When is Loan Fraud Not Loan Fraud? When It’s a False Claim
Run a
Google news search on “mortgage fraud” or “loan fraud” and you’ll get
literally scores, if not hundreds, of hits. For example, our search
turned up this CNN/Money story on “The Top
10 Mortgage Fraud States” in which Florida, New York, and California
were the “Top Three” states. Loan fraud is considered one of the
significant contributing causes of the recent economic malaise. Even though banks and underwriters are more conscious of
potential fraud, this article reports that
“incidents of residential mortgage fraud” increased 7 percent in the
past year. Clearly, such fraud is rampant and the citizenry is looking
to law enforcement officials to catch the wrongdoers.
It is
in this context that we found the following story to be of interest. According to a May 6, 2010 press release, a
lender based in the state of New York agreed to a settlement in which
it will pay $26.3 million to resolve allegations that it violated the False
Claims Act. The False Claims Act applies to
Federal contractors that knowingly submit inaccurate invoices to the
U.S. Government. So how can a lender violate the False Claims Act? The
press release provided an interesting answer.
The
press release stated—
Ciena
Capital LLC, a private, non-depository lender located in New York City …
and a subsidiary, Business Loan Center (BLC), a small business lending
company licensed to originate and service loans under Section 7(a) of
the Small Business Act, are alleged to have submitted false claims for
payment on loans made through the Small Business Administration (SBA). The SBA, through various lending programs, provides financial
assistance to small businesses by guaranteeing up to 85% of the value
of loans made by private lenders.
Okay. We can see that Ciena Capital and BLC were making loans
connected with the SBA, so that links them to the Federal government.
Where do the false claims come in?
… Ciena and BLC falsely certified that they complied with SBA
regulations when they submitted claims for payment on loans they
originated, underwrote, and serviced. Some of
these loans defaulted shortly after they were made as a result of Ciena’s and BLC’s disregard of SBA
rules, regulations, and underwriting requirements.
Now the
picture becomes clearer. Apparently, these lenders were paid by the
SBA for making loans to small businesses, but they had to vet the
businesses in accordance with SBA rules, and they (allegedly) failed to
do so. When they submitted their requests for payment, they (allegedly
falsely) certified that they had followed the SBA’s rules.
What
else does the DOJ press release say?
Other loans were originated by
former BLC Executive Vice President Patrick Harrington, or his office,
during his tenure. Harrington pleaded guilty to
conspiracy to defraud the United States and was sentenced to 10 years in
prison for his prominent role in the fraudulent loan scheme, which
included falsifying loan documents, inflating property appraisals, and
using straw purchasers to engage in sham transactions.
The relators will receive $4.3 million as
their share of the government’s recovery.
When is loan fraud not
loan fraud? When it’s fraud committed in the Federal contracting
context. Then it’s a false claim.
Theft of Government Property? How is This Theft of Government Property?
Just when we thought we’d seen it all …
Here is a story from the Beaverton Valley Times, a
media outlet that covers the local scene in Oregon. The news article
reports that a former U.S. Army Captain, Michael Dung Nguyen, age 28,
was sentenced on May 3, 2010 to serve 30 months in prison plus three
years of “supervised release” for the crime of theft of government
property and “structuring financial transactions”. We investigated
further, being interested in the criminal aspects of structuring
financial transactions, as well as the whole theft of government
property thing. What we found was a sordid little tale of stupidity and
greed, reminiscent of an NCIS TV show episode we watched a couple of
years ago.
What did our Captain Nguyen do?
According to the article—
During a December court
hearing, Nguyen admitted that while on duty in Iraq, he stole about
$690,000 in U.S. currency he had access to as the project purchasing
officer in the Army’s 1st Battalion, 23rd Infantry Regiment.
The
money was stolen from commander's emergency response program funds,
which were suppose[d] to be used for security-contract payments with the
Sons of Iraq, as well as humanitarian relief and reconstruction
programs.
Okay. The “government property” Captain Nguyen
stole was cash—“uncirculated bundles of $100 bills”. Well, yes, we
suppose U.S. dollar bills of any denomination are technically
“government property;” they are printed by the U.S. Mint and were in the
possession of the U.S. Government in Iraq. But seriously—don’t you
think there’s a better description of the crime?
While
you ponder that question, back to the sad tale of Captain Nguyen.
According
to the article, “Nguyen admitted that while on duty in Iraq, he stole
about $690,000 in U.S. currency he had access to as the project
purchasing officer in the Army’s 1st Battalion, 23rd Infantry
Regiment.” Importantly, “Nguyen was the only person who had access to
the money, which was kept in a safe at his battalion’s station in
Iraq.” That’s some cunning plan there, Captain Mike. Make sure you’re
the only person with the combination to the safe where the cash is
stored, so that you are the only possible suspect when somebody comes to
investigate where the money went. And he would have gotten away with
it too, if not for those meddling kids ….
Nguyen’s
cunning plan consisted of three key parts:
- Steal money from the safe.
- Mail the money to himself at his
family’s home in Beaverton, OR.
- Profit.
As
the article reports, “When Nguyen returned from Iraq in June 2008,
according to the U.S. Department of Justice, he opened new bank accounts
at Bank of America, Washington Mutual Bank, America's Credit Union and
Heritage Bank, and deposited $387,550 of the stolen cash into those
accounts in Oregon and elsewhere.” Moreover, “After depositing the
money, Nguyen bought new cars – a 2008 BMW and a 2009 Hummer H3T – in
addition to buying computers, firearms, electronics and furniture.” But
wait—there’s more: “A search of his Beaverton home turned up more
than $300,000 in stolen cash hidden in the attic.” Nice work, Mike. We
hoped you enjoyed tooling around in the Bimmer and the Hummer, no doubt
displaying your firearms along the way.
So
how was Captain Mike Nguyen caught? Did somebody notice the missing
$700,000 and start an investigation? Did his commanding officer conduct
an inventory on funds in his possession? Did Nguyen’s replacement turn
him in? Nope. None of the above.
In fact, it was the
good old IRS who noticed something was amiss in the city of Beaverton.
According to the article, “The investigation was initiated by the
Portland office of the Internal Revenue Service, Criminal Investigation,
following the discovery of large and frequent currency deposits and
substantial expenditures above Nguyen's legitimate income level.”
Oops. Captain Mike was enjoying the ill-gotten funds just a little too
much.
As an aside, in the past we have bemoaned the lack of controls over
operations in Iraq. As we wrote in a previous post (link above)—“where
are the controls on this type of behavior? We understand there is a war
or two going on, and things get messy in a combat zone … but as
taxpayers we expect better of our government personnel—and we expect
better controls to prevent and/or detect the wrongdoing at the time the
wrongdoing is committed, and not six or seven years after the fact.”
Hey,
it’s nice Captain Mike got caught and was sentenced to 30 months in
prison. It’s great that “Nguyen was also ordered … to serve three years
of supervised release after his prison sentence, pay $200,000 in
restitution and to forfeit his interest in all personal property he
bought with the stolen money.” That’s keen and no doubt represents a
victory for the taxpayers. But we have to ask:
- Why didn’t the U.S. Army know that $700,000 was
missing?
- Was there an IG investigation? If
Nguyen could mail home $700,000, what could his brother and sister
officers get away with?
- Was his commanding officer disciplined?
- Is “theft of government property” really the most appropriate charge
here?
- Is 30 months of prison time supposed to
deter future wrongdoers? Really?
According
to the article, the investigation took the combined efforts of “the
FBI, the U.S. Army Criminal Investigation Division’s Major Procurement
Fraud Unit, and the Department of Defense’s Criminal Investigative
Service.” All that horsepower, and this is the result we get? Color us
disappointed.
Oh, and that “structuring financial
transactions” thing? The article gives no details. But here’s an overview article for your
information.
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Kickbacks are a No-No
Do you remember that episode of Friends
where Monica got fired from her restaurant job for accepting free steaks
from the restaurant’s supplier? It was in the
second season, and is described thusly—
Monica gets a new
position as Head Lunch Chef, also in charge of purchasing, who has her
own little desk (when Roland's not there), and a beeper. However, she is
soon fired for accepting a gift from the restaurant's new meat
supplier.
We all learned then (if we didn’t know it already)
that accepting kickbacks from a supplier creates a conflict of interest
and is a “no-no” in the procurement world. Soliciting
or accepting a kickback is
more serious in the world of Federal government
contracting, as we shall discuss in some depth.
The FAR
discusses kickbacks from subcontractors at 3.502. Here are the relevant definitions—
- “Kickback”
means any money, fee, commission, credit, gift, gratuity, thing of
value, or compensation of any kind which is provided, directly or
indirectly, to any prime contractor, prime contractor employee,
subcontractor, or subcontractor employee for the purpose of improperly
obtaining or rewarding favorable treatment in connection with a prime contract or in connection with a
subcontract relating to a prime contract.
- “Person” means a corporation,
partnership, business association of any kind, trust, joint-stock
company, or individual.
- “Prime contract” means a contract or contractual action entered
into by the United States for the purpose of obtaining supplies,
materials, equipment, or services of any kind.
- “Prime
Contractor” means a person who has entered into a prime contract with
the United States.
- “Prime Contractor employee” means any officer, partner,
employee, or agent of a prime contractor.
- “Subcontract” means a
contract or contractual action entered into by a prime contractor or
subcontractor for the purpose of obtaining supplies, materials,
equipment, or services of any kind under a prime contract.
- “Subcontractor”
(1) means any person, other than the prime
contractor, who offers to furnish or furnishes any supplies, materials,
equipment, or services of any kind under a prime contract
or a subcontract entered into in connection with
such prime contract; and (2) includes any person
who offers to furnish or furnishes general supplies to the prime
contractor or a higher tier subcontractor.
For a bit of the
relevant Federal Acquisition Regulation policy, here’s a bit from
3.502-2
The Anti-Kickback Act of 1986
(41 U.S.C. 51-58) was
passed to deter subcontractors from making payments and contractors from
accepting payments for the purpose of improperly obtaining or rewarding
favorable treatment in connection with a prime contract or a
subcontract relating to a prime contract.
The Act—
(a) Prohibits any person from—
(1) Providing, attempting to
provide, or offering to provide any kickback;
(2) Soliciting, accepting, or attempting to accept any
kickback; or
(3) Including,
directly or indirectly, the amount of any kickback in the contract price
charged by a subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged by a prime
contractor to the United States.
(b) Imposes criminal penalties on any person who knowingly and
willfully engages in the prohibited conduct addressed in paragraph (a) of this subsection.
(c) Provides for the recovery of civil penalties
by the United States from any person who knowingly engages in such
prohibited conduct and from any person whose employee, subcontractor, or
subcontractor employee provides, accepts, or charges a kickback.
(d) Provides that—
(1) The contracting officer may offset the amount of a
kickback against monies owed by the United States to the prime
contractor under the prime contract to which such kickback relates;
(2) The contracting officer may direct a prime contractor to
withhold from any sums owed to a subcontractor under a subcontract of
the prime contract the amount of any kickback which was or may be offset
against the prime contractor under paragraph (d)(1)
of this subsection; and
(3) An
offset under paragraph (d)(1) or a direction under paragraph (d)(2)
of this subsection is a claim by the Government for the purposes of the
Contract Disputes Act of 1978.
(e) Authorizes
contracting officers to order that sums withheld under paragraph (d)(2) of this subsection be paid to the contracting agency,
or if the sum has already been offset against the prime contractor, that
it be retained by the prime contractor.
(f)
Requires the prime contractor to notify the contracting officer when
the withholding under paragraph (d)(2) of this
subsection has been accomplished unless the amount withheld has been
paid to the Government.
(g) Requires a prime contractor or subcontractor to report in
writing to the inspector general of the contracting agency, the head of
the contracting agency if the agency does not have an inspector general,
or the Department of Justice any possible violation of the Act when the
prime contractor or subcontractor has reasonable grounds to believe
such violation may have occurred.
(h) Provides that, for the purpose of
ascertaining whether there has been a violation of the Act with respect
to any prime contract, the Government Accountability Office and the
inspector general of the contracting agency, or a representative of such
contracting agency designated by the head of the agency if the agency
does not have an inspector general, shall have access to and may inspect
the facilities and audit the books and records, including any
electronic data or records, of any prime contractor or subcontractor
under a prime contract awarded by such agency.
(i) Requires each contracting agency to include in each prime
contract exceeding $100,000 for other than commercial items (see Part 12), a requirement that the prime contractor shall—
(1) Have in place and
follow reasonable procedures designed to prevent and detect violations
of the Act in its own operations and direct business relationships (e.g., company ethics rules prohibiting kickbacks by employees,
agents, or subcontractors; education programs for new employees and
subcontractors, explaining policies about kickbacks, related company procedures and the consequences of detection; procurement
procedures to minimize the opportunity for kickbacks; audit procedures
designed to detect kickbacks; periodic surveys of subcontractors to
elicit information about kickbacks; procedures to report kickbacks to
law enforcement officials; annual declarations by employees of gifts or
gratuities received from subcontractors; annual employee declarations
that they have violated no company ethics rules; personnel practices
that document unethical or illegal behavior and make such information
available to prospective employers); and
(2) Cooperate fully with any Federal agency investigating a
possible violation of the Act.
(j) Notwithstanding paragraph (i) of this
subsection, a prime contractor shall cooperate fully with any Federal
government agency investigating a violation of Section 3 of the Anti-Kickback Act of 1986 (41 U.S.C. 51-58).
But
we’re not done yet. Contract clause 52.203-7 (“Anti-Kickback
Procedures”) will be found in most every Federal contract valued in
excess of the simplified acquisition threshold (except for commercial
contracts). It says pretty much what’s posted above, verbatim, and also
requires that essentially all of the prohibitions and requirements must
be flowed-down to subcontractors “in all subcontracts under this
contract which exceed $100,000.”
So we can all agree that accepting
kickbacks in return for a favorable evaluation and
award of a subcontract is a bad thing. Monica just got fired for
accepting her kickbacks, but when a Federal contract is involved,
criminal penalties may be imposed in addition to civil ones.
It’s
kind of a big deal—which is why we are so surprised at the number of
government contractors—both big and small—who lack the kind of controls
mandated by the contract clause. What do we mean? Notice (for example)
the clause language, which is unusually focused for a discussion of required contractor internal controls:
…procurement procedures to minimize the opportunity for
kickbacks; audit procedures designed to detect kickbacks; periodic
surveys of subcontractors to elicit information about kickbacks;
procedures to report kickbacks to law enforcement officials; annual
declarations by employees of gifts or gratuities received from
subcontractors; annual employee declarations that they have violated no
company ethics rules; personnel practices that document unethical or
illegal behavior and make such information available
to prospective employers)….
How many of those
controls do you have in place? Do you have a Government contract that
includes the Anti-Kickback Procedures clause? (Of course you do, but go
look and confirm for yourself.) See that clause? If you don’t have
the required procedures and controls, you are in breach of your
contract. You have termination and litigation exposure, and you didn’t
even know it. Tsk, tsk. You should have hired Apogee
Consulting, Inc. a long time ago.
What happens to a company when its
employees are accused of accepting kickbacks and there are some Government contracts involved? Glad
you asked, because we have an example of that situation right here.
Today’s example is (once again) KBR, prime contractor under the multi-billion dollar LOGCAP III
contract. KBR has been accused of employing
persons in its transportation department who accepted kickbacks from two freight forwarders (presumably in return for the
award of subcontracts). The DOJ press release states—
The
United States is pursuing allegations that the two freight forwarders,
Eagle Global Logistics (which has since merged with TNT Logistics and
become CEVA) and Panalpina
provided unlawful kickbacks in the form of meals, drinks, tickets to
sports events and golf outings to KBR
employees. The government will seek damages and penalties under the
False Claims Act and common law, as well as penalties under the
Anti-Kickback Act. (Italics added.)
The
suit against KBR was filed by two “whistle-blowers” (called “relators”) under the False Claims Act.
The U.S. Government has investigated the allegations, and has decided to
“intervene” in the lawsuit with respect to some (but not all) of them.
When the U.S. Government intervenes, it essentially takes over the
lawsuit and, if the government is successful in securing a conviction or
settlement, the relators
will receive a percentage of the recovery. The case is United States
of America ex rel. Vavra, et al. v. Kellogg Brown & Root, Inc., et
al., C.A. No. 1:04-CV-00042 (E.D. Tex.).
In the world of Government contracting, acceptance of kickbacks
from subcontractors and other vendors is a serious matter that can lead to litigation and large-dollar pay-outs.
Investing in the appropriate controls won’t prevent 100% of employee
wrongdoing—but it will go a long way toward limiting your exposure if
they occur. Go ahead and do the cost-benefit analysis; you’ll see that
implementing the controls—the ones that you already agreed to
implement when you executed that Government contract—is a smart investment.
Latest DOD Report on Situation in Iraq
DOD is required by law to issue a
report to Congress each quarter discussing “specific
performance indicators and measures of progress
toward political, economic, and security stability in Iraq.” Nineteen such reports have been issued to date, including the
latest, which was issued in March 2010 and
covered the period ending February 2010. We reported on two of the
previous reports, here and here.
The reports document significant
progress in restoring Iraq’s political, economic, and cultural
stability. The reports also document continued challenges facing both
the Government of Iraq (GoI)
and the US-led multi-national forces as they move toward the end of the
combat mission by August 2010 and a complete redeployment of all US
forces by December 31, 2011. The current report notes that on January
1, 2010, the US forces “conducted a command and control (C2)
transformation” as the theater command transitioned from a
multi-national force to a US-only force.
With respect to the political landscape, the report states—
Efforts promoting national unity continue, with an
increased commitment to the political process by Iraq’s political
actors. Despite signs of progress, Iraqis have not yet reached agreement
on some core issues. The contentious matters of oil wealth
distribution, the management of oil resources, and the resolution of
disputed internal boundaries (DIBs) continue as sources of tension
between Arabs and Kurds. Sunni-Shi’a tensions persist over perceived Sunni marginalization,
including transitioning the Sons of Iraq (SoI) program, reintegrating former detainees and regime elements,
the ongoing de-Ba’athification controversy, and assisting in the return and reintegration of
Iraqi refugees and internally displaced persons (IDPs). Over half of the
SoI have yet to be
integrated into ministerial, security force, or private employment in order to facilitate election
security in March 2010, although progress continues to be made in
placements.
Importantly, endemic corruption is
on the decline. The report notes that—
The Iraqi government has made measured progress in its efforts
to reduce corruption. In January 2010, the Council of Ministers (CoM) approved the GoI’s national anti-corruption strategy to improve compliance with
the United Nations Convention against Corruption (UNCAC), ratified by
the GoI in 2008. Increased
resources to identify and remedy government corruption have shown
positive results and include a government launched anti-bribery campaign
and an expanded public outreach effort to educate the public on the
social and economic costs of corruption. In December 2009, Deputy
Transportation Minister Adnan
al-Ubaidi was convicted of
receiving a $100,000 bribe and was sentenced to eight years
imprisonment; in a separate case, three Ministry of Trade officials were
convicted and sentenced on corruption charges. These cases mark
significant progress compared to previous years in which political
pressures often derailed corruption cases against major figures.
Additionally, USF-I and other U.S. organizations continued to assist the
GoI in its efforts to fight
organized crime and other corruptive influences against private sector
companies and professionals such as doctors and business owners.
Iran continues to exert influence in the country. The report
states—
Iran’s multi-pronged strategy
in Iraq consists of political outreach, soft-power initiatives, and
lethal support for surrogate groups. Iran continues to exert significant
influence in Iraq, although many senior Iraqi officials are privately
pushing back against Iranian pressure and appear intent on limiting
Iran’s effort to manipulate Iraqi politics. During this reporting
period, Iran viewed the Iraqi national elections as critical to balance
U.S. influence in Iraq. Throughout the period of seating the government,
Iran focused its levers of influence, including economic, financial,
religious, and potentially lethal aid to Iraqi insurgents, to shape
Iraqi politics toward Iran’s own interests. Leveraging its strong
economic and religious ties to the Iraqi Shi’a population, Iran has intervened to moderate disputes between
Iraq and Syria. Iranian security leaders also have long-standing
contacts with many Kurdish leaders, including Iraqi President, Jalal Talabani.
Destabilizing Iranian influence will continue to pose a significant
challenge to Iraq’s stability and political independence.
Not to get too deep into the details, we would feel remiss not
to note the discussion on security. From the report:
Security in Iraq continues to improve and the ISF
successfully maintained security throughout the elections. Overall,
security incidents remained at low levels from December 2009 to February
2010, averaging 150 security incidents per week, which is a 14.8%
decrease from the last reporting period and a 45% drop compared to the
same period in 2008-2009. Monthly high-profile attacks (HPAs) nationwide
remained essentially unchanged from the previous reporting period.
Periodic spectacular, multiple-device HPAs seem to be emerging as the
extremists’ preferred attack method to create outsized effects while
husbanding resources. Although HPAs executed during the previous
reporting period through February 2010 caused a large number of civilian
deaths and injuries, thus far these attacks have not rekindled a cycle
of ethno-sectarian violence. Finally, the disruption of attacks by ISF
highlights the increasing Iraqi security capabilities that Al-Qaeda in
Iraq (AQI) faces as it attempts to operate. The Iraqi government’s
success in preventing large-scale attacks during the Ashura holiday also demonstrates a
growing capacity for increasing security during times of heightened
threat of AQI attacks. Despite generally lower attack levels,
significant longterm
challenges remain, including control of border areas to reduce the
import of lethal materials and continued development of MoI and Ministry of Defense (MoD) security coordination capabilities.
As wordy as the foregoing has been, in truth we have barely
scratched the surface of the detailed 77-page report. As the focus of
the mainstream media is aimed at Afghanistan, many citizens have lost
sight of the progress being made in Iraq. Taking the time to review
these quarterly reports leads to a more informed understanding of how
the U.S. is progressing in restoring the country to its rightful role as
a sovereign entity in the community of nations.
Our advice? You should click on the
link above and read the report.
Photo
Credit: Sgt. Jamal Kennedy, a team leader with Co. B, TF 1-21
Inf., mans a .50 caliber machine gun outside the Rahemawa
Iraqi Police station Jan. 30 in Kirkuk, Iraq. Soldiers provided
secondary security, while Iraqi Security Forces provided the primary
security for the elections. (Sgt. Sean Kimmons)
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