract pricing, product testing, certifications, delivery requirements, or technical specifications.
Why Are Defense Contractors Targeted Under the Major Fraud Act?
Defense procurement cases can arise when federal investigators question whether information supplied to the Department of Defense or another federal agency was accurate when the government awarded, priced, tested, or administered a contract.
A procurement audit may identify discrepancies between invoices, cost data, laboratory results, engineering records, production documents, or contractual specifications.
A DOJ procurement-fraud investigation can then focus on whether those discrepancies resulted from deliberate conduct rather than an accounting, engineering, or quality-control dispute.
The Major Fraud Act applies to qualifying grants, contracts, subcontracts, and other federal assistance, including procurement of property or services.
The statute expressly covers prime contractors and subcontractors or suppliers working under a federal prime contract when the applicable contract, subcontract, or constituent part has a value of at least $1 million.
18 U.S.C. § 1031 Quick Reference: Violations, Penalties & Defenses
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Focus Area |
Alleged Violations & Requirements |
Defense Strategy & Key Penalties |
| Contract Pricing & Cost Audits |
• Inflating labor, material, or overhead costs • Submitting false invoices on contracts valued at $1M or more |
• Defense: Prove differences were honest accounting errors, not intentional fraud. • Penalty: Up to 10 years' prison; Fines up to $1M–$5M per count. |
| Product Testing & Specifications |
• Concealing failed quality tests • Falsifying lab data or substituting unauthorized components |
• Defense: Show retesting followed approved engineering protocols and certifications were made in good faith. • Penalty: Enhanced fines up to $5M per count if loss exceeds $500K or risk of injury exists. |
| Corporate Exposure & Penalties |
• Executive or manager knowledge of false certifications • Pattern of fraudulent billing across subcontracts |
• Defense: Demonstrate early internal compliance reviews and show named executives lacked personal knowledge. • Penalty: Multi-count fines capped up to $10M aggregate; Debarment. |
What Conduct Can Lead to a Federal Procurement Fraud Investigation?
The allegations depend on the contract and records under examination. Examples can include:
- Reporting labor, material, or overhead costs that investigators contend were knowingly inflated
- Providing testing data that investigators contend was falsified or knowingly presented as reliable when it was not
- Certifying that components met contractual specifications when investigators contend they did not
- Substituting materials, components, or manufacturing processes without required approval
- Submitting invoices based on quantities, prices, or work that investigators contend were knowingly misrepresented
- Providing inaccurate supplier certifications or quality records in connection with federal procurement
- Concealing information that investigators contend was intentionally withheld to obtain federal money or property
How Does 18 U.S.C. § 1031 Apply to Defense Contract Pricing?
Pricing allegations can become complicated when a contract involves indirect costs, cost allocations, labor rates, material markups, or multiple tiers of subcontractors.
Investigators may compare figures submitted to the government with internal accounting records and communications among executives, finance personnel, and project teams.
A defense contractor can face allegations that a cost estimate, pricing submission, or invoice contained a false representation.
The investigation may then turn on whether the person responsible for the submission knew the information was false and intended to obtain federal money or property through that representation.
What if the Investigation Concerns Testing Data or Product Specifications?
Testing and technical records can create a different type of procurement-fraud investigation. A defense contractor may be required to demonstrate that a component satisfies military, safety, durability, performance, or manufacturing specifications.
Investigators may examine raw test results, laboratory notebooks, calibration records, failed tests, retesting decisions, engineering approvals, and communications about whether a product was ready for delivery.
A criminal case may focus on allegations that personnel knowingly altered test results, omitted failed tests, directed testing under conditions that produced a desired result, or certified compliance despite knowing that a product did not meet contract requirements.
The identity and role of the person who prepared or approved the information can become important.
An executive who receives a final certification may have a different factual position from an engineer who performed a test, a quality manager who rejected a component, or a procurement employee who transmitted a supplier's certification. Investigators may examine communications among those personnel to determine what each person knew and intended.
What Must the Government Prove Under 18 U.S.C. § 1031?
To obtain a conviction under 18 U.S.C. § 1031, the prosecution must establish beyond a reasonable doubt that the statutory requirements were satisfied. In general, the government must establish:
- The defendant knowingly executed or attempted to execute a scheme or artifice
- The scheme was intended to defraud the United States or obtain money or property through false or fraudulent pretenses, representations, or promises
- The conduct occurred in connection with a qualifying federal grant, contract, subcontract, federal assistance program, or procurement
- The applicable transaction met the statute's $1 million threshold
- The defendant had the required fraudulent intent
How Can a Defense Address a Procurement Fraud Investigation?
A defense strategy should be tied to the specific contract, the alleged false representation, and the evidence showing who knew what and when. Depending on the allegations, our attorneys may focus on:
- Identifying the precise representation the government claims was fraudulent
- Determining which contract provision or procurement requirement the representation concerned
- Tracing the source of pricing, testing, or specification data through the contractor and its suppliers
- Comparing internal records with the information actually submitted to the government
- Establishing whether a disputed figure resulted from an accounting methodology rather than an intentional falsehood
- Determining whether a technical failure was known before a certification or delivery was made
- Examining whether the individual charged personally knew the information was inaccurate
- Testing whether the alleged conduct falls within the federal contract and dollar-value requirements of § 1031
What Are the Potential Penalties Under the Major Fraud Act?
A violation of 18 U.S.C. § 1031 is punishable by up to 10 years in federal prison and a fine of up to $1 million under subsection (a). The statute also permits higher fines in specified circumstances, including where the gross loss to the government or gross gain to the defendant is at least $500,000.
Under 18 U.S.C. § 1031(b)–(c), maximum statutory fines can escalate significantly beyond the base $1 million fine. Courts may impose a fine of up to $5 million per count if the gross loss or gain is $500,000 or greater, or if the offense involves a conscious or reckless risk of serious personal injury.
In multi-count prosecutions, the total aggregate fine can reach $10 million or be doubled under 18 U.S.C. § 3571(d) based on gross financial gain or loss.
Federal sentencing can also involve the loss amount attributed to the offense and other conduct relevant under the Federal Sentencing Guidelines.
A procurement calculation may require analysis of the government's claimed loss, the amount actually paid, the value of goods or services provided, and the relationship between the alleged fraud and the financial loss.
What Related Federal Laws Apply to Defense Procurement Investigations?
Understanding related federal statutes is critical because prosecutors rarely file charges under 18 U.S.C. § 1031 in isolation, frequently leveraging overlapping fraud, false statement, and conspiracy provisions to multiply sentencing exposure and force plea negotiations.
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False Claims Act - Criminal Provisions (18 U.S.C. § 287): Makes it a federal felony to knowingly present or cause to be presented any false, fictitious, or fraudulent claim for payment or approval to any military department or government agency, carrying up to 5 years in federal prison per false claim.
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False Statements and Concealment (18 U.S.C. § 1001): Prohibits knowingly and willfully making materially false statements, concealing material facts, or submitting falsified records in any matter within the jurisdiction of the executive branch—including defense procurement audits, testing certifications, and billing submissions.
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Federal Wire Fraud (18 U.S.C. § 1343): Penalizes any scheme to defraud or obtain money or property through false representations transmitted via interstate wire communications, such as electronic invoices, email correspondence, or wire transfers, carrying up to 20 years in prison per count.
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Conspiracy to Defraud the United States (18 U.S.C. § 371): Prohibits two or more individuals from conspiring to commit a federal crime or to defraud the federal government or its agencies in any manner or for any purpose, exposing executives, project leads, and subcontractors to joint criminal liability.
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Bribery of Public Officials and Witnesses (18 U.S.C. § 201): Targets situations where defense contractors or their agents give, offer, or promise anything of value to a public official or defense procurement officer to influence an official act, contract award, or audit determination.
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U.S. Sentencing Guidelines § 2B1.1 (Economic Offense Enhancements): Controls federal sentencing determinations for procurement fraud by establishing base offense levels and applying incremental enhancements based on government loss calculations, sophisticated means, and leadership roles within an organization.
Hypothetical Case Study: Defense Contractor Accused of Falsifying Missile Component Testing
A defense subcontractor holds a $14 million federal contract to manufacture guidance-system components for a military program. During a quality audit, the government discovers that 11 components failed an environmental stress test.
The company retested the components after an engineer changed the test fixture configuration. The second test was passed.
Investigators later obtained emails showing that a quality manager knew about the failed first test and approved a certification stating that all 11 components satisfied the contractual testing requirement.
The DOJ alleges the company and two executives concealed failed tests to get paid under the subcontract. The government also points to internal messages discussing production delays and the cost of replacing the components.
Examining the Testing Requirements
Our criminal defense attorneys at Eisner Gorin LLP would examine:
- The contract's precise testing requirements,
- The approved test protocol,
- The reason for the fixture change,
- The raw data from both tests,
- Calibration records,
- Engineering approvals, and
- The roles of the executives identified by investigators.
The analysis would also address whether the second test was authorized under the contract and whether the certification represented that every component had passed a particular test or instead certified compliance based on the approved final testing procedure.
Assume the evidence shows that the prime contractor's engineering department approved the revised fixture before the second test, and the quality manager believed the approved retest controlled the final certification.
The emails about production delays would show pressure to meet the delivery schedule, but they would not show that executives knew the certification was false.
Our team would use those facts to challenge the government's theory of knowing fraudulent intent and the connection between the alleged conduct and the statutory elements.
After the evidence was presented to federal prosecutors, they closed the Major Fraud Act investigation without charging the executives, and the company was allowed to complete the contract under enhanced testing controls.
Frequently Asked Questions (FAQs)
Understanding how federal authorities investigate and prosecute procurement fraud is critical for defense contractors facing government audits, as early legal intervention can mean the difference between an administrative resolution and severe criminal penalties.
What is the minimum contract value required for an 18 U.S.C. § 1031 prosecution?
The Major Fraud Act specifically applies to qualifying federal prime contracts, subcontracts, grants, or assistance programs valued at $1 million or more. If the applicable transaction or constituent part falls below this $1 million statutory threshold, federal prosecutors cannot charge a contractor under Section 1031, though they may still attempt to pursue other fraud statutes such as wire fraud or false statements.
Does an accounting or billing error constitute procurement fraud under Section 1031?
No, a honest administrative mistake, accounting discrepancy, or quality-control dispute does not amount to federal procurement fraud. To secure a conviction under 18 U.S.C. § 1031, the government must prove beyond a reasonable doubt that the defendant acted with specific intent to defraud or obtain federal funds through deliberately false or fraudulent representations.
Can a subcontractor be charged under the Major Fraud Act if they have no direct contract with the government?
Yes, Section 1031 explicitly covers prime contractors, subcontracts, and lower-tier suppliers working under a federal prime contract. As long as the underlying prime contract or subcontract meets the $1 million threshold, a subcontractor can face federal prosecution for submitting falsified test results, inaccurate cost data, or non-conforming parts.
What are the criminal penalties for violating 18 U.S.C. § 1031?
A basic conviction under Section 1031 carries up to 10 years in federal prison per count and a base fine of up to $1 million. However, statutory fines can escalate significantly up to $5 million per count—or up to $10 million in multi-count cases—if the gross gain or gross loss to the government reaches $500,000 or if the offense involves a conscious or reckless risk of serious personal injury.
What should a defense contractor do upon discovering a failed test or pricing error in a government submission?
Upon discovering an inaccuracy or failed test, a contractor should immediately consult experienced federal defense counsel to evaluate the issue before taking action. Counsel can review internal records, determine whether voluntary disclosure under federal procurement regulations is appropriate, and establish whether the discrepancy resulted from an authorized procedure rather than fraudulent intent.
How can a contractor prove lack of fraudulent intent in a testing or product specification audit?
Defending against testing fraud allegations often involves examining raw laboratory records, engineering approvals, retesting protocols, and communications among technical personnel. Showing that a retest was authorized under the contract, that equipment was properly recalibrated, or that management reasonably believed the final delivery satisfied technical specifications can effectively undermine the government's claim of deliberate deception.
How Can Eisner Gorin LLP Help You?
Navigating a federal procurement fraud investigation or audit under 18 U.S.C. § 1031 requires immediate, specialized legal representation to prevent criminal charges, safeguard corporate reputation, and protect federal contracting eligibility.
At Eisner Gorin LLP, our federal defense attorneys bring extensive experience defending prime contractors, subcontractors, and corporate executives in complex Department of Justice investigations and federal audits across the country.
Here is how our defense team can assist your business during a federal procurement fraud inquiry:
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Conducting Internal Investigations & Data Audits: Before federal agents draw conclusions from incomplete data, we perform comprehensive internal reviews. We analyze raw test logs, engineering approvals, pricing records, and communications to establish whether disputed entries stemmed from legitimate technical judgments or administrative errors rather than fraudulent intent.
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Challenging Statutory Thresholds & Jurisdictional Elements: We evaluate whether the government can legally satisfy the strict statutory elements of Section 1031, including verifying whether the specific subcontract or constituent part actually meets the $1 million statutory threshold required for prosecution.
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Intervening Pre-Indictment with Federal Prosecutors: Early defense intervention is critical in federal procurement cases. We engage directly with Assistant U.S. Attorneys and DOJ Fraud Section prosecutors before charges are filed to present factual defenses, highlight authorized testing protocols, and push for complete closure of the criminal investigation or resolution through civil/administrative channels.
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Defending Corporate Executives & Employees: When investigations target individual engineers, quality assurance managers, or corporate officers, we provide dedicated, experienced defense counsel to protect their personal rights during federal interviews, grand jury proceedings, and court hearings.
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Managing Mandatory Disclosures & Parallel Regulatory Proceedings: Federal criminal audits often coincide with administrative suspension or debarment proceedings. We guide clients through complex mandatory disclosure decisions under federal acquisition regulations to minimize fallout, protect government contracts, and maintain ongoing operations.
The federal criminal defense attorneys at Eisner Gorin LLP can help you. Schedule your consultation by calling us or filling out the contact form. Our law firm is based in Los Angeles.
