It’s Been 24 Hours, Time for Another Procurement Fraud Story
administrator
We’re
aware that the Apogee Consulting, Inc. is in danger of becoming the
“all-fraud, all-the-time” website. A couple of days ago, we vented a bit
about the sad state of the public procurement process, where we noted
“Not a week goes by without a story of corruption, bribery, and/or
fraud hitting the internet.” A day later, we reported allegations
that defense employees were stealing military firearms (potentially
including .50 caliber machine gun parts) and selling them after hours.
Well, we skipped a day or two, but now we’re back with yet another
story of corruption in the Federal contracting arena. Forget that bit
about “not a week goes by”—it’s now hard to go 24 hours without hearing
about some type of wrongdoing.
Either
the number of incidents of corruption has skyrocketed recently, or the
investigators and prosecutors are getting better at ferreting it out.
Maybe it’s a little of both …
Today’s story is brought to you by the U.S. Department of Justice (DOJ), as are most of these stories. The DOJ oversees the National Procurement Fraud Task Force (NPFTF). The NPFTF is “committed to detecting, investigating, and prosecuting procurement, grant, and Recovery Act fraud.”A
visit to the NPFTF website (link above) reveals sordid tales of
corruption, from the relatively quotidian (“Former Pittston Area School
Board Member Sentenced to 12 Months for “corrupt receipt of a reward”)
to the more ominous (“Former Junction City Mayor Sentenced to 24 months
for taking bribes from builder”). Naturally, there are also many
stories of procurement fraud and corruption related to military
contracts.
Back to today’s story which can be found here.
The headline is simple: “Former Representative of Backfill
Subcontractor Sentenced to 33 Months in Jail for Kickback and Fraud
Scheme”. The press release reveals that “James E. Haas Jr., a former
representative of a New Jersey subcontractor that provides common
backfill, a type of soil material used to refill an excavation”
was sentenced on February 23, 2010 to 33 months in jail, a $30,000
fine, and ordered to pay the EPA $53,000 in restitution. What was the
crime? According to the press release—
[Haas]
engaged in a kickback and fraud conspiracy at the Federal Creosote
Superfund site, located in Manville, N.J. Haas admitted to paying
kickbacks to former employees of a prime contractor at Federal Creosote
in exchange for the award of a subcontract to the company he
represented. He also admitted to inflating bid prices for the
subcontract to include the amount of the kickbacks paid to his
co-conspirators. Haas also pleaded guilty to committing fraud against
the United States.
Haas
wasn’t the only malefactor. The DOJ announced that “To date, a total
of three companies and eight individuals have pleaded guilty as part of
the investigation.” The investigation has been conducted by the DOJ,
the EPA’s Inspector General, and the IRS Criminal Investigation team. (We guess the fraudsters forgot to report the income from their illegal activities. Tsk, tsk.)
Really, what else can be said? If there’s any lessons
to be learned, it’s that that companies need to be vigilant in
implementing—and testing—appropriate internal controls. Fraudsters
need to be detected. That “prime contractor” whose employee accepted
kickbacks should have been caught by the contractor. Moreover, having strong internal controls acts to prevent potential fraudsters from committing wrongdoing.
In
our experience, companies are reluctant to invest in their internal
controls, and reluctant to test those controls through internal audits
and other means. They prefer to trust their employees to do the right
thing. As these stories show, there are too many employees who take
advantage of that trust (naïveté?) to engage
in fraud and corruption. It’s time to get serious about detecting and
preventing wrongdoing, so that the number of these stories declines.
Real Acquisition Reform
Nick Sanders
With all the hoopla surrounding program cost growth and schedule slips, and the resulting calls for “acquisition reform”—and even some statutory steps in that direction—one might think there have been put forward some innovative suggestions. Nope. As we posted recently, most of the “conventional wisdom” in this area is wrong, and most “reformers” are more aptly described as PWACs—Persons Without A Clue.
So it is with a great deal of satisfaction that we can finally point to one recommended acquisition reform step that, if implemented, would save the taxpayers a great deal of money—as well as increasing efficiency within program supply chains. What makes this step even more interesting is that it comes from an unlikely source: the Defense Department Inspector General (DOD IG). Talk about adding value!
Here’s the DOD IG report that caught our eye and sparked our fascination. It’s a report from October 2009, just released (in redacted form) in mid-February 2010. It discusses the volatility of titanium pricing, and suggests some ways in which the DOD could better control the pricing it receives for this commodity. Why in the world would it take auditors to recommend such a fundamental—nay, basic—strategic acquisition approach? But before we get too wrapped up the obviousness of the recommendation, let’s look at what the DOD IG had to say.
First, the IG noted that certain contracts (notably the multi-year contract for the Navy F/A-18 E/F Super Hornet) contained economic price adjustment contract clauses. These clauses are designed to provide automatic contract price adjustments based “on changes in the economic behavior of the national economy.” Without these contracts, contractors would have to price in the risk that certain commodities would suffer price increases; should those increases not materialize then the contractors would receive a windfall. Essentially, the clauses turn otherwise fixed-price contracts into limited forms of cost-reimbursement contract—but only for the commodity covered and only to the extent that the market price for that commodity moves outside certain bounds, as reported by the Bureau of Labor Statistics (BLS) in its producer price index (PPI) reports.
In this case, the commodity in question is titanium. Titanium is a strong, lightweight metal with an exceptional strength-to-weight ratio, elevated temperature performance, and corrosion resistance. It is used in a variety of applications, most notably in jet engines and airframe components. The IG reported that, in 2007, “an estimated 76 percent of domestic titanium metal was used in aerospace applications.” There are three major domestic titanium suppliers: TIMET, ATI, and RTI.
The IG found that “the BLS producer price index for titanium mill shapes, used in the economic price adjustment clause of the Navy F/A-18 E/F Super Hornet contract, was outdated and subject to extreme market volatility, as it was primarily based on spot market prices. The index was also too narrow to be used in DOD multiyear contracts…” But the DOD IG had more to say on the subject of titanium pricing.
It reported that “DOD had not effectively mitigated its risk for titanium material price increases… As a result, Defense aerospace weapons systems were subject to higher market prices for titanium material based on supply and demand of titanium in the commercial marketplace.” It provided three root causes for this situation:
1. DOD suppliers of titanium components had not always secured titanium material on long-term contracts and material purchased at market prices carried a significantly higher price that got passed through to DOD contracts.
2. DOD multiyear contracts that used the BLS producer price index for titanium mill shapes were not effective because the BLS index was outdated, primarily based on spot market prices, and too narrow an index.
3. DOD does not have a strategic purchasing program for titanium to leverage buying power, take advantage of economies of scale, and secure prices on longterm contracts when acquiring titanium products.
The DOD IG noted that the DOD requires between 20 and 30 million pounds of titanium annually. Importantly, the Pentagon could save “from $100 million to $300 million annually” if it purchased half of its needs via a long-term contract instead of having its contractors purchase it at market prices. As evidence for that assertion, the IG reported on how the titanium price volatility had affected the F/A-18 contract prices, noting that “The material price increase related to titanium costs for the FY 2007 through FY 2009 performance period was $129 million, which accounted for more than 66 percent of the total material cost increases during that period of performance.”
The IG concluded:
DOD was subject to market volatility in titanium material pricing because DOD did not have a strategic purchasing program for titanium to leverage buying power, take advantage of economies of scale, and secure prices on long-term contracts when acquiring titanium products. Also, DOD had limited options when purchasing titanium because of the restriction on the acquisition of specialty metals under title 10, United States Code, section 2533b.
The IG recommended that the DOD adopt a strategic materials management process with respect to titanium, and noted that DOD had requested this step in an April 2008 report to Congress. The IG reported:
The Strategic Materials Protection Board concluded that the National Defense Stockpile should reshape into the Strategic Materials Security Program. They stated that this program could have the programmatic flexibility to efficiently and effectively acquire the right materials and to ensure that essential strategic materials are available to respond to current and future needs and threats, including the ability to more fully project material needs and the ability to leverage the buying power of DOD and other Federal agencies by aggregating materials requirements and negotiating long-term strategic procurement arrangements. In line with the conclusions of the National Defense Stockpile April 2009 Report to Congress, the Deputy Under Secretary of Defense for Industrial Policy, in conjunction with the Administrator, Defense National Stockpile Center, Defense Logistics Agency, should develop a strategic purchasing program for titanium with U.S. titanium producers to leverage buying power, take advantage of economies of scale, and secure prices on long-term contracts when acquiring titanium products.
This is real acquisition reform, folks. This is a relatively simple two-step process that could save the DOD from $100 to $300 million each year. That money could go to other needs, or back to the taxpayers. So what is Congress waiting for?
Is Corruption in the Public Procurement Process Simply a Part of the Process?
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12 February 2010 – The U.S. Department of Justice (DoJ)
announces that “Lincoln Fabrics Ltd., a Canadian weaver of ballistic
fabrics, and its American subsidiary, have agreed to pay the United
States $4 million to settle the United States’ lawsuit against Lincoln
for violations of the False Claims Act in connection with their role in
the weaving of Zylon fabric used in the manufacture and sale of
defective Zylon bullet-proof vests.” According to the DoJ press
release—
The United States alleged that the Zylon in these vests lost its
ballistic capability quickly, especially when exposed to heat and
humidity. The United States further alleged that Lincoln was aware of
the defective nature of the Zylon by at least December 2001, but
continued to sell Zylon for use in ballistic armor until August 2005,
when the National Institute of Justice issued a report that Zylon
degraded quickly in ballistic applications. At that time, all American
body armor manufacturers stopped using Zylon in body armor. … This
settlement is part of a larger investigation of the body armor
industry’s use of Zylon in body armor. As part of today’s agreement,
Lincoln has pledged its cooperation in the Government’s on-going
investigation. The United States previously has settled with six other
participants in the Zylon body armor industry for over $54 million.
Additionally, the United States has pending lawsuits against Toyobo
Co., Honeywell Inc., Second Chance Body Armor, Inc. and First Choice
Armor Inc.
16 February 2010 – The
DoJ announces
that “An Italian subsidiary of a U.S.-based company has
agreed to plead guilty and to pay a $2.29 million criminal fine for
participating in a conspiracy to rig bids, fix prices and allocate
market shares of marine hose sold in the United States and elsewhere.”
The DoJ press release
explained—
A one-count felony
charge was filed today in U.S. District Court in Houston, against
Parker ITR S.r.l., a manufacturer of marine hose, headquartered in
Veniano, Italy. … Parker ITR has agreed to pay a criminal fine and to
cooperate fully in the Department’s ongoing antitrust investigation.
Parker ITR is the fourth company to be charged in the investigation. To
date, nine individuals have been convicted for their involvement in the
marine hose conspiracy. … Parker ITR is charged with participating in
the conspiracy from as early as 1999 until as late as May 2, 2007.
According to the charge, Parker ITR and its co-conspirators agreed to
allocate shares of the marine hose market and to use a price list for
marine hose in order to implement the conspiracy. Parker ITR and its
co-conspirators agreed not to compete for one another’s customers
either by not submitting prices or bids, or by submitting intentionally
high prices or bids, to certain customers. As part of the conspiracy,
Parker ITR and its co-conspirators provided information received from
customers in the United States and elsewhere about upcoming marine hose
jobs to a co-conspirator who served as the coordinator of the
conspiracy. Parker ITR received marine hose prices for customers in the
United States and elsewhere from the coordinator of the conspiracy and
then sold the marine hose to those customers at collusive and
noncompetitive prices and then concealed the conspiracy through various
means, including code names, private email accounts and telephone
numbers.
Parker ITR is charged
with violating the Sherman Act, which carries a maximum fine of $100
million for corporations. The maximum fine may be increased to twice
the gain derived from the crime or twice the loss suffered by the
victims of the crime, if either of those amounts is greater than the
statutory maximum fine.
18 February
2010 – The DoJ announces that “former military contractor Terry
Hall, 43, of Snellville, Ga., pleaded guilty today to conspiracy to pay
more than $3 million in bribes to U.S. Army contracting officials
stationed at Camp Arifjan, an Army base in Kuwait, and to money
laundering conspiracy.” The DoJ press
release continues--
Terry Hall was
indicted on May 6, 2009, along with U.S. Army Major Eddie Pressley, 39,
and his wife, Eurica Pressley, 37, both of Harvest, Ala. … Hall’s
companies received approximately $21 million between 2005 and 2007. …
To obtain the contracting business and facilitate unlawful payments by
other contractors, Hall admitted he made more than $3 million in
unlawful payments and provided other valuable items and services to
U.S. Army contracting officials stationed at Camp Arifjan, including
U.S. Army Major Eddie Pressley, and former Majors John Cockerham, James
Momon and Christopher Murray, among
others.
… Hall owned and
operated several companies, including Freedom Consulting and Catering
Co., (FCC) and Total Government Allegiance (TGA), which provided goods
and services to the U.S. Department of Defense (DoD) in connection with
Operation Iraqi Freedom. Hall’s companies received a Blanket Purchase
Agreement (BPA) to deliver bottled water in Iraq and a contract to
construct a security fence in
Kuwait.
The case against Hall
arose out of a wide-ranging investigation of corruption at the Camp
Arifjan contracting office. To date, eight individuals including Hall
have pleaded guilty for their roles in the bribery scheme. On Dec. 2,
2009, former Cockerham was sentenced to 210 months in prison and
ordered to pay $9.6 million in restitution. According to court
documents, Cockerham arranged for Hall’s companies to receive bottled
water calls worth more than $2.6 million, as a result of which Hall
paid Cockerham approximately
$800,000.
… Momon arranged for
Hall’s companies to receive bottled water calls [against a Blanket
Purchase Agreement] worth approximately $6.4 million, as a result of
which Hall paid Momon more than $300,000. Momon pleaded guilty on Aug.
13, 2008, to receiving bribes from various contractors at Camp Arifjan,
including Hall, and is awaiting sentencing. … Murray arranged for Hall
to receive contracts to construct security fences at Camp Arifjan, as a
result of which Hall paid Murray approximately $30,000. Murray pleaded
guilty to receiving bribes from various contractors at Camp Arifjan,
including Hall, and making a false statement. He was sentenced on Jan.
8, 2009, to 57 months in prison and ordered to pay $245,000 in
restitution.
The case against Eddie
Pressley and his wife, Eurica Pressley, is scheduled for trial on April
5, 2010. The indictment alleges that the Pressleys received more than
$2.8 million in money and other valuable items from Hall, in exchange
for Eddie Pressley’s agreement to take official actions to benefit
Hall. Eurica Pressley, at her husband’s request, allegedly arranged for
an entity named EGP Business Solutions Inc., (EGP) to be incorporated,
opened a bank account in the name of EGP, and opened bank accounts in
her name in the United States, Dubai, United Arab Emirates and the
Cayman Islands, all in order to receive the bribe
payments.
The charge of bribery
conspiracy carries a maximum prison sentence of five years and a
$250,000 fine. The money laundering conspiracy carries a maximum prison
sentence of 20 years and a $250,000 fine. According to the court
documents, Hallwill forfeit $15,757,000 to the U.S. government.
19
February 2010 – The DoJ announces that “A U.S. Army contracting
official was charged today with bribery and unlawful salary
supplementation in connection with two schemes to solicit more than
$30,000 in bribes from an Egyptian businessman in Kuwait.” The DoJ
press release provided
the following details—
William
Rondell Collins, 46, of Bartlett, Tenn., was charged today in a
four-count indictment … with two counts of soliciting and accepting
bribes as a public official and two counts of unlawful salary
supplementation from a source other than the U.S. government.According
to the indictment, the U.S. Army Area Support Group-Kuwait (ASG-KU) is
responsible for maintaining Camp Arifjan, a U.S. military installation
providing support for operations in Afghanistan, Iraq and other
locations in the Southwest Asian Theater. As part of those
responsibilities, the ASG-KU maintains an off-post housing office in
downtown Kuwait City, which procures, leases and supervises off-post
housing for government employees and military service members stationed
at Camp Arifjan. According to the indictment, Collins was employed in
the ASG-KU’s off-post housing office as a housing specialist
responsible for supervising private contractors and procuring off-post
apartment rentals.
The
indictment alleges that, in January 2009, a company owned by an
Egyptian businessman was awarded a fixed-price U.S. government contract
to provide maintenance services for off-post housing managed by Collins
and the ASG-KU off-post housing office. … in July 2009, Collins
allegedly solicited a monthly fee of approximately $1,400 from the
Egyptian businessman in return for Collins’s agreement to provide
favorable and preferential treatment and advice to the Egyptian
businessman’s company on the performance and renewal of the contract.
Collins also allegedly agreed to conceal from his supervisors the
existence and nature of the monthly fee arrangement. According to the
indictment, Collins allegedly accepted five $1,400 payments from the
Egyptian businessman between July and December
2009.
The
indictment also alleges that, between July and December 2009, Collins
solicited a monthly payment of approximately $962 from the Egyptian
businessman in exchange for drafting and submitting an inflated
off-post apartment lease to the United States for approval. According
to the indictment, Collins allegedly received approximately $5,775 from
the Egyptian businessman on Dec. 13, 2009, representing a six-month
advance on the scheme.
The
bribery counts each carry a maximum penalty of 15 years in prison and a
fine of the greater of $250,000 or twice the value gained or lost. The
unlawful salary supplementation counts each carry a maximum penalty of
five years in prison.
Look,
we don’t want to go on a rant here. But seriously, this is getting out
of control. Not a week goes by without a story of corruption, bribery,
and/or fraud hitting the internet. We’re glad these wrongdoers are
getting caught, but why do so many participants in the public
procurement process think they can get away with such blatant
wrongdoing? Clearly, they expect to get away with it. Our question
is, why? Are internal controls so loose in the Southwest Asia theater
of operations? Is management oversight lax? Are the wrongdoers simply
stupid? We don’t think so—some of these malefactors are senior military
officers. What in the world is going
on?
Defense Employees Create New, Unofficial, Sales Channel for Military Firearms
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We had just finished typing this rant on seeming widespread fraud, corruption, and other wrongdoing in the defense industry, when this little gem
came to our attention. According to the linked article posted at
DefenseReview.com, on February 17, 2010, the Federal Bureau of Alcohol,
Tobacco, Firearms and Explosives (BATFE, formerly known as the ATF) raided the Nashville, Tennessee headquarters of SabreDefence Industries.
The article reports that the BATFE “has been investigating claims that Sabre Defence employees have been selling guns illegally.” According to this article, “The company
said it had learned that some of its employees involved in inventory
control ‘may have obtained and re-sold some items without appropriate
licenses.’ The company did not say which firearms were involved.”
In July, 2008, Sabre Defence
was awarded an ID/IQ contract for a minimum of 4,952 M16A3 and 702
M16A4 rifles, to be provided to the U.S. Navy, Marine Corps., and to
foreign military customers. Sabre
Defense also manufactures the Browning M2 “Ma Deuce” .50 caliber
machine guns and barrels, as well as XR15 rifles. So if there has been
a bit of “inventory shrinkage” associated with some unofficial product sales, that is very likely to be serious business indeed. Not to mention some hefty prison time.
DOD Implements the Franken Amendment
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In
one of his first actions since becoming Senator in July 2009, Minnesota
Senator Al Franken successfully added an amendment to the 2010 Defense
Appropriations Act
that would prevent the award of defense contracts to companies that
mandate use of alternate dispute resolution (ADR) procedures instead of
litigation when employees sue them for such crimes as sex
discrimination or workplace sexual assault.
Commonly
known as the “Franken Amendment,” its creation was traced back to the
case that Jamie Leigh Jones tried to bring against her employer
(Halliburton) in 2007. Ms. Jones alleged she was raped by multiple
co-workers while in Iraq performing on Halliburton/KBR contracts.
Although she attempted to litigate the matter, her employment agreement
mandated use of arbitration instead. When binding arbitration is used, there are only limited rights of appeal.
Specifically,
the amendment would bar federal funds from going to defense contractors
that continue to apply mandatory arbitration clauses to claims of
sexual assault, assault and battery, intentional infliction of
emotional distress, and negligent hiring, retention and supervision.
The amendment also covers civil rights claims of workplace
discrimination, according to Franken's office.
The amendment does not require contractors to change or modify existing employment contracts.
Not everybody was happy that the Franken amendment passed and was signed into law by President Obama. This op/ed piece rails against it, calling it a victory for trial lawyers and the plaintiff’s bar. Nonetheless, it is current law and the DoD has been forced to implement it.
So
on February 17, 2010, Mr. Shay Assad (Director, Defense Procurement and
Acquisition Policy) issued a “Class Deviation to Implement Additional
Contractor Requirements and Responsibilities Restricting Use of
Mandatory Arbitration Agreements.” The Class Deviation memo can be
found here.
The Class Deviation provides DoD contracting officers with a new contract clause (DFARS Clause 252.222-7999) that must be used in all DoD
contracts in excess of $1 million that utilize FY 2010 Defense funds.
Exceptions are made for acquisitions of commercial items and
commercially available off-the-shelf items. The clause must be used in the following circumstances:
1.An
order valued at more than $1 million that uses FY 2010 funds, placed
against an ID/IQ contract, is covered by the Franken restriction
“regardless of whether the basic ID/IQ contract was covered.”
2.An order valued at more than $1 million that uses FY 2010 funds, placed against a GSA Schedule, is covered.
3.A contract modification adding more than $1 million in FY 2010 funds to a contract awarded before February 17, 2010, is not
covered by the restriction. However, a “bilateral modification adding
new [contract] work after February 17, 2010 to such a contract is
covered” by the restriction.
The clause requires a contractor executing the awarded contract to agree to the following –
1.Not
to enter into an agreement with any of its employees or independent
contractors that requires, as a condition of employment, that the
employee or independent contractor agree to resolve through arbitration
any claim under Title VII of the Civil Rights Act of 1964, or any tort
arising from a sexual assault or harassment, or negligent hiring,
supervision, or retention (among other matters).
2.Not to take any action to enforce any provision of an existing agreement that mandates the above actions.
3.Pass the foregoing restrictions to all covered subcontracts (i.e., those valued in excess of $1 million that use FY 2010 funds, excepting commercial item acquisitions and acquisitions of commercially available off-the-shelf items.
It’s
difficult to estimate the impact from the Franken Amendment and its
associated ADR restrictions on defense contractors. Certainly, one
might speculate that legal costs will increase as ADR use drops. We
might also guess that procurement systems will have to be revised to
add the new clause into covered subcontracts—and that somebody (or
bodies) will need to verify that covered subcontractors are complying
with the restrictions. The impact may be minimal, or could be
disruptive if implemented poorly. More importantly, contractors now
have one more certification to comply with. A knowing failure to
comply may result in allegations of violation of the False Statements
Act, which could be expensive to resolve.
Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.