The Department of Justice’s Anti-Fraud Priorities and Their Impact on Businesses and M&A Activity

As we enter 2026, few would have envisioned that the False Claims Act (“FCA”), a Civil War era tool that was used by President Abraham Lincoln to address procurement fraud, would today become one of the “government’s most powerful weapons against fraud”.[1] The Department of Justice (“DOJ”) has made clear the FCA as a priority to address and redress fraud against the government, and businesses as well as their acquirers. In fact, settlements and judgments in fiscal 2025 were record-breaking, with the highest number since the FCA was adopted.

In this new era of False Claims Act enforcement, no business is immune from the DOJ’s reach or radar, and investors should consider the implications of the FCA.[2] Under the FCA’s “qui tam” provision, private individuals (known as “whistleblowers” or “relators”) can file lawsuits on behalf of the federal government alleging other private individuals or entities defrauded federal programs and, in return, receive payment from the government.[3] Indeed, whistleblowers are actually incentivized to report possible violations for personal benefit and liability can be triple (“treble”) damages for identified violations.

Further, federal prosecutors have become increasingly creative in applying the FCA and using their expanded enforcement tools, including the use of artificial intelligence (“AI”) to leverage data to detect potential fraud threats and schemes. This data in combination with whistleblowers outlining claims of fraud, waste and abuse, is widening the pool of potential FCA targets and enforcement actions.

Recommendations

As should always be the case, acquirers and investors should work closely with their counsel to conduct comprehensive business and legal due diligence. Through careful due diligence this will allow investors to assess whether the target acquisition company has compliance systems in place and follows industry regulations. If due diligence uncovers compliance issues, investors should address potential liability with counsel, including mandating the target company take corrective action and/or buyer/investor protections, including indemnification provisions with appropriate escrow and/or hold-backs. Representation and warranty insurance often does not provide coverage for these types of claims and liabilities.

Avoid Usurping Corporate Independence

After investing in a company that receives government funding, investors should avoid their representative’s involvement in the company’s day-to-day operations. Involvement and control over management or operations increases an investor’s risk of being the target of an FCA investigation. Investors should address appropriate governance, management and oversight while seeking to eliminate, or at least minimize, unnecessary exposure. In addition, investors should ensure appropriate structures, including separate standalone single purpose entities, indemnification as well as insurance to potentially limit liability to that entity and not expose other assets. Considerations should be carefully measured related to what entities are involved and potentially piercing of the corporate veil. 

Invest in Compliance Systems

While maintaining an arm’s-length relationship with company management, investors should consider facilitating robust compliance measures within the portfolio company. For example, providing anti-fraud and abuse training conducted by outside counsel, and establishing a sub-committee on the portfolio company’s board to identify and root out compliance issues and limit FCA risk.

Be Proactive if You Receive a DOJ Civil Investigative Demand Letter

A DOJ Civil Investigative Demand Letter (“CID”) is a formal request to gather information including, documents, written interrogatories and potential testimony related to potential FCA violations prior to litigation.[4] A CID is often issued before a lawsuit is filed by the government. The DOJ has the authority to serve this powerful pre-litigation tool when it has reason to believe that any person or entity may be in possession, custody, or control of any document, material, or information relevant to a FCA violation. DOJ’s request for the production of documents, interrogatory responses, and sworn oral testimony can be used by the government to evidence civil violations, and in turn, in some instances can lead to referral for criminal charges. If a CID letter lands in your mailbox a proactive approach is often the best response, including considering the following steps:

• Meet with counsel to develop a response plan
• Access company whistleblower compliance standards and best practices
• Identify relevant data, documents and document custodians
• Institute a legal hold to preserve relevant documents 
• Consider whether appropriate to file a Director and Officer insurance claim
• Conduct an internal stress test
• Contact the assigned federal prosecutor promptly

Cole Schotz’s team of White Collar, Government Investigations and Corporate attorneys are monitoring the evolving enforcement of the False Claims Act and its impact on investments and acquisitions. We are well poised to help you navigate these changing legal strategies and industry-specific issues. Please reach out to the authors and your Cole Schotz relationship partner with any questions.

[1] Available at: https://www.justice.gov/opa/pr/false-claims-act-settlements-and-judgments-exceed-68b-fiscal-year-2025

[2] Recent DOJ FCA enforcement actions are widespread by industry and scope and relate to ensuring government funds are used for their intended purpose, with targets including: health care, life sciences, government contractors, and any businesses that seek to avoid tariffs and duties that are owed or received loans, grants, disaster relief or other government support, such as COVID-19 CARES Act Paycheck Protection Program loans.

[3] See 31 U.S.C. § 3730.

[4] See 21 U.S.C. § 3733.