Recent FTO Designations Raise FCA Liability Concerns for Multinational Organizations

Introduction

On February 20, 2025, the State Department designated multiple Mexican drug cartels and Transnational Criminal Organizations (“TCOs”) as foreign terrorist organizations (“FTOs”). At the same time, these groups were designated as Specially Designated Global Terrorists (“SDGTs”). The designation creates a new risk that businesses operating in areas where those entities are active, particularly Mexico, could be investigated and prosecuted for materially supporting those entities (18 U.S.C. § 2339B). However, criminal investigations and prosecutions for material support require the Department of Justice (“DOJ” or “The Department”) to investigate, pursue charges, and litigate in federal court.

For federal contractors and grant recipients, liability is not limited to situations in which DOJ decides to open investigations and prosecute criminal “material support” cases. The FTO and SDGT designations also increase the risk that private whistleblowers and DOJ lawyers may additionally pursue cases under the False Claims Act (“FCA”). The FCA prohibits, among other things, submitting, or causing to be submitted, false claims to the U.S. Federal Government. Federal contractors must make a certification related to financial transactions involving the assets of designated FTOs or SDGTs as part of the regular course of their business relationships with the U.S. Government. Federal agencies, such as the U.S. Department of State and U.S. Agency for International Development (“USAID”), require additional certifications related to funding of FTOs in grant awards.

Past FCA enforcement actions have resulted from allegations that these certifications were false. Given the Trump Administration’s focus on combatting drug cartels, the role of (and incentives for) whistleblowers in FCA enforcement, and the pervasive presence of drug cartels in Mexico, multinational companies and non-governmental organizations should carefully evaluate their business operations and policies related to federal procurement, awards, grants, and other forms of support, including regarding interactions with cartels and potential support for FTOs and SDGTs, to guard against these new and emerging risks.

The False Claims Act

Under the FCA, an individual or company may be subject to liability for knowingly presenting, or causing to be presented a false or fraudulent claim for payment, or for knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim.¹31 U.S.C. § 3729(a)(1) (2024). In FCA suits based on alleged false certifications, the allegedly false certification or representation must be “material,” to the Government’s payment of the claim.²Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 579 U.S. 176, 194 (2016).

The FCA allows private individuals or entities, known as relators, to file qui tam lawsuits alleging violations of the FCA on the Government’s behalf. If a realtor files a qui tam lawsuit, the relator can share in the Government’s monetary recovery and recover their attorney’s fees. The Government may elect to assume primary responsibility for the litigation, but if the Government declines to pursue the case, the relator can continue prosecuting the case itself (assuming the Government does not dismiss the case). FCA enforcement statistics suggest that the relators’ financial incentives are a significant driver of qui tam suits. In 2024, for example, more than $2.4 billion of the $2.9 billion in reported FCA settlements and judgments arose from qui tam actions filed by relators.³See Dep’t of Just., Press Release, False Claims Act Settlements and Judgments Exceed $2.9B in Fiscal Year 2024 (Jan. 15, 2025), available at https://www.justice.gov/archives/opa/pr/false-claims-act-settlements-and-judgments-exceed-29b-fiscal-year-2024.

FCA implications of FTO and SDGT designations

The designation of drug cartels as FTOs and SDGTs expose businesses and non-governmental organizations operating in or sourcing products from locations, especially Mexico, where FTO- and SDGT-designated cartel groups are closely intertwined with the local economy, to potential liability under the FCA based on certifications they must make by virtue of interacting with the U.S. Federal Government. 

1. The Federal Acquisition Regulation (“FAR”)

The FAR, which is the primary regulation governing executive agency procurement, contains mandatory certifications that apply to contracts with all federal agencies. The FAR contains an express restriction on certain foreign purchases, including “any supplies or services if any proclamation, Executive order, or statute administered by OFAC, or if OFAC’s implementing regulations at 31 CFR chapter V, would prohibit such a transaction by a person subject to the jurisdiction of the United States.”⁴48 C.F.R. § 52.225-13.OFAC’s implementing regulations contain several parts under which cartels or those associated with cartels may now be designated:

• Part 590 (Transnational Criminal Organizations Sanctions Regulations) prohibits “the making of any contribution or provision of funds, goods, or services,” to any person the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State, determines to have “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” any person whose interests are blocked.⁵ 31 C.F.R. § 590 (Jan. 21, 2022).
• Part 594 (Global Terrorism Sanctions Regulations), implementing the SDGT designations, prohibits transactions involving foreign persons designated by the Secretary of State to have committed or participated in training to commit “acts of terrorism that threaten the security of U.S. nationals.”⁶31 C.F.R. § 594 (June 6, 2003).
• Part 597 (Foreign Terrorist Organizations Sanctions Regulations) requires financial institutions to block all financial transactions involving the assets of any organization designated as an FTO by the Secretary of State and maintain control over those funds.⁷31 C.F.R. § 597 (Oct. 8, 1997).
• Part 536 (Narcotics Trafficking Sanctions Regulations) prohibits transactions involving foreign persons determined by the Secretary of the Treasury, in consultation with the Attorney General and the Secretary of State to “play a significant role in international narcotics trafficking centered in Colombia” or “materially to assist in, or provide financial or technological support for or goods or services in support of, the narcotics trafficking activities” of such designated persons.⁸31 C.F.R. § 536 (Mar. 5, 1997)
• Part 598 (Foreign Narcotics Kingpin Sanctions Regulations) prohibits virtually all transactions with designated “significant foreign narcotics traffickers” as well as those “materially assisting in, or providing financial or technological support for or to, or providing goods or services in support of, the international narcotics trafficking activities” of persons designated under the sanctions.⁹31 C.F.R. § 598 (Jul 5, 2000)
• Part 599 (Illicit Drug Trade Sanctions Regulations) prohibits virtually all transactions with foreign persons determined by the Secretary of the Treasury, in consultation with the Secretary of State, the Attorney General, and the Secretary of Homeland Security, “to have engaged in, or attempted to engage in, activities or transactions that have materially contributed to, or pose a significant risk of materially contributing to, the international proliferation of illicit drugs or their means of production,” to have knowingly received any property or interest in property that are derived from such activities or transactions, or who pose a significant risk of materially contributing to or facilitating such activities or transactions.¹⁰31 C.F.R. § 599 (Dec. 20, 2022)

Because federal contractors must certify they have not triggered a violation of any OFAC rules, any transactions involving persons designated under the sanctions programs listed above may give rise to liability under the FCA, because the contractors or subcontractors will have expressly certified compliance with OFAC sanctions. The new FTO and SDGT designations significantly broaden the scope of exposure for businesses operating in Mexico in particular. Virtually all transactions in support of activities related to any of these designated persons would constitute a violation of OFAC sanctions and expose the contractor to liability under an FCA suit. Moreover, given the qui tam provision, whistleblowers (such as disgruntled employees, subcontractors, or competitors, amongst others) will be incentivized to bring FCA suits for alleged violations of the FAR OFAC certification requirements.

2. USAID and State Department Grant Awards

Certifications related to grant awards issued by the State Department or USAID offer another potential basis for FCA liability. ¹¹We are unaware of any FCA cases specifically involving State Department grants, though it appears this would be a viable avenue for an FCA enforcement action.Prospective grantees are required to affirm, in their grant applications, that grant funding will not be used to materially support terrorism. For example, grants awarded by USAID contain a required certification that the grantee “did not, within the previous three years, knowingly engage in transactions with, or provide material support or resources to, any individual or entity who was, at the time, subject to sanctions administered by [OFAC] within the U.S. Department of Treasury pursuant to the Global Terrorism Sanctions Regulations (31 CFR Part 594), and the Foreign Terrorist Organizations Sanctions Regulations (31 CFR Part 597).”¹²Primary source documents providing the USAID provision are not publicly available. The standard reference included in all USAID contracts after 2020 is noted and available at other sources. See Charity & Sec. Network, Issue Brief False Claim Act Cases Against NPOs, 9 (June 2020), available at https://charityandsecurity.org/wp-content/uploads/2018/09/Revised-2020-Updated-Fact-Sheet-FCA-Cases-April-2019-Autosaved.pdf. As a standard term, State Department federal awards mandate “the recipient shall comply with the following Executive Orders,” including EO 13224, which provides that the Secretary of State may designate a group or person as an SDGT.¹³See U.S. Dep’t of State, Standard Terms and Conditions for Federal Awards 12 (October 1, 2024), available at https://bo.usembassy.gov/wp-content/uploads/sites/16/2024/11/Standard-Terms-and-Conditions-for-Federal-Awards-10.1.24.pdf. Importantly, these requirements also flow down to subcontractors.¹⁴See id. at 3.

Using these certifications, DOJ has litigated FCA cases alleging that grant recipients provided material support for terrorism.¹⁵See U.S. ex rel. TZAC, Inc. v. Norwegian People’s Aid, No. 1:15-cv-04892-GHW (October 3, 2019) (dismissal order); U.S. ex rel. TZAC v. Am. Univ. Beirut, No. 1:14-cv-06899-JPO (November 16, 2018) (dismissal order). In USAID grant awards, the term “material support” is broadly defined,  in a manner that mirrors the “material support” provision in 18 U.S.C. § 2339B. The complaints in these cases focused on the Supreme Court’s holding in Holder v. Humanitarian L. Project, 561 U.S. 1 (2010) (explaining that the “material support” prohibition is constitutional as applied to “training,” “expert advice or assistance,” “service,” and “personnel” provided to designated FTOs). In one case a relator alleged that a USAID grant recipient provided material support to terrorists by facilitating meetings with and between designated FTOs and by providing training to police officers in territory controlled by FTOs.¹⁶See U.S. Dep’t of Just., Manhattan U.S. Attorney Announces Settlement With Norwegian Not-For-Profit, Resolving Claims That It Provided Material Support To Iran, Hamas, And Other Prohibited Parties Under U.S. Law (Apr. 3, 2018), available at https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-settlement-norwegian-not-profit-resolving-claims-it; U.S. Dep’t of Just., Acting Manhattan U.S. Attorney Announces Settlement With American University Of Beirut, Resolving Claims It Provided Material Support To Three Entities Designated Prohibited Parties Under U.S. Law (Mar. 23, 2017), available at https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-settlement-american-university-beirut-resolving. Similarly, if a State Department grant recipient provided support to a group designated as an SGDT under EO 13224, the grant recipient may be exposed to FCA liability for falsely certifying compliance.

Given the broad scope of activities covered by the “material support” provision, and the pervasive presence of drug cartels and TCOs in impoverished regions of Latin America where outside assistance is often delivered, grant recipients should carefully evaluate their activities following the drug cartel FTO designations. In addition to financially motivated whistleblowers, given the political disputes regarding foreign aid, there is an additional possibility of ideologically motivated whistleblowers or outside groups bringing FCA qui tam matters.

Conclusion

Given the significant publicity accompanying the designation of drug cartels as FTOs, and the strong financial incentives for whistleblowers to file qui tams based on interactions between federal contractors and grant recipients and FTOs, contractors and grant recipients should take the following steps to attempt to mitigate these risks:

• Review processes and procedures associated with internal whistleblower intake mechanisms to ensure that issues raised internally are dealt with in a thorough and timely manner. Some whistleblowers will not proceed to file FCA litigation if they perceive that the company has handled their concerns internally.
• Conduct a risk assessment to identify potential points of contact with FTOs and SDGTs. Common risk areas are interactions with third parties, including vendors and other suppliers. Third-party vetting that may be sufficient to address FCPA or anticorruption issues may not be sufficient to mitigate risks of interactions with FTOs and SDGTs. Employees on the ground in areas with pervasive cartel activity are most likely to have relevant knowledge; any risk assessment should capture their knowledge in a systematic manner and be part of regular trainings and compliance verification processes.
• An acquiring entity should include in its due diligence process a review of any risks created by the FTO and SDGT designations, paying close attention to any government contracts or grants. With a statute of limitations that may stretch to 10 years, these FCA risks can linger long after the conduct occurred, so a detailed historical review will be essential from now on.

Based on the risk of FCA litigation and the potential fact discovery that would occur in litigation, contractors and grant recipients should consider the extent to which the review measures recommended above should be taken in the context of a confidential investigation conducted under the attorney-client privilege.