Compliance and Subcontractor Management
Once again we post yet another article blathering on about subcontractor/supplier management and how important it is to program execution. You’d think we’d get off that particular soapbox after six years, right? Seen it; read it; no need to see it or read it again. Boring!
A couple of weeks ago we were privileged to speak at the Public Contracting Institute’s annual “DCAA Hot Topics” update seminar, held in Dallas, Texas. The topic was the DFARS Business Systems but we chose to focus on moving beyond the “first line of defense against fraud, waste, and abuse” and, instead, addressed the compliance risks that the six “first lines” don’t address. (Indeed, as you know if you are any kind of reader of this blog, we don’t think those six systems do much of anything at all with respect to detecting or preventing fraud, waste, or abuse.) We spoke about compliance risks that exist outside the walls of the contractor’s facility: the compliance risks that exist in the program’s supply chain.
Again, a topic that we’ve discussed and written about before. Not much new to say or to write about it, right?
And as we’ve noted before, attorneys have a tendency to want to protect their corporate client(s) by focusing on contract language that protects and perhaps indemnifies the client from any wrongful actions performed by the subcontractors/suppliers in that program supply chain. We’ve even seen the phrase “transfer of risk from prime to sub” used before – and it bothered us. It bothered us because you can’t do that. You cannot transfer risk from prime contractor to subcontractor and there is no contract language that will do so. The most you can do is to put language in your agreement that will make the prime whole from the actions of its suppliers; and even then the phrase “make the prime whole” is problematic, because there are some things (such as schedule slips to significant program milestones) from which the program cannot recover.
Thus: our asserted position that program execution risk cannot be transferred and attorneys who believe otherwise simply do not understand what the phrase “program execution” actually means.
Enough rehashing of points made previously in other blog articles. Where are we going with this? Well, we’re going to make a relatively new point today:
Prime contractors (and higher-tier subcontractors) cannot simply rely on contract language to protect themselves from the wrongdoing of their suppliers and subcontractors. They cannot simply rely on certifications and representations. Prime contractors (and higher-tier subcontractors) will be held accountable for the wrongdoing of their suppliers.
Accordingly, they need to actually verify the representations and certifications. They need to actually review, audit, and/or confirm the assertions made by their suppliers.
That’s a bold set of statements, we hear you saying. Expensive, too. And manpower-intensive as well. Not likely to happen in this budget-conscious age of cost-cutting and layoffs.
But we think we are correct. Contractors that simply accept documents and invoices at face value, without checking and verifying the accuracy of those documents and invoices, may be found to be negligent. Those negligent contractors may be subject to allegations of False Claim Act violations, with all the expense that entails. Remember, “reckless disregard” and “deliberate ignorance” have been held to meet the requisite scienter standard under the civil FCA statute.
Obviously, the amount of checking and verification depends on a risk analysis, and that risk analysis starts with contract type. Choosing the correct contract type is more important that many would think. Cost-reimbursement subcontracts require more invoice review; whereas FFP subcontracts probably require more project status report review. T&M subcontracts are just risky in every sense, and should probably be avoided if possible.
The point is: somebody needs to assess risk and then take actions that would tend to militate against the assessed risk. Program teams simply should not expect suppliers and subcontractors to do the right thing; they should be checking and reviewing and verifying that their suppliers and subcontractors are doing the right thing.
As a President once said, “Trust; but verify.”
With that in mind, let’s talk about CSC’s prime contract with the Defense Information Systems Agency (DISA). CSC (more formally called Computer Sciences Corporation) was awarded a DISA contract to “help manage the telecommunications network” used by the Department of Defense. CSC then awarded a subcontract to NetCracker Technology Corporation. We know about this contractual relationship courtesy of the Department of Justice, which issued a press release describing what went wrong, the ensuing FCA litigation, and how much the two parties (CSC and NetCracker) had to pay in order to settle the allegations.
In summary, “From 2008 through 2013, NetCracker allegedly used employees without security clearances to perform work when it knew the contract required those individuals to have security clearances, resulting in CSC recklessly submitting false claims for payment to DISA.”
To settle the allegations, NetCracker agreed to pay $11.4 million. For its part, CSC agreed to pay $1.35 million.
Now, we all should understand why NetCracker needed to settle the FCA litigation. It provided employees that (allegedly) lacked the requisite security clearances. That’s not good. A former NetCracker employee filed a qui tam suit (as so often happens) and then the legal process took over from there. The original relator reportedly will receive $2.359 million for his efforts. So far, so good. That’s how these things work.
But what about CSC? What did it (allegedly) do wrong to lead to a $1.35 million settlement? We have no inside information, but we strongly suspect the answer lies in the sentence from the DoJ announcement that we italicized above. Notice how CSC’s role was described: “CSC recklessly submitting false claims for payment.” Recklessly. That’s the word we think describes why CSC had to settle and why the prime contractor was even involved in the litigation.
Apparently, CSC acted recklessly when it simply paid NetCracker’s invoices without checking whether or not NetCracker’s employees had the required security clearances. If we are correct in our assumption, then had CSC performed any reviews or checking or verification of the security clearances of its subcontractor, then it would have had some strong defenses to the FCA allegations of the relator. CSC didn’t review or check or verify, and that lack of action cost it a (relatively small) litigation settlement.
CSC was held accountable for the wrongdoing of its subcontractor—a fact which supports the set of bold statements we made earlier in this article. NetCracker represented that its employees had the requisite security clearances. NetCracker may even have certified to that “fact” (though we suspect it was more in the nature of an “implied certification” rather than an express certification). CSC accepted NetCracker’s assurances at face-value, without checking further. And that lack of diligence cost CSC $1.35 million.
Consider our assertions and the support for our assertions.
Consider not making the same mistakes as CSC.
Ish Kabibble, Wrong-Way Corrigan, and the Charge of the Light Brigade
My father, who passed away in 2010, used to try to get me to believe the craziest things. He tried to get me to believe that there was once a person with the name “Ish Kabibble.” He tried to tell me that there was a real person with the name “Wrong-Way Corrigan.” He was always trying to get me to believe that nonsense and I learned to be wary of what he called his “facts.”
And yet, in the present day, when Google can lead one on a learning adventure, it turns out that my father was telling me the truth about a lot of things. I was the one who was wrong, not he.
 Indeed, there was a person named “Ish Kabibble” and it turns out good ol’ Ish hailed from Pennsylvania, just like my father did. Ish (real name “Merwyn Bogue”) was a coronet player and a member of Kay Kyser’s popular big band. (Wikipedia tells me that Kyser’s band had 11 number one records in the 1930’s and 1940’s, including a 1943 version of “Praise the Lord and Pass the Ammunition”.) Not only did he play coronet for Kay’s band, but Ish was also the band’s business manager for 20 years. In addition, Ish was a member of Kay Kyser’s Kollege of Musical Knowledge, which was a television quiz show in 1949 and 1950. My father likely would have watched that TV show. Ish (and Kay Kyser) also appeared together in several films released in the 1940’s. They were comedies and Ish was supposedly a singer of comedic songs, kind of like the Weird Al Yankovic of his day. My father probably saw those films as a young boy. Wikipedia even posits that Ish’s name, roughly translated from Yiddish, was the source for Mad Magazine’s famous catchphrase, “What, me worry?” (But somebody else edited the article to point out that was a very tenuous reach. Want more detail on the etymology of the name? Check out this article.) So yeah, Ish Kabibble was a real person. He was actually kind of famous, once upon a time, even if he was known more for his foolish persona than his musical skills.
 Wrong-Way Corrigan was also kind of famous, once upon a time. He was a real person (real name Douglas Corrigan) and he was a mechanic and helped build Charles Lindbergh’s famous plane, The Spirit of Saint Louis. Like Lindbergh, Corrigan also wanted to make a daring solo flight across the Atlantic Ocean, but was denied permission to do so. Instead, he “accidentally” flew his plane “the wrong way” from New York to Ireland in 1938, about ten years after Lindbergh’s historic flight. Like Lindbergh, Corrigan flew solo and nonstop; his flight took 28 hours (versus Lindbergh’s 33-hour trip). But unlike Lindbergh, Corrigan claimed his flight had been a terrible mistake. Although Corrigan’s flight plan called for flying from New York to Long Beach, California, he ended up flying the wrong way to Ireland because of “heavy cloud cover that obscured landmarks and low light conditions, causing him to misread his compass.” Sure. And yet Corrigan never admitted to intentionally violating his flight plan. He was a true hero, even if he was known more for flying the wrong direction than for his heroics.
And he was a true hero. Corrigan’s heroics were noted by a journalist at the time, who wrote—
You may say that Corrigan's flight could not be compared to Lindbergh's in its sensational appeal as the first solo flight across the ocean. Yes, but in another way the obscure little Irishman's flight was the more audacious of the two. Lindbergh had a plane specially constructed, the finest money could buy. He had lavish financial backing, friends to help him at every turn. Corrigan had nothing but his own ambition, courage, and ability. His plane, a nine-year-old Curtiss Robin, was the most wretched-looking jalopy..
As I looked over it at the Dublin airdrome I really marveled that anyone should have been rash enough even to go in the air with it, much less try to fly the Atlantic. He built it, or rebuilt it, practically as a boy would build a scooter out of a soapbox and a pair of old roller skates. It looked it. The nose of the engine hood was a mass of patches soldered by Corrigan himself into a crazy-quilt design. The door behind which Corrigan crouched for twentyeight hours was fastened together with a piece of baling wire. The reserve gasoline tanks put together by Corrigan, left him so little room that he had to sit hunched forward with his knees cramped, and not enough window space to see the ground when landing
I was thinking about these perhaps random, unconnected people recently when I found myself in a heated discussion about the outcome of a very expensive ERP system implementation. I was not part of the implementation—not really. I had been brought in very late and none of my suggestions/recommendations could be acted upon—not because people disagreed with them, but because it was simply too late in the implementation process to make those changes. More to the point, there were a number of suggestions/recommendations made by a number of people that were “deferred” or passed on altogether, so as to move the implementation along. As a result of those decisions, the final ERP product lacked significant functionality. Immediately after implementation, the contractor began to realize some of those suggestions/recommendations by all those people really should have been acted upon, because now that poor contractor was going to have to spend even more time and money to get the ERP system right. The fixes were going to be extensive and expensive. It was almost as if the original implementation was going to have to be redone.
I was in a meeting when some of the post-implementation “fixes” were being discussed, and I made the observation that it was a shame the contractor was, in essence, going to have to do two system implementations, because the first one simply hadn’t done the job. Perhaps undiplomatically, I opined that it was too bad the ERP implementation leadership had placed more importance on achieving the “go-live” milestone instead of achieving full system functionality, and had placed more emphasis on reporting schedule progress than they had on listening to the input of those designing the ERP system. I noted that I thought those designing the ERP system hadn’t voiced their concerns to leadership strongly enough. (I also noted the requirements definition was lacking, as well.) With 20/20 hindsight, it was clear that the company should have postponed the implementation date so as to incorporate all the suggestions/recommendations, rather than proceed to implement a substandard system right on time. It would have meant a bit of embarrassment for those involved, but it would ultimately have saved the company a lot of money.
To be clear, I was voicing my opinion in the nature of a “lesson learned” discussion amongst people who had spent many long hours, late nights, and weekends trying to do the best job they could in the timeframe they had been given. I wasn’t disparaging their efforts; I acknowledged their efforts but felt they had been wasted to some extent because the objective hadn’t been fully achieved despite those heroic efforts. It was the direction that was lacking, not the execution. They had heroically flown their plane despite the odds stacked against them—but they had flown it the wrong way.
My observations really upset one of the people in the room—somebody who was not a leader of the implementation, but was instead one of the crew of people who had worked those long hours and late nights and weekends to make the “go-live” implementation date. He felt that nobody—especially somebody who had come late to the party—should criticize those efforts.
Basically, his point was that any criticism demeaned the heroic efforts of the implementation team. He felt that any criticism, even criticism aimed at leadership and the direction provided, was criticism of the team as a whole. From his point of view, the team was covered in glory because of their valiant efforts, and he didn’t want to discuss anything else about the project. He couldn’t see my point that there was a lesson to be learned about heroic efforts that were largely wasted because they were spent in the wrong direction.
Kind of like the charge of the British Light Brigade at the Battle of Balaclava in 1854.
(You wondered when that was going to come up, didn’t you?)
The charge, made famous by Tennyson’s poem, combines many of the same elements as I saw in the contractor’s ERP system implementation. (Aside from the whole life and death thing, of course.) The Light Brigade made a frontal assault against a well-prepared Russian artillery battery with excellent fields of fire. The results were not pretty. The British lost about 50% of their force and, although they reached their objective, they could not hold it and were immediately forced to retreat. The Russians were so well situated and the British force so ill-suited to a frontal assault that the French Marshal in the field was moved to say “It is magnificent, but it is not war. It is madness.” As Wikipedia notes, “The semi-suicidal nature of this charge was surely evident to the troopers of the Light Brigade, but if there were any objection to the orders, it was not recorded.”
You see the point here, yes?
As the Wikipedia article dryly states, “The reputation of the British cavalry was significantly enhanced as a result of the charge, though the same cannot be said for their commanders.” Wikipedia goes on to say that “The charge of the Light Brigade continues to be studied by modern military historians and students as an example of what can go wrong when accurate military intelligence is lacking and orders are unclear.” Or for our purposes, it is an example of what can go wrong when accurate requirements and system design is lacking and leadership direction is unclear.
Finally, let’s get to the lessons-learned aspect. My colleague was convinced that any attempt to learn lessons from the semi-failed system implementation was unwarranted criticism of the team—criticism that denied their heroic efforts. I didn’t agree, believing strongly that learning lessons is what leads to future improvement. How does that disagreement play into the charge of the Light Brigade? Well, the Wikipedia article states—
According to Norman Dixon, 19th-century accounts of the charge tended to focus on the bravery and glory of the cavalrymen, much more than the military blunders involved, with the perverse effect that it ‘did much to strengthen those very forms of tradition which put such an incapacitating stranglehold on military endeavor for the next eighty or so years,’ i.e., until World War I.
This has been an admittedly wandering article. We’ve gone from Ish Kabibble—an imaginary figure who turned out to be real—to another real person, Wrong-Way Corrigan, a hero who flew the wrong way. And we ended up with the charge of the British Light Brigade in a war more than 150 years ago. It’s been a long journey. What have we learned from the trip?
It is perfectly proper to conduct a post-implementation “lessons learned” exercise after an ERP implementation. It is perfectly proper to discuss such things as the adequacy of the requirements definition and system design. It is perfectly proper (though perhaps politically unwise) to discuss leadership direction and whether or not meeting schedule milestones was given greater importance than achieving full system functionality.
Those discussions do not—or should not—be seen as criticism of the efforts of those involved in executing the direction provided. Just because you flew in the wrong direction does not mean you didn’t make a heroic flight. Just because you charged into a well-defended position and lost half your troops doesn’t mean the troops didn’t display heroic levels of bravery.
More importantly, it is more than perfectly proper to discuss those things. It is vital. Because a failure to discuss problems and to learn lessons from them means that we will be repeating sub-optimal ERP system implementation in the future.
Even if it’s hard to hear, it needs to be said.
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DCMA Cost Monitors Fail at Proposal Audits, According to DoD IG
The Department of Defense Office of Inspector General, in a report that should not have surprised anybody who’s been following this issue, recently issued an audit report critical of the Cost Monitors at the Defense Contract Management Agency. The audit report essentially said that the DCMA Cost Monitors were less effective than the auditors of the Defense Contract Audit Agency at performing audits of contractor proposals.
Shocking, we know. Shocking.
The DoD OIG, continuing the time-honored tradition of criticizing anybody and everybody in the Federal procurement process that isn’t actually a member of the DoD OIG staff, told Pentagon leadership that DCMA “cannot demonstrate that it performs adequate cost analyses on proposals below the [DCAA] audit thresholds” and that DoD cannot “show that DCMA achieves an annual rate of return comparable to the return that [DCAA] achieved before the change in audit thresholds.” In other words, by shifting the proposal audit burden from DCAA auditors to DCMA Cost Monitors, the government is likely to pay more for its negotiated contracts. How much more? Perhaps lots more.
We don’t know how much money the DoD is leaving on the table because, according to the DoD OIG, “DCMA cannot demonstrate that it … reports reliable performance statistics on its cost analysis efforts.”
The genesis of this predictable finger-pointing exercise was a decision made by Shay Assad in September, 2010, to address DCAA’s inability to issue audit reports by establishing dollar thresholds below which DCAA would not perform audits of contractor proposals for new contract awards (called by DCAA “forward pricing proposals”). We told readers about that philosophical change in audit approach in this article. We were enthusiastic supporters of the notion that the less DCAA involvement in negotiations between Defense Department and contractor, the better it would be for everybody. We wrote: “this seems to be a good first step in DCMA’s evolution towards a contract administration agency that can evaluate and negotiate cost proposals without leaning on DCAA like a crutch. We applaud it—and encourage the Pentagon to keep going!”
A couple of years later (November, 2012, to be more exact) we published another article reviewing a DoD OIG audit report that expressed concerns with the shift of the workload from DCAA to DCMA. We summarized the IG’s concerns thusly—
If you are the DOD IG, you might notice that, despite reports at the time that stated ‘defense officials believe the change will focus resources on high-risk areas and increase savings to the department,’ the fact of the matter is that the change in audit approach did not reduce DCAA audit hours as much as initially predicted, did not help DCAA reprioritize the workload as much as initially promised and, as a result, the new approach actually led to a reduction in taxpayer savings. If you are the DOD Inspector General, you might well conclude that the entire initiative was poorly thought out and was, in essence, a mistake.
Indeed, that’s exactly what the DOD IG concluded, in a new audit report published this month.
Critically, the November 2012 OIG audit report found that the decision to transfer audit workload from DCAA to DCMA lacked a “business case”. In other words, the decision was made for bureaucratic reasons and lacked a solid, defensible business rationale. Which is ironic, because the people making that decision were ostensibly solid businesspeople. When Ash Carter was Undersecretary of Defense (AT&L) he famously hung a sign outside his Pentagon office that said, “In God we trust; all others bring data.” The funny thing is that, in this one decision at least, the data was never provided.
The foundational premise of the November 2012 DoD OIG audit report was that DCAA achieved $1,885 in taxpayer savings for every audit hour spent on such “low-dollar proposal audits.” According to the IG, as a result of shifting the proposal audit workload to DCMA, the U.S. taxpayers were going to lose out in $249.1 million in potential savings each year. The IG wrote—
Lastly, we find that DP and DPAP did not demonstrate why they chose to direct Department and taxpayer resources to DCMA to perform a job DCMA was not prepared to perform when DCAA had the existing infrastructure in place to get the job the done. A formal business case analysis could have identified that it was advantageous and more economical to direct any increase in DoD resources to the organization that already had the existing infrastructure to adequately perform proposal evaluations and track the questioned costs.
We thought the IG’s audit report was damning. We were appalled that such decisions were made based on questionable data, on inflated values of audit hours that could be saved and redirected toward incurred cost audits, and without proper vetting and approval. We admit it: we were young and naïve.
And now, three years later and three years older and three years wiser (or more cynical, if you prefer), we are not at all surprised that the DoD OIG is back once again, criticizing the initial decision and the results of that decision. Nor should you be surprised.
In its 2015 audit report, the IG found that things are looking better for DCAA five years after the policy change. DCAA’s backlog of incurred cost audits has been reduced (though of course not as much as had been promised) and questioned costs have increased as a percentage of examined costs when compared to 2010 (though of course the more recent DCAA annual report indicates that trend has reversed a bit). As predicted, DCAA was the winner. And DCMA was the loser—as the IG found that 34 percent of cost analysis files reviewed were non-compliant with DCMA Instruction 120 (“Pricing and Negotiation”). Granted, that was about half the non-compliance rate found in 2012—but the IG still found it to be unacceptably high.
There was more to the audit report, about DCMA’s delayed implementation of its Pricing and Negotiation (“P&N”) eTool and the fact that its Mission Review Team (MRT) does not evaluate the sufficiency of the cost analysis procedures performed by the Cost Monitors. But none of the other stuff matters as much as the fundamental point that the shift of audit workload from DCAA to DCMA has had troubling results, at least as reported by the DoD OIG.
This is How You Do Corruption
We’ve got to hand it to the U.S. Navy. They know how to do corruption big time. You know: gangsta style corruption. Not like those pikers in the Army or Air Force. The Navy team gets it. This is how you do corruption.
And we’re not talking about the little stuff, either. We’re not talking about the cheating scandal at the Navy Nuclear Propulsion School nor are we talking about the now infamous Inchscape Shipping Services scandal (aka the “Fat Leonard Scandal”) which cost at least four Navy officials their careers.
Nope. All that is history. It’s water under the bridge.
Today’s story is about the tainted award of “more than $53 million” in Navy contracts for telecommunications equipment, software, and related services. It’s a complicated story, and thus it’s worth writing about – unlike most of the banal stories of public procurement corruption that we happen across. We hasten to note that the “facts” of this story are based on allegations contained in a Federal grand jury indictment, and that the persons named have not been convicted of any crime yet. They are entitled to be presumed innocent until actually proven guilty. That being said, we are not going to further use the word “alleged” in this article (unless it’s in a quote); please just take the word as a given in what follows.
Now fasten your seatbelt because you are in for a wild ride, courtesy of this U.S. Depart of Justice press release. The press release discussed the actions of three individuals: (1) James Shank, a now-retired Program Manager at the Navy’s Space and Naval Warfare (SPAWAR) Systems Center; John Wilkerson, who was a DoD “Account Manager” for Iron Bow Technologies, LLC, and (3) Co-Conspirator 2, who was a program manager for Advance C4 Solutions (AC4S) until he joined yet another company (Superior Communications Solutions, Inc. or SCSI). What you need to know is that Mr. Wilkerson not only worked for Iron Bow, but he was also part-owner and operator of SCSI.
So right away we understand that Mr. Wilkerson had a conflict of interest problem with respect to his employment by Iron Bow. He was trying to balance being an employee of one IT company while being part-owner of another IT company—both of whom were competing for work with SPAWAR. That conflict of interest would absolutely play a role in his dealings with Mr. Shank, as we will learn.
The DoJ press release describes a corrupt relationship, where Shank “improperly shared information with Wilkerson and Co-Conspirator 2, and worked with them to structure the government contracts so as to give their companies an unfair advantage over other potential bidders.” But that’s just the summary of the relationship. The devil, as they say, is in the details.
As one example of how Wilkerson tried to play both ends of his two competing interests, note the following quote from the DoJ announcement—
Shank … initiated the procurement process on more than 11 delivery orders that purchased telecommunications equipment and furniture as part of the Air Force project. Those delivery orders were issued to Iron Bow in 2010 and 2011. Shank made sure that the delivery orders included telecommunications equipment and/or furniture that were assigned SCSI-specific part numbers, thereby guaranteeing that SCSI would receive revenue from the delivery orders. The indictment alleges that SCSI received approximately $33 million of the $35 million paid to Iron Bow under the various furniture and equipment delivery orders.
It seems that Wilkerson won lots of work for Iron Bow, while making sure (thanks to Shank) that his own company was a mandatory subcontractor under Iron Bow’s prime contract Delivery Orders. Nice.
For another example of the kind of corrupt chicanery that was going on, check out this bit—
… according to the indictment, Shank, Wilkerson, and Co-Conspirator 2 developed a request for proposal (RFP) for DO27, a contract to supply labor services for an Air Force technology project, including for overall project management services, so that AC4S would win the contract. On June 10, 2010, DO27 was awarded to AC4S in the amount of $18,332,738.10. Wilkerson provided Co-Conspirator 2 with a quote for labor on behalf of SCSI that was less than the quote he had previously submitted on behalf of Iron Bow as their sales representative. After SCSI was selected as a subcontractor on DO27, it subcontracted with Iron Bow to provide most of the labor SCSI was supposed to provide under DO27. Wilkerson was able to earn income from the work Iron Bow employees were doing by having SCSI act as a middleman and charging a mark-up on Iron Bow’s work. Wilkerson and Co-Conspirator 2 then directed an SCSI employee to create false invoices supposedly documenting the hours SCSI employees spent working on DO27, which were submitted to AC4S and paid by the United States government. SCSI received $6,794,432.98 on DO27 out of the $18 million AC4S received for providing labor for the project.
Did you get all that. Go back and read it again, slowly, to be sure.
SPAWAR awarded a Delivery Order to AC4S, using a quote from prospective subcontractor Iron Bow in the pricing. After award, Wilkerson submitted a lower bid from SCSI, thus cutting Iron Bow out of the picture. Naturally, AC4S awarded SCSI the lower-priced subcontract. But then SCSI turned around and awarded its own subcontract to Iron Bow, and Wilkerson pocketed the mark-up on the subcontract while bragging to Iron Bow about all the work he was winning for the company. In addition, somebody at SCSI doctored some fake invoices to make it seem that SCSI was adding value and not engaging in invoicing for excessive pass-through costs (which is a prohibited practice). Nice.
Perhaps the best part of this story happened when SCSI offered Shank, who was the SPAWAR Program Manager awarding all this work to Iron Bow, AC4S and SCSI, a job. The DoJ relates that aspect of the story thusly—
In late 2010 or early 2011, Wilkerson offered Shank employment. Shank did not disclose that fact to anyone at SPAWAR and did not recuse himself from any of the contracts that benefited Wilkerson. In February 2011, Co-Conspirator 2 left AC4S and went to work for Wilkerson at SCSI. According to the indictment, Co-Conspirator 2 received a $500,000 bonus when he joined SCSI, which was paid for by profit Wilkerson had earned on the furniture contracts.
By March 2011, the Air Force project was not complete and there were a number of contract disputes related to the project. Shank was directed not to take any other action related to the project without the approval of a senior manager. Nevertheless, the indictment alleges that in April 2011, Shank accepted more than $3.7 million worth of invoices that benefited SCSI without informing the senior manager. After Shank accepted employment with SCSI in May 2011, but was still working for SPAWAR, he allegedly approved more than $1.1 million worth of invoices that benefitted SCSI and Wilkerson.
Thus, Shank had a prohibited conflict of interest, in that he was awarding contracts and approving invoices related to those contracts, all while he had accepted employment from the same contractor to whom he had awarded the contracts and was sending him invoices to approve for payment. SCSI benefited from that relationship to the tune of $4.8 million in invoices approved for payment—invoices approved for payment in contravention of express direction to Shank not to take any action, because of unspecified contractual disputes. Nice.
But employment was not the only illicit activity that tainted the relationship between Shank and Wilkerson. As the DoJ announcement stated, “In addition, Wilkerson allegedly paid Shank $86,000 in the year after Shank retired from government service, funneling the payment through two other companies in order to conceal the source of the funds.” Nice.
As the DoJ press release stated: “Shank and Wilkerson face a maximum sentence of 20 years in prison for a wire fraud conspiracy; and two years in prison for offering and accepting illegal gratuities. Shank also faces a maximum sentence of 5 years for criminal conflict of interest.” Nice.
This is how you do it.
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As we’ve noted before, we (or actually “I”—but go with it) recently spoke at the Fall Meeting of the American Bar Association’s Section of Public Contract Law on the topic of Contractor Business Systems. As readers of this blog might well guess, we asserted that the administration and/or oversight of Contractor Business Systems costs a lot of bucks and delivers very little bang. We asserted that the premise that contractors’ business systems are the first line of defense against waste, fraud, and abuse, is wrong. We asserted that the whole notion that the majority of defense contractors’ business systems were inadequate, or that the allegedly inadequate business systems contributed to wasteful or fraudulent or abusive business practices, is very largely a fabrication—an imaginary tale dreamed up (we suppose) to scare certain legislators into giving DCAA more funding. We asserted that not only is the focus on Contractor Business Systems misplaced, but that the misplaced focus takes resources away from where they are really needed.
