Introducing the “Do Not Pay List”
Improper payments have long been the target of Federal oversight officials. The Improper Payments Information Act of 2002 (P.L. 107-300, aka “IPIA”) required Federal agencies to identify vulnerable programs, estimate amounts of improper payments, and report back to Congress on progress being made to reduce such payments. The Improper Payments Elimination and Recovery Act of 2010 (P.L. 111-204) amended IPIA to require Federal agencies to review their programs and activities for improper payments at least once every three years, to produce a “statistically valid assessment” of improper payments being made, and to report on “causes of the improper payments, actions planned or taken to correct those causes, and the planned or actual completion date of those actions….”
The Office of Management and Budget (OMB) has a website dedicated to reducing improper payments. It says—
Federal agencies make more than $2 trillion in payments to individuals and a variety of other entities each year. An improper payment occurs when the funds go to the wrong recipient, the recipient receives the incorrect amount of funds, or the recipient uses the funds in an improper manner.
So you can see that the issue of “improper payments” is a big deal. While we don’t necessarily agree that the eye-catching estimate of $2 trillion in such payments is based on a rigorous statistical analysis, we do agree that everybody will benefit if improper payments are reduced or eliminated altogether.
President Obama obviously thinks the issue of improper payments is a big deal. In November, 2009, he issued Executive Order 13250 (“Reducing Improper Payments and Eliminating Waste in Federal Programs”) “to reduce improper payments by intensifying efforts to eliminate payment error, waste, fraud, and abuse in the major programs administered by the Federal Government….” In March, 2010, he issued a Presidential Memorandum (“Finding and Recapturing Improper Payments”) to direct Federal agencies “to expand their use of Payment Recapture Audits, to the extent permitted by law and where cost-effective.”
In addition to the foregoing, in June, 2010, President Obama issued another Presidential Memorandum (“Enhancing Payment Accuracy Through a ‘Do Not Pay List’”) that focused on preventing improper payments by making sure that recipients of Federal funds were eligible for those payments. President Obama wrote—
… I hereby direct agencies to review current pre payment and pre-award procedures and ensure that a thorough review of available databases with relevant information on eligibility occurs before the release of any Federal funds, to the extent permitted by law. At a minimum, agencies shall, before payment and award, check the following existing databases (where applicable and permitted by law) to verify eligibility: the Social Security Administration's Death Master File, the General Services Administration's Excluded Parties List System, the Department of the Treasury's Debt Check Database, the Department of Housing and Urban Development's Credit Alert System or Credit Alert Interactive Voice Response System, and the Department of Health and Human Services' Office of Inspector General's List of Excluded Individuals/Entities. This network of databases, and additional databases so designated by the Director of the Office of Management and Budget (OMB) in consultation with agencies, shall be collectively known as the ‘Do Not Pay List.’
Now, nearly two years later, the OMB has issued its own Memorandum that discusses progress that has been made on the President’s direction, and tells Agencies that it’s time to get serious about using the “Do Not Pay List.” The OMB Memo notes that a “web-based, single-entry access portal” has been developed in order to permit Agencies to access the various databases that President Obama identified. In addition, “data analytics services” that “utilize additional data sources” are now part of the “Do Not Pay solution.” These additional data sources include—
… Treasury's Office of Foreign Assets Control List, zip code data, prison information, and several privately available sources. The sources are augmented by advanced data analytic activities for identifying trends, risks, and patterns of behavior that may warrant further review by the agency.
So that’s nice. But that’s not all. The OMB Memo states—
In addition, while the agency plans should be based on the existing legal framework of statutes and regulations (to enable the immediate implementation of the plans), agencies are encouraged to submit to OMB -for OMB and interagency consideration -suggestions for possible revisions to statutes or regulations that could have the potential to improve the Federal Government's ability to access data or develop and use central solutions for pre-payment eligibility reviews. As these suggestions will be considered on a separate, parallel track, an agency should submit them to OMB separately from the agency's submissions of its draft and final plans.
Well, that might give one pause. We wonder exactly what “revisions to statutes or regulations” we might see in the future. But that’s not all. The OMB Memo also states—
… contracting officers shall continue to use the Federal Awardee Performance and Integrity Information System (FAPIIS) to establish whether a contractor has the integrity and business ethics to receive a federal contract, in accordance with applicable statutes and regulations. To the extent that additional information provided by the Do Not Pay solution is helpful to contracting officers, in their efforts to ensure that the Federal Government does business with responsible parties, contracting officers are encouraged (but not required) to review the Do Not Pay solution for this purpose. The agency's Chief Acquisition Officer shall work with its CFO (or the other relevant official who is accountable for complying with the President's "Do Not Pay List" directive) to evaluate the extent to which the information provided by the Do Not Pay solution can assist contracting officers as a complement to F APIIS. Acquisition officials are encouraged to periodically review the Do Not Pay solution to determine if the information provided would be useful in the agency's acquisition process.
Let’s wrap this up.
A mixed message, perhaps. But also not especially surprising. Or so it seems to us.
USAID Contractor Diverts Funds to Bogus Subcontractors
Mark-Anthony Elisha Adams, age 43, of Fort Washington, Maryland, held the position of Deputy Director at MasiMax Resources, Inc. MasiMax, a contractor to the US Agency for International Development (USAID), was acquired by RTI International in 2009 and has not existed as a separate entity since 2010. In 2011, RTI became aware of a possible subcontracting problem with MasiMax’s prime contract with USAID, and notified authorities.
An investigation by the USAID’s Inspector General and other Federal officials determined that Adams allegedly approved more than $1 Million in fraudulent invoices from “subcontractors” controlled by Adam’s wife and his friend. According to the story by Law360 (subscription required)—
Mark-Anthony Elisha Adams, 43, and his wife, Latasha Bell, 36, of Fort Washington, Md., pled not guilty to charges including wire fraud, mail fraud, conspiracy to launder money and aggravated identity theft in Washington federal court … The indictment alleges Adams forged a coworker's name on various forms to get the bogus invoices approved. In one case, the couple allegedly submitted an invoice for more than $3,600 for an honorarium and per diem for ‘Latasha S. Bell, Ph.D.,’ purportedly a participant in a research program attending a meeting in Tanzania. …
Lipscomb, 42, of Aliso Viejo, Calif., pled guilty to conspiracy to commit wire fraud on March 2 in connection with the alleged scheme and agreed to forfeit more than $386,000. He was released on his own recognizance pending sentencing. He faces a maximum sentence of 20 years in prison and a $250,000 fine, prosecutors said.
The Law360 story noted that the funds allegedly diverted by Adams were intended to benefit global public health initiatives, including fighting the HIV/AIDS epidemic in Africa. The story quoted prosecutors as follows—
‘Instead of the funds being used to assist in the treatment of conditions such as HIV/AIDS, the money was allegedly used by Mr. Adams and Ms. Bell to pay for expensive home renovations and purchase luxury vehicles such as a Cadillac EXT and a Mercedes S550.’
Normally we like to probe stories such as these to determine whether better internal controls may have detected this type of wrongdoing earlier. In this case, we have a company executive who allegedly forged a coworker’s invoice approval. But there has to be more to this story, because it should take more than an approved invoice to generate payment to a subcontractor. There also needs to be an executed subcontract. That subcontract needs to have been awarded and the price determined to be fair and reasonable. We don’t know whether that happened or how normal corporate procurement processes were subverted. All we know is that within a couple of years of acquiring MasiMax, RTI International detected some irregularity that caused them to bring in the authorities.
The Law360 article reported RTI’s reaction as follows: “From our perspective, I think we've been wronged. Clearly the government has been wronged, and we really hope justice is carried out in this case." We are guessing that justice will be carried out.
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Kennedy Aide Sentenced for Wire Fraud and Theft of Government Property
 Longtime readers of this blog know that we believe the incidence of fraud committed by government contractors is no higher than that committed by government civil servants—or even by military personnel. We believe that where you find lax internal controls, you will tend to find weak people committing fraud. Thus, we believe that the recent focus on government contractor fraud is no more or less warranted than a focus on fraud within the civil service or within the military.
Lord knows we’ve published a long list of blog articles covering fraud within all three venues. One need only type in “fraud” in the site search box (located at the top right of the home page) to see the various individuals who’ve tried, with mixed success, to obtain ill-gotten goods. We’d be saddened by the number of weak-willed people, in all walks of life, but we also remember that these fraudsters are a very small minority of the total population. The vast majority of government contractor employees act with honesty and integrity—as do the vast majority of civil servants and military personnel.
Today’s story is short and consistent with other stories of fraud. Today we want to bring your attention to the case of Ngozi Pole, a former Office Manager for the staff of former Senator Edward Kennedy. Mr. Pole was recently sentenced to 20 months in prison, three years of “supervised release,” 500 hours of community service, and was ordered to pay the U.S. Government $77,609 in restitution. Mr. Pole was found guilty of “five counts of wire fraud and one count of theft of government property,” according to this Department of Justice press release.
The DOJ press release had this to say about Mr. Pole’s actions—
… beginning in at least 2003 and continuing until January 2007, Pole repeatedly submitted paperwork causing the Senate to pay him larger bonus payments than had been approved by either the chief of staff or former U.S. Senator Edward M. Kennedy. According to the evidence presented at trial, these unauthorized bonus payments totaled more than $75,000. Pole hid the existence of these unauthorized payments by repeatedly transmitting information to the chief of staff that falsely showed that he received only those payments that had been authorized.
Well, what can we learn from the foregoing?
For starters, we can learn that one should not let one’s subordinates submit their own compensation paperwork. We might also consider that reports of compensation should come from sources other than those receiving the compensation. Those are two lessons that this incident brings to mind.
This incident also reinforces, once again, that you can find fraud anywhere you find lax internal controls and weak-willed individuals. It doesn’t matter whether you are looking within a government contractor or within a military unit, or within a civil service bureau. Or, apparently, within a Senatorial office.
TriWest Learns Price of Fraud by Losing $20 Billion TRICARE Contract
On March 19, 2012, Federal Times reported that the Pentagon had awarded the latest military healthcare contract (called TRICARE) to UnitedHealth Military & Veterans (UHMV), a part of the UnitedHealth Group. The incumbent contractor, TriWest, lost the contentious competition and nobody at Federal Times was quite sure why.
But the author of the Federal Times story noted two interesting facts that may have played a role in TriWest’s loss.
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During the competition, “new bids” were solicited “after UnitedHealth Group argued that Tricare chose contractors that promised to negotiate discounts with health providers at levels below Medicare. That, they said, forced contractors to focus on low costs rather than quality care.”
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In September, 2011, TriWest “was ordered to pay $10 million after a whistle-blower lawsuit said the company ‘systematically defrauded’ Tricare by not passing on savings to the government gained through negotiations with health care providers; by pushing through large numbers of claims without checking them for errors to avoid late fees; and by paying for ineligible beneficiaries, non-covered services, unknown services and services paid for by another provider.”
So while nobody knows for sure what the debrief would tell TriWest, the clear implication is that TriWest’s hands were tainted by fraudulent conduct, which caused the company to lose out on the $20 Billion TRICARE award.
A couple of weeks later, Bloomberg reported that TriWest had protested the award decision at the GAO. According to the Bloomberg article, TriWest argued that—
The U.S. Department of Defense made an ‘inexplicable decision’ to award the contract to UnitedHealth, ‘a company with a long history of performance problems and legal issues, and with no history of providing health care to the military,’ David McIntyre Jr., TriWest’s chief executive officer, said in a statement yesterday.
TriWest’s bid was lower than UnitedHealth’s offer and also included ‘several hundred million dollars’ in discounts that the government failed to include in its review, McIntyre said during a conference call with reporters today.
The Bloomberg article reported that UnitedHealth has had its own problems with allegations of fraud. According to the story—
UnitedHealth’s legal issues include an American Medical Association lawsuit against the company, McIntyre said. The lawsuit filed in 2000 alleged the insurer manipulated payments to out-of-network doctors. UnitedHealth announced in January 2009 it would pay $350 million to settle the suit, which sought damages for the physicians.
Apparently, TriWest is arguing that the DOD should have considered UnitedHealth’s settlement in its evaluation of past performance. Bloomberg reported—
The Pentagon only consulted five references provided by UnitedHealth in its review of the company’s track record, McIntyre said. Tricare officials should have done more to examine the company’s prior performance, such as contacting insurance commissions in states where UnitedHealth operates and reviewing the insurer’s public financial documents, he said. ‘It’s a little like buying a house without an inspection,’ McIntyre said.
It seems that TriWest is arguing that, if its own recent fraud settlement affected perceptions of the company’s performance, then UnitedHealth’s 2009 fraud settlement should have counted against it, as well—kind of like offsetting penalties in football.
We’re not going to delve into the rules of evaluating past performance here. But it is not at all clear that the Pentagon evaluators had to impute a 2009 UnitedHealth fraud settlement to the entity (UHMV) that was the legal entity submitting the official bid.
This was a “must-win” bid for TriCare. According to Bloomberg—
Closely held TriWest, based in Phoenix, risks losing what founder McIntyre has called its ‘only business.’ The company has helped manage the military’s health services for the past 16 years. The work has generated more than $20 billion in contracts for the company since fiscal 2000, according to data compiled by Bloomberg Government. ‘It is likely if we weren’t doing this work anymore, we would shut down the corporation,’ McIntyre said in today’s conference call.
For its part, the Pentagon is playing its cards close to its vest—as one would expect. This Washington Post article noted that TriCare asserted that it was told by the debriefers that “the decision to award the contract to UnitedHealth was based on ‘technical proficiency, past performances and price.’”
But the fraud allegations—and settlement—may have figured into the award decision, as well. We’ll wait for the GAO decision to learn more of the details. But in the meantime, readers should consider this to be a reminder that the price of fraud may be more expensive than it seems at first glance.
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