Transactions Involving the Government: What Cautious Companies Should Know About the Conspiracy Law
By: DULCE J. FOSTER
November 2003
Every business in the United States, from the smallest sole proprietorship to the largest corporate giant, will have to deal with the Federal government at some time or another. Whether it be the Securities Exchange Commission or the Food and Drug Administration, the Department of Labor or the Internal Revenue Service, government agencies lurk in the background of virtually every commercial transaction.
Most companies do everything they can to ensure compliance with the statutes and regulations that govern them, while at the same time trying to maximize profits. Knowing where to draw the line between good business practice and breaking the law can be an extraordinary challenge in today’s environment.
This challenge is particularly significant whenever a company conducts business with, seeks payment from, or for any reason provides information to, a government agency. Such transactions are governed by a Federal law stating that conspiring with others to defraud the United States or any of its agencies is a felony. The range of conduct that the government has considered illegal under this law is broader than one might think. A company can be charged with conspiring to defraud the United States even if it has made no direct misrepresentation to any government agency and has strictly complied with all statutes and regulations.
All that is required to establish a violation of the conspiracy statute is:
- an agreement between two or more individuals or entities to impair, obstruct, or impede any lawful function of government,
- an overt act to further that agreement, and
- intent to accomplish the objectives of the agreement.
Such agreements are called “Klein” conspiracies after United States v. Klein – a 1957 case in which this type of conspiracy was alleged to have occurred. Significantly, the government has argued that in a Klein conspiracy, the actions taken need not be illegal, and the accused need not have agreed to violate any substantive federal or state law. Furthermore, the objective of the conspiracy need not involve any loss of government funds. For example, some courts have held that an agreement to interfere with the government in the lawful gathering of information violates this law.
The government has charged companies and individuals with participating in Klein conspiracies in a wide variety of contexts. The prototypical Klein conspiracy involves manipulating funds to conceal the true nature of financial transactions from the IRS. A current Minnesota case involves the alleged concealment of the true nature of a medical device in order to obtain Medicare reimbursement, even though the device itself is medically reasonable and necessary. In other cases, companies have been charged with using improper methods to procure government contracts.
The important lesson to be learned is that, when the Federal government is involved, following the letter of the law may not be enough to avoid a government investigation, or at worst – a criminal conviction. The Federal government is willing to prosecute practices that it perceives to be dishonest even when no substantive crime has been committed.