False Statements and Trouble
 We’ve mentioned the False Statements Act (18 U.S.C. § 1001) before, in numerous articles. It’s kind of fundamental to the whole government contracting thing. If you don’t know much about it, you should really consider doing some research before your first proposal submission or before your first government audit of said proposal submission.
We are not lawyers but our understanding of the statute’s requirements can be summed up in one sentence: you cannot lie to government personnel and you cannot create false or fictitious documents, or you will get fined and very likely go to jail. (See, e.g., the real reason that Martha Stewart spent five months in a Federal Prison Camp.) Our blog has been rife with stories about deceit, lies, false certifications, false representations, and the like – most of which had some dire consequences for those who were found to have been engaging in such duplicitous activities.
Don’t be those people.
Two more examples to add to the pile of object lessons today.
In the first story, which came to us from our trusted source of a Department of Justice press release, we learned that the estate and trusts of Layton P. Stuart had settled False Claims Act litigation by agreeing to pay the U.S. Government $4 million. In addition to that payment, another corporate “victim” will receive an additional $6.9 million, bringing the final settlement tally to $10.9 million.
From the announcement, we learned that the origin of the FCA case had come from alleged false statements made by Mr. Stuart—“former owner and president of One Financial Corporation, and its subsidiary, One Bank & Trust N.A., both based in Little Rock, Arkansas.” According to that announcement—
The United States’ complaint, filed earlier this year, alleged that Stuart and One Financial violated the False Claims Act by making false statements about the financial condition of One Financial and One Bank to induce the Department of the Treasury to invest Troubled Asset Relief Program (TARP) funds in One Financial. … In the lawsuit, the United States alleged that in 2009, Stuart, on behalf of One Financial, applied for a TARP investment. According to the United States, Stuart knowingly made false statements about the financial condition of One Financial and One Bank and about the intended use of the TARP funds. In particular, Stuart allegedly concealed serial frauds that he and other One Financial directors and One Bank executives had been committing, and intended to continue committing, on One Bank. The schemes involved Stuart’s diversion of One Bank funds for personal use, including Stuart’s purchase of luxury vehicles for his wife and children. Within two weeks of receiving the TARP funds, Stuart allegedly diverted $2.185 million into his personal accounts. Stuart was terminated from One Bank in September 2012.
The DoJ press release notes that “The government’s False Claims Act lawsuit remains pending against One Financial. Separate criminal actions against several former One Financial and former One Bank executives also remain pending in the Eastern District of Arkansas.”
The second story also came courtesy of a DoJ announcement, in which it was stated that Wayne Simmons, of Annapolis, Maryland, had been arrested “after being indicted by a federal grand jury on charges of major fraud against the United States, wire fraud, and making false statements to the government.” What makes Simmons’ case interesting (and what’s getting it so much play on Facebook and other sites) is that Simmons was a recurring guest analyst on Fox News—a purported terrorism expert. So Simmons’ victims include Fox News (and the public at large). But his alleged fraud against Fox News is the least of the charges he’s facing.
According to the DoJ press release—
According to the indictment, Simmons falsely claimed he worked as an ‘Outside Paramilitary Special Operations Officer’ for the Central Intelligence Agency (CIA) from 1973 to 2000, and used that false claim in an attempt to obtain government security clearances and work as a defense contractor, including at one point successfully getting deployed overseas as an intelligence advisor to senior military personnel. According to the indictment, Simmons also falsely claimed on national security forms that his prior arrests and criminal convictions were directly related to his supposed intelligence work for the CIA, and that he had previously held a top secret security clearance. The indictment also alleges that Simmons defrauded an individual victim out of approximately $125,000 in connection with a bogus real estate investment.
So, according to the indictment (which should not be confused with a finding of guilt), Simmons was pretty much a serial liar and con man, bilking news companies, corporations, and individuals alike. If convicted, he’s looking at a maximum of 35 years in Federal prison (20 years on the wire fraud counts, 10 years on the major fraud against the U.S. counts, and 5 years on the false statements count.) That’s a long time in the pen for a 62 year-old man.
Two stories of alleged lies and deceit. One expensive settlement and one potential very long prison sentence. You may want to think twice before you follow in these individual’s footsteps.
Fake Cert Leads to Big Settlement
 File this story in the “Captain Obvious” folder. There’s nothing earth-shattering about this one. But it serves as a good example of how a false certification can lead to big troubles.
The story comes to us—as so many do—courtesy of the U.S. Department of Justice press release. From that source, we learn that UFC Aerospace and its former President (Doug Davis) settled a civil fraud lawsuit filed against them by the U.S. Government (as intervenor). The suit alleged that UFC and its then-President engaged in “fraudulent conduct in violation of the Small Business Act, 15 U.S.C. § 632(n), in order to secure numerous lucrative defense subcontracts with government contractors.” More specifically, the complaint alleged that “UFC falsely certified to government contractors that UFC was a woman-owned small business (‘WOSB’) when UFC at no point met either requirement for WOSB status under the Small Business Act. Specifically, no women were majority owners of UFC or managed or controlled UFC’s management and daily business operations.”
According to the DOJ press release –
UFC began claiming WOSB status at least beginning in late 2001, by representing to contractors UFC knew were doing work with the federal government that it was a WOSB. UFC falsely relied on the purported ownership interest of the wives of the actual owners, John Davis and Douglas Davis, to make these representations. UFC continued to represent that it was a WOSB at various times until 2011, and earned millions of dollars on the contracts procured with those representations. UFC did so because it understood that this status mattered both to the contractors and to the Government, and it believed that it was obtaining a competitive advantage by claiming to be a WOSB. However, at no time during the entire time period from 2001 to 2011 did UFC ever qualify under the Small Business Act as a WOSB. The only ownership interest that the wives of John and Douglas Davis had in UFC was through trusts that were entirely controlled by John and Douglas Davis, and under which the women were entitled to a maximum of only 5% of the trusts’ assets. Moreover, neither woman controlled or managed the company at any time. In fact, neither woman had company email accounts, attended management meetings, or spent regular time in the office during the relevant time period.
How big was the settlement that Davis and UFC negotiated with the DoJ? “In the settlement … UFC and DAVIS admitted and accepted responsibility for the fact that UFC never qualified for WOSB credit under the Small Business Act and will pay the Government $20,015,956.92.” (Emphasis added.)
$20 million for a false certification should serve as a definite warning to those entities who scheme to win Federal contracts and subcontracts under false pretenses. Indeed, the DOJ press release contained the following statement—
SBA Inspector General Peggy E. Gustafson said: ‘This settlement sends an important message that falsely certifying a company’s status as a Woman Owned Small Business is unacceptable and bears a significant consequence. We will continue to aggressively pursue parties that wrongfully obtain both prime and subcontracting opportunities for small businesses that are legitimately owned and controlled by women. I want to thank the U.S. Department of Justice for its dedication to reaching a settlement in this case.’
This story should also serve as a warning to prime contractors who may be willing to turn a blind eye towards potential subcontractors that may be in the “right” socioeconomic category and to which a contract award would enable meeting commitments made in Small Business Plans. The socioeconomic status of an entity should not – and must not – be the overriding criterion used to make source selection decisions. Yes, it is the responsibility of the subcontractor to accurately complete Reps and Certs, and there is no regulatory obligation that compels a prime to audit potential subcontractors to confirm the accuracy of those Reps and Certs. However, the prime cannot act with reckless disregard either. The prime cannot knowingly or negligently make a subcontract award based on false pretenses. Moreover, when there is corruption in the source evaluation and selection process, we need to carefully examine the course of dealings between the prime’s buyer and the subcontractor in order to identify whether there were any violations of the company’s business conduct policy (e.g., bribes or kick-backs) in the procurement. Given all that, in our view, the unnamed prime contractor in this story dodged a bullet.
Consider our assertion regarding the duties and responsibilities of the prime contractor when designing internal controls over subcontractor evaluations and selection decisions. And consider the consequences for UFC Aerospace when thinking about winning new contract awards through false or intentionally inaccurate Reps and Certs.
|
The Importance of Timekeeping
 In today’s modern aerospace/defense environment, direct labor dollars make up a smaller proportion of total contract cost than has historically been the case. We’ve noted this phenomenon before, with respect to the importance of managing supply chain risk and ensuring that subcontracted work supports overall program execution. While all that is relevant and true, sometimes it all comes down to managing the labor hours of employees within the four (or six) walls of the factory. Sometimes it is about internal controls over timekeeping and labor reporting.
Timekeeping and labor reporting is about the most obvious thing that would generate “interest” for employees (disgruntled and otherwise) looking to find wrongdoing. All they have to do is to look around them and see what their colleagues and peers are doing. They see when their fellow employees show up for work and they see when they leave for home. It’s incredibly easy to notice when somebody is taking advantage of lax management to work less than the standard work day. Consequently, timekeeping irregularities comprise the majority of internal hotline calls. Some of those hotline calls lead to official disclosure reports. At one point a few years ago, it was reported that timekeeping problems comprised as much as 75 percent of all mandatory disclosures made to Federal agency Inspectors General.
When discussing internal controls over timekeeping and labor reporting, the traditional answer is to point to employee certification and the review/approval of the next level supervisor or manager. Unfortunately, the distributed workplace—the new “virtual” workplace where many employees work in offices located miles from their supervisors or telecommute from home—doesn’t lend itself to management visibility over employee activities. Couple that from-a-distance management environment with a flexible employee work schedule, and it becomes relatively clear that the supervisor/manager approval of an employee timesheet is little more than a rubber stamp. It’s an illusory internal control.
DCAA likes to perform annual “floorcheck” audits (MAAR 6 audits) to evaluate the accuracy of contractor employee (salaried and/or hourly) "labor hour charges to contracts, indirect accounts, or other cost objectives,” but the fact of the matter is that no DCAA auditor is likely to surface intentional labor mischarging from floorcheck audit procedures and employee interviews, unless the employee (stupidly) decides to volunteer such incriminating information. The MAAR 6 audit procedures are more likely to uncover systemic, corporate-sponsored, mischarging instead of individual wrongdoing. Thus, DCAA audit procedures are no substitute for rigorous contractor internal controls in this area.
Moreover, the contract clause at 52.203-13 (“Contractor Code of Business Ethics and Conduct”) requires large businesses to “establish … an internal control system” that includes (among other requirements)—
Periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the Contractor’s code of business ethics and conduct and special requirements of Government contracting, including—
(1) Monitoring and auditing to detect criminal conduct;
(2) Periodic evaluation of the effectiveness of the business ethics awareness and compliance program and internal control system, especially if criminal conduct has been detected; and
(3) Periodic assessment of the risk of criminal conduct, with appropriate steps to design, implement, or modify the business ethics awareness and compliance program and the internal control system as necessary to reduce the risk of criminal conduct identified through this process.
Accordingly, if you are a large business (i.e., not a small business as that term is defined in FAR Part 19) then you need to be serious about establishing effective internal controls in the area of timekeeping and labor accounting. If you don’t do so, you risk DCAA finding that your accounting system has a significant deficiency, which will not be happy-making for your company.
Despite all the compliance requirements and disincentives for noncompliance, some contractors—some of the largest contractors—still screw-up from time to time. The Boeing Company is one of those large contractors that recently screwed-up to the tune of $18 million.
According to a Department of Justice press release, Boeing agreed to pay $18 million in order “to settle allegations that “the company submitted false claims for labor charges on maintenance contracts with the U.S. Air Force for the C-17 Globemaster aircraft.” According to the DoJ announcement—
The government alleged that Boeing improperly charged labor costs under contracts with the Air Force for the maintenance and repair of C-17 Globemaster aircraft at Boeing’s Long Beach Depot Center in Long Beach, California. … The government alleged that the company knowingly charged the United States for time its mechanics spent on extended breaks and lunch hours, and not on maintenance and repair work properly chargeable to the contracts.
Further details were provided here at MilitaryTimes.com. According to that story, “A former Boeing employee, James Thomas Webb, alleged that workers at the Long Beach Depot Center in California submitted claims from 2006 to 2013 for eight-hour days despite knowing that they spent less time than that working because of lunch breaks and other extended breaks.”
Importantly, note that the origin of the allegations was a qui tam relator, a former employee. The employee “received $3 million from the government under the settlement, and another $115,000 in legal fees from Boeing.” For its part—
Boeing didn't concede liability in the settlement.
‘Boeing took prompt corrective action immediately after it became aware of the site's irregular billing practice, and the company cooperated fully with the government investigation,’ the company said in a statement to USA Today.
The bottom-line here is that implementing effective internal controls over timekeeping and labor reporting will tend to generate a positive return on investment. Boeing is not the first major aerospace/defense contractor to learn this expensive lesson. Don’t let your company be the next DoJ settlement in the news.
DCAA Resources
Our recent articles on the dearth of published DCAA audit guidance (called Memoranda for Regional Directors, or MRDs) must have struck a chord, because we started to get emails from people who had access to those MRDs and who were willing to share them. Truthfully, there wasn’t much of interest except for the MRD that addressed how to deal with offsetting debit/credit transactions in a sample universe. (Indeed, our anonymous sources state that MRDs continue to be published in GFY 2016 but those MRDs continue to be of little interest to the general public.) But that fact just goes to support the notion that there was no reason for the audit agency to hide the guidance. There were no “secrets” and thus nothing to hide. Refusing to publish the “releasable” audit guidance feeds the suspicious minds of folk (like us) and does nothing to reduce the too-adversarial nature of the relationship between DCAA auditors and those being audited.
Regardless, we thank those who care enough to provide us insight into the “behind the walls” inner workings of DCAA. To that end, we thought it would be appropriate to lay-out our ground rules for receiving and using such insight.
-
If a document says “For Official Use Only” or FOUO we don’t want it. Don’t send it to us.
-
If a document is contains proprietary information regarding a contractor, we don’t want it.
-
If a document pertains to on-going litigation and is protected by Attorney-Client Privilege, we don’t want it.
-
If you are breaking an agency rule by sending it to us, we don’t want it.
-
If you are a Contracting Officer and you want us to give you advice on a dispute between DCAA and a contractor—and you are looking to issue a Determination on the matter—please don’t ask. We have nearly 900 blog articles and, chances are, we’ve already expressed our opinion somewhere in there. Maybe you can find what you’re looking for via the site’s search feature. If not, you’re on your own. Be bold.
Other than that, if you have things you would like to share, go ahead and email us. It’s always nice to augment our meager resources with information and insight from others.
And speaking of resources, it seems that DCAA has some concerns in that area. The concerns center on certain provisions of H.R. 114-270 – the 2016 National Defense Authorization Act (NDAA). While the bill has not yet been sent to President Obama—and there’s a decent chance he may veto it—the House and Senate have agreed on the Conference Report and it’s not likely to change much (if at all) from this point on. Of special concern to DCAA leadership is the language found in Title VIII of the bill (“Acquisition Policy, Acquisition Management, and Related Matters”). Proposed Section 893 states—
SEC. 893. IMPROVED AUDITING OF CONTRACTS.
(a) Prohibition on Performance of Non-defense Audits by DCAA.--
(1) In general.--Effective on the date of the enactment of this Act, the Defense Contract Audit Agency may not provide audit support for non-Defense Agencies unless the Secretary of Defense certifies that the backlog for incurred cost audits is less than 18 months of incurred cost inventory.
(2) Adjustment in funding for reimbursements from non-defense agencies.--The amount appropriated and otherwise available to the Defense Contract Audit Agency for a fiscal year beginning after September 30, 2016, shall be reduced by an amount equivalent to any reimbursements received by the Agency from non-Defense Agencies for audit support provided. …
(d) Incurred Cost Inventory Defined.--In this section, the term ``incurred cost inventory'' means the level of contractor incurred cost proposals in inventory from prior fiscal years that are currently being audited by the Defense Contract Audit Agency.
(Emphasis added.)
According to one source, Ms. Anita Bales (Director, DCAA) issued an email that said—
Last week, the 2016 National Defense Authorization Act (NDAA) conference report was released with provisions that affect DCAA. Specifically, the current House- and Senate-approved conference report prohibits DCAA from performing any non-DoD audits if our incurred cost inventory is not less than 18 months. We have been pushing hard to remove or modify this language, and we have been adamant in our arguments that reimbursable work has no impact on our resources for performing DoD work because of how each is funded.
Importantly, the Authorization Act is not yet final because it still has to be signed by the President. We are continuing to work this issue from several angles, and I want to assure you that we are working diligently with Congress staff members to explain that the proposed language in the bill will not help our efforts in reducing the backlog and will, in fact, hinder our ability to achieve their desired outcome.
(Emphasis added. Note we could not independently verify that this was a legitimate quote from Ms. Bale’s email.)
We do not presume to assume that it is a real email quote, but what if it were? The logic underlying the bolded statement would be consistent with what we’ve experienced of DCAA management. The logic conflates “resources” with “budget dollars” instead of linking “resources” with “audit staff.” In other words, it should be obvious that if you have a fixed number of “resources”—i.e., audit staff to perform audits—then you have to prioritize how those resources are used, regardless of funding source. Whether funding is provided by DOE or NASA or USAID or DHHS or from the DoD itself, the funding all comes from the taxpayers and they should expect (and get) the most efficient and effective use of their funds. Playing shell games with appropriation accounts achieves neither objective.
Our anonymous source states—
… the argument of the DCAA is that the reimbursable work is self-supporting. If that work is taken away by NDAA 2016, then auditors will have to be RIF'd, because they're in the wrong locations and there is not funding to TDY them to other locations, as was done in decades past. That may be true I don't know. I don't have access to the numbers.
Why is DCAA managing itself this way? Let’s be clear that we are almost wholly without insight into how DCAA prepares and manages its budgets – but it seems fairly obvious that Field Audit Offices (FAOs) are being created and staffed (and presumably funded) at the local Branch level. Why? Why not budget and manage at the Regional Level and let the appropriate Regional leadership determine where best to put his or her scarce audit resources, given the overall funding provided? Why determine local staffing based on local budgets, augmented by reimbursable work? Doesn’t that impact prioritization of the agency’s workload?
It sure seems that way to us.
It seems likely that Congress will send the FY 2016 NDAA to the President, who may or may not sign it. If a veto is made, it may or may not be overridden by Congress. Thus, there is a chain of “maybes” that need to happen in order to create a situation where the individual DCAA auditor would need to worry about the Section 893 language. But DCAA could mitigate any impact by rethinking its budgeting and management processes so as to limit reliance on non-DoD funding when developing program plans and priorities for the audit staff.
And those other non-DoD agencies that have come to rely on DCAA for audit support? They could mitigate the risk associated with elimination of DCAA audit support by making plans to get their own audits done. Indeed, certain agencies (including DOE and NASA) have begun talking about just that issue, and have begun to make plans to carry on without DCAA audit support.
In our experience, good DCAA auditors typically do not have a tough time finding new jobs at DCMA, EPA, DOE, or other agencies. DCAA trains its auditors well (or used to), and thus other Federal agencies are happy to fill their open slots with ex-DCAA auditors. Hell, private industry tends to fill its audit liaisons and compliance staff with ex-DCAA auditors—and we know there are several openings right now, for those interested in leaving Government service. So it’s not all bad and we don’t think the average DCAA auditor needs to be overly concerned—especially if that auditor is willing to relocate.
But we do think DCAA needs to rethink its current management approach and figure out how to manage its agency workload priorities without being overly reliant on funding from non-DoD sources. Funding is not resources; people are resources. That’s why former Comptroller David Walker started calling employees “human capital.” And when you have limited “human capital,” then the amount of funding you have is really irrelevant.
|
