Is the prime contractor held liable for its subcontractor's false payrolls? If so, in what capacity? Is the prime and/or sub held to the penalties set forth in the U.S Criminal Code, 18 U.S.C. 1001? Why would the contractor be held liable?
Yes, both the prime and its subcontracor's could be charged under 18 U.S.C. 1001 for making false statements by submitting false payroll information. Additionally, both may be prosecuted for making false claims under the Civil False Claims Act, 31 U.S.C. Section 3729-33 for submission of false payroll information. Moreover the prime may be liable under the criminal statute for False Claims, 18 U.S.C. Section 287, as well. This is because both the prime contractor and its subcontractors are responsible for the accuracy of claims filed with the government.
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In the case of the criminal false claim, the statute imposes liability on "Whoever makes or presents to any person or officer in the civil, military, or naval service of the United States, or to any department or agency thereof, any claim upon or against the United States, or any department or agency thereof, knowing such claim to be false, fictitious, or fraudulent, shall be imprisoned not more than five years and shall be subject to a fine in the amount provided in this title." While there may be certain defenses for the prime, since it has a duty to enure the claims of its subs are accurate, it can be held accountble. Filing of charges against either the prime or its subs whether criminal or civl is at the discretion of the Justice Department. In the case at hand, the prime may have a defense to responsibility depending on the facts.
You should consult your agency's legal counsel for specific advice regarding this matter.