False/Inflated Invoices on Government Subcontract Leads to Fines and Jail Time for Executives
On September 9, 2009 the Department of Justice (DOJ) released a press release announcing that Delmar Spier (CEO of United States Protection and Investigations, LLC (USPI) and his wife Barbara Spier (President of USPI) had entered guilty pleas in the U.S. District Court (District of Columbia) for conspiracy, major fraud, and wire fraud in connection with USPI's subcontract with the U.S. Agency for International Development's (US AID) rebuilding efforts in Afghanistan. USPI provided security and protection services to a US AID contractor under a cost plus fixed fee contract. This contract type requires the contractor to invoice only for the actual costs it incurs, subject to the allowability criteria of FAR Part 31.2. USPI invoiced its prime contractor for "inflated expenses ... for rental vehicles, fuel and security personnel [and for] fabricate[d] invoices from fictitious companies..." over a period of four years, from June 2003 to July 2007. According to the DOJ press release, the fraud was worth $3 million, which the Spiers agreed to disgorge back to the U.S. government.
Sentencing has yet to occur, but the press release notes that "The conspiracy charge carries a maximum sentence of five years in prison and a $250,000 fine. The charge of wire fraud carries a maximum sentence of 20 years in prison and a $250,000 fine. The charge of major fraud carries a maximum sentence of 10 years and a $1 million fine." Two other USPI employees were indicted along with the Spiers; one of those employees (William Dupre) is scheduled to be tried in December 2009.
See the DOJ press release here.
This is a timely reminder that corporate executives will be held responsible for violations of Federal statutes and regulations in connection with the contracts they receive, and that compliance is almost always the less expensive option. Moreover, prime contractors are responsible for providing oversight over the activities of their subcontractors, particularly when those subcontractors have cost-reimbursement contract types.
Trust – But E-Verify
  Effective September 8, 2009 Federal contracts and solicitations will contain clauses that mandate use of the E-Verify system to determine that employees are eligible to work in the United States. Administered by the Department of Homeland Security’s U.S. Citizenship and Immigration Service (USCIS), the E-Verify internet-based system to verify the work eligibility of new hires and the validity of Social Security Numbers (SSNs) based on completed I-9 Forms. The system, a legacy of the Bush Administration, was (up until 9/8/09) voluntary—but no longer. The Federal Acquisition Regulation (FAR) has been revised (primarily at 22.1800) to mandate use of E-Verify for nearly all Federal contractors.
 The new rule will be in included in solicitations and contracts expected to exceed $100,000 in value, except for contracts to acquire commercial off-the-shelf (COTS) items. Existing ID/IQ contracts will be modified to include the clause if their period of performance is expected to last longer than six months after the September 8, 2009 effective date. The new rule will require contractors to (1) enroll in E-Verify within 30 days of receiving a covered contract if they are not already enrolled (some 92,000 employers have already enrolled), (2) check the eligibility of all new employees hired during the duration of the covered contract, (3) check the eligibility of any existing employee that is assigned to a covered contract, and (4) flow the clause down to subcontractors if the value of the subcontract is greater than $3,000.
It may be difficult for contractors to determine which employees have been verified and which need to be verified (because they are being assigned to a covered contract). The new rule provides some flexibility in this area. Instead of only verifying employees assigned to the contract and other new hires, a contractor may elect to verify all of its employees. If it elects this option, the contractor must verify every one of its employees within 180 days of (1) enrollment in E-Verify; or (2) notifying E-Verify Operations of the decision to exercise this option.
Because of the obvious compliance challenges involved in this new rule, USCIS is offering free webinars on Form I-9 and the E-Verify program, including E-Verify requirements for federal contractors. Contractors can sign up for a webinar here. USCIS has created guides to help Federal contractors with E-Verify requirements – there is both an initial Users Manual and a Supplemental Guide.
View an E-Verify I-9 with Passport Demonstration here
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Lessons of the Top 100 Aerospace/Defense Companies
On August 9, 2009 Flight International published its analysis of the Top 100 A&D companies in the world. The article contains some interesting lessons from which other companies may be able to learn. 1. EADS vs. Boeing. As we previously noted, EADS has supplanted Boeing as the Number One Aerospace/Defense company in the world, aided by (a) a seven percent strengthening of the Euro vs. the U.S. Dollar, and (b) a top-line revenue growth of U.S. $9.8 Billion (contrasted to Boeing's 8.3% revenue decline of $5.5 Billion versus last year's sales). Obviously, Boeing's sales were impacted by the 57-day machinists strike, which Flight International (and its PricewaterhouseCoopers compliation team) estimate cost Boeing about $4.3 Billion in lost business. Looking only at the commercial aircraft businesses, Boeing delivered 375 aircraft in 2008 versus Airbus' record year of 483 deliveries. As a result Boeing Commercial Aircraft (BCA) suffered a sales drop of 15.3% while Airbus' sales rose 18.9% (or 11.2% after currency adjustment). After looking at those numbers, it's no wonder the BCA President decided to retire. On the defense side of the house, EADS' defense business grew 47.2% to $17.8 Billion (after currency adjustment), even after its well-reported troubles with its A400M military transport aircraft. In contrast, Boeing's Integrated Defense Systems (IDS) business reported flat revenue growth. 2. Companies connected to the Boeing supply chain did not fare well either. For instance, Spirit Aerosystems, Kawasaki Heavy Industries, Curtiss-Wright, and Fuji Heavy Industries each underperformed against their peers. In contrast, some Airbus suppliers Zodiac Aerospace, Latécoère, and Moog outperformed their peers. 3. The past decade has been the time of the big defense primes, with sales per head and inventory turns and ROIC increasing at the largest of the defense companies. However, the Flight International analysis revealed that the historical trend might be changing. The article reported that "Boeing's Integrated Defence Systems unit failed to grow and Lockheed Martin's aeronautics and electronics business shrank 1.5%. Northrop Grumman, meanwhile, managed only modest growth, of 2.4%, in its defence aerospace business." These results are compared to the defense industry as a whole, "Overall, the defence aerospace industry maintained its momentum, with the top 15 companies or divisions growing 6%, against a comparable figure of 7% for 2007." In other words, the rest of the industry outperformed the largest companies, in contrast to what has been experienced over the past decade. 
Past Performance on Steroids? New GSA Database to be Used to Help Determine Contractor Responsibility
We have written time and time again about the Obama Administration’s direction to Executive Branch agencies to get serious about documenting contractor past performance information. Generally speaking, this is a good thing. The fact is that program execution cannot be mandated by contract terms and conditions; the customer cannot sue a contractor into performing. The most one can get in such a situation is financial recompense. And so it is right and proper for a record to be kept of contractor performance, and that record should be a factor in future contract award decisions. This philosophy is reflected in recent direction from the OMB and FAR Case 2008-016, discussing how to use the Past Performance Information Retrieval System (PPIRS) and mandating that “clear, comprehensive, and constructive” evaluations be submitted for contract actions, so that they can guide future award decisions. (We noted that the process by which a contractor might challenge its PPIRS evaluation was unclear.) The proposed rule in FAR Cast 2008-016 would direct contracting officers to input reports into PPIRS whenever a contractor was terminated for default (T4D) or was determined to have submitted “defective” cost or pricing data when subject to the Truth-in-Negotiation Act (TINA). On September 3, 2009 the FAR Councils issued another proposed rule (FAR Case 2008-027) to implement a requirement of Section 827 of the FY 2009 Defense Authorization Act. The Act required the General Services Administration (GSA) to establish yet another database covering “integrity and performance” information of “covered Federal agency contractors and grantees” for a period of five years. The Act also required awarding officials to review the database information, and to consider other past performance information (such as that in PPIRS), “when making any past performance evaluation or responsibility determination.” The Act further required that certain members of Congress will have access to the database, in addition to acquisition officials. This new database is called the Federal Awardee Performance and Integrity Information System (FAPIIS). FAPIIS appears to be past performance information on steroids. The proposed rule deals with contract awards; the OMB’s Office of Federal Financial Management will propose similar guidance for grants and grantees in a future promulgation. According to the proposed rule, FAPIIS will draw data from existing systems “where feasible.” Existing systems that will provide data to contracting officers include: - The Excluded Parties List System (EPLS) will provide information on companies (and individuals) that are currently suspended or debarred from receiving Federal awards. However, the rule notes that suspensions and debarments last for a maximum of three years—but since the statute requires that information be maintained for five years, contracting officers will need to access the EPLS archives as well as the current List of Parties Excluded.
- The PPIRS and CPARS databases will provide data regarding contractor past performance. If PPIRS works as proposed, contractors that are terminated for default or that are found to have submitted “defective” cost or pricing data will be reported into the database. (See details in link above.)
The FAPIIS structure also encompasses new systems, including: - Contracting officers will report all determinations of non-responsibility and terminations for default “or cause”.
- Suspension/Debarment Officials (SDOs) will report all administrative agreements.
- Contractors with contracts and grants cumulatively valued at $10 million or more will report information related to all criminal, civil, and administrative proceedings directly into the system.
The following FAR revisions are part of the proposed rule: - FAR 9.105-2(a)(3) will require contracting officers to enter data on all contract actions over the simplified acquisition threshold into FAPIIS, if the C.O. makes a determination that the otherwise successful offeror is not a currently responsible source because of the lack of a satisfactory performance record or lack of a satisfactory record of integrity and business ethics.
- FAR 9.104-3(d) will “clarify the relationship of the non-responsibility determination and the Certificate of Competency” when a small business is involved.
- FAR 9.406-3 will require that SDOs enter data about administrative agreements (which are alternatives to suspension or debarment) into FAPIIS.
- A new contract clause, identified as 52.209-XX, will require contractors to identify whether they meet the criteria for FAPIIS reporting – i.e., a cumulative contract/grant award value of $10 million. The clause will be added to each contract expected to exceed $500,000. If the contractor meets the requirement, it will be required to report information regarding legal proceedings directly into the FAPIIS database on a semi-annual basis.
To their credit, the FAR Councils report that they “are committed to avoiding de facto debarments” and have proposed some controls to prevent automatic determinations of non-responsibility. For example: - There will be a point of contact for reports of system errors and a point of contact for each Government entity that enters information into FAPIIS.
- Contactors will have the opportunity to post comments regarding information that has been entered by the Government, which will be retained along with the performance information for a period of six years (five years of active access plus one year of archiving).
- The system will notify contractors automatically when new information is posted to the contractors’ records.
- If the Contracting Officer obtains relevant (negative) information about an offeror, that CO must contact the offeror to permit it to provide additional information that might demonstrate its responsibility. However, the CO must also notify the appropriate SDO if “the information appears appropriate for that official’s consideration” of whether to initiate suspension or debarment proceedings against that contractor.
Contractors will want to know what information they will need to report into FAPIIS. The proposed rule requires current FAPISS information to be certified as being current, accurate, and complete. It also requires a certification as to whether the offeror, and/or any of its principals, has, within the past five years, been involved in any civil or criminal proceeding, or any administrative proceeding, in connection with the award to or performance by the offeror of any Federal or State contract or grant, if the proceeding resulted in: - a conviction (criminal proceeding)
- a finding of fault and liability that results in a payment of a monetary fine, penalty, reimbursement, restitution, or damages of $5,000 or more (civil proceeding)
- a finding of fault and liability that results in the payment of a monetary fine or penalty of $5,000 or more, or the payment of a reimbursement, restitution, or damages in excess of $100,000 (administrative proceeding)
- a disposition by consent or compromise with an acknowledgement of fault by the contractor, if the proceeding could have resulted in any of the foregoing outcomes.
Open items include whether this proposed rule will apply to commercial items and whether the rule will apply to Commercial-Off-the-Shelf (COTS) items. This is clearly a significant proposed rule that may affect the ability of certain contractors to receive Federal contract or grant awards. It is, however, mandated by public law. As such, there may not be very much that contractors can do to affect it. It should be noted that the FAR Councils cite President Obama’s March 4, 2009 Memorandum on Government Contracting as support for the proposition that responsible contractors are those that have “historically completed projects both effectively and cost efficiently.” Rather than fight the proposed rule, contractors may be better served to develop communication protocols to ensure that their past performance information is accurate (or to provide comments when they believe the information is not accurate), and to ensure that they are accurately reporting information into the FAPIIS database(s) when required to do so. As always, strong performance and cost/schedule discipline, coupled with robust customer communication, is the best means of ensuring good evaluations by Government officials. The proposed rule is here. Comment on the proposed rule here.
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