Procurement Fraud Training Procurement Fraud Branch AFMC LOJAF

Procurement Fraud Training Procurement Fraud Branch AFMC LO/JAF WPAFB OH

Introduction and Overview l Why are You Here? l Learn the Definition of Fraud l Examine the Consequences of Procurement Fraud l Primary Criminal and Civil Statutes Affecting Procurement Fraud l Who Commits Fraud and Who Reports It l Types of Procurement Fraud, Fraud Indicators and Trends l Fraud Investigations, Criminal, Civil and Administrative Remedies l Other Issues l Exercise and Discussion: Is this Fraud?

Why are we here? • Procurement Fraud is a serious problem • Learn about fraud and how the Government deals with it • Learn what you can and should do about it (and what you shouldn’t do!)

Consequences of Procurement Fraud l National Security l l l End Users l l l Failure of a part or system creates advantages for adversaries, both on the battlefield and at home Assets devoted to pursuing and prosecuting fraud cannot be used for other missions Safety issues Adverse mission impact due to unreliable systems Contractors and their Employees l l Safety issues Financial impact due to contracts lost to irresponsible contractors and unfair competition

Definition of Fraud l Three Elements to the Definition of Fraud: 1) Misrepresentation 2) of a Material Fact 3) with the Intent to Deceive l Includes: l Deliberate omission of material facts l False or misleading representations

Definition of Fraud l Can be a single act or combination of circumstances l Can be the suppression of truth or the suggestion of what is false l May occur by direct falsehood, by innuendo, by speech, by silence, by word of mouth or by look or gesture

The Law Primary Criminal and Civil Statutes Covering Procurement Fraud

Criminal vs Civil Cases • Intent – actual knowledge vs. reckless disregard • Burden of Proof – beyond a reasonable doubt vs. preponderance of the evidence (as little as 51% to 49% on balance) • Discovery – grand jury vs. depositions • Remedies – imprisonment/fines/restitution vs. damages/penalties

Criminal Statutes False Statements (18 USC § 1001) l Prohibits making a false statement, concealing a material fact, or knowingly making or using a false document in any matter “within the jurisdiction of the United States” Major Fraud Against the U. S. l Prohibits false statements or claims on contracts >$1 million Fraud Involving Aircraft or Space Parts (18 USC § 36) l Prohibits false statements concerning any aircraft or space part

Criminal Statutes • False Claims (18 USC § 287) l Prohibits presenting false claims to the Government • Bribery of Public Officials (18 USC § 201) • • • Directly or indirectly promising, giving or offering anything of value to a public official with the intent to influence a public act, induce an illegal act Receiving anything of value in exchange for influence in the commission of a public act Public Corruption is the breach of public trust by elected or appointed Government Employees who ask, demand, solicit, seek, accept, receive or agree to receive anything of value in return for preferred treatment

Criminal Statutes • Anti-Kickback Act (41 USC §§ 52 & 53) • • Directly or indirectly promising, giving or offering anything of value to a contactor for the purpose of obtaining favorable treatment in connection with a prime contract or subcontract Receiving anything of value in exchange for favorable treatment in connection with a prime contract or subcontract • Conspiracy (18 USC §§ 286 & 371) • Agreement of two or more people either to commit a crime or to achieve a lawful end by unlawful means

Criminal Statutes • Mail & Wire Fraud (18 USC § 1341 & 1343) • • • Often used as a basis for a separate federal prosecution of what would otherwise have been only a violation of a state law Mail Fraud - Any scheme which attempts to unlawfully obtain money or valuables in which the postal system is used at any point in the commission of a criminal offence Wire Fraud - Provides for enhanced penalty of any criminally fraudulent activity if it is determined that the activity involved electronic communications of any sort, at any phase of the event • Interstate Transportation of Stolen Property (18 USC § 2314) • Transmitting, transporting or transferring in interstate or foreign commerce any goods, wares, merchandise, securities or money of a value of $5, 000 or more, knowing the same to have been stolen, converted or taken by fraud

Criminal Statutes • Money Laundering (18 U. S. C. §§ 1956 -1957) l Engaging in financial transactions in order to conceal the identity, source and/or destination of money l Encompasses any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting l Occurs in three stages: Placement, Layering, and Integration l Placement refers to the initial point of entry for funds derived from criminal activities l Layering refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point and the end of the laundering cycle l Integration refers to the return of funds to the legitimate economy for later extraction

Civil Statute False Claims Act (31 USC § 3729) l Prohibitions: l Knowingly presenting, or causing to be presented to the Government a false claim for payment; l Knowingly making, using, or causing to be made or used, a false record or statement to get a false claim paid or approved by the government; l Conspiring to defraud the Government by getting a false claim allowed or paid; l Falsely certifying the type or amount of property to be used by the Government; l Certifying receipt of property on a document without completely knowing that the information is true; l Knowingly buying Government property from an unauthorized officer of the Government, and; l Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the Government.

Civil Prosecution False Claims Act (31 USC § 3729) l Imposes treble damages and civil fines of $5, 000 to $10, 000 per false claim l Establishes “Preponderance of the Evidence" standard for all elements of the claim - including damages l Establishes liability for "deliberate ignorance" and "reckless disregard" of the truth l Rewards Qui Tam plaintiffs between 15 -30 percent of the funds recovered from the defendant l Defendant pays successful plaintiff's expenses and attorney's fees l Employment protection for whistleblowers including: l l l Reinstatement with seniority status Special damages Double back pay

na io at R ty ni tu or pp O liz at io n Who Commits Fraud and Who Reports It Financial Pressure “Fraud Triangle” – Common Elements of Fraud

WHO COMMITS FRAUD? l People do! l They could be: l l l • Employees or Management Contractor Personnel or Government Employees Military or Civilian Companies can be held responsible for actions of their employees and managers

How Fraud Gets Reported l l Reported by the Contracting Personnel Reported by a Contractor Employee l May be come to light as part of a Qui Tam lawsuit l Reported by other AF or other Do. D employees A call to the Fraud, Waste and Abuse Hotline l Reports are received by: l l l l AF OSI or other Law Enforcement Agencies Inspector General Staff Judge Advocate Installation Procurement Fraud Advisor AFMC LO/JAF Procurement Fraud Branch SAF/GCR

The Typical Offender • Contractor: • • • Company does not exceed 120 employees Machine shop, electronics manufacturer/assembler Annual sales range between $1 - $3 million Management structure made up of 1 to 3 executives with decision making authority Government Employee: • • • Has little or no supervision Works in the same area for an extended period of time Has extensive contacts with contractors that he or she oversees Darleen Druyun, former Principal Deputy Assistant Secretary for Air Force Acquisition and Management – Guilty of Fraud in air refueling tanker lease program

Types of Procurement Fraud, Fraud Indicators and Trends A “Blended Family”

Types of Contract Fraud l l Defective Pricing Cost Mischarging l l l l Direct/Indirect Costs Unallowable Costs Cost Shifting Between Projects Cost Inflation Labor Mischarging Progress/Performance Payment Fraud Disposition of Property and Materials Unfinished Ghammas Primary Health Clinic, Diwaniyah, Iraq

Types of Contract Fraud l Bribery/Kickbacks/ Gratuities l Price-Fixing and/or Bid Rigging l Outright Theft/Embezzlement l Quality Control Problems l Most serious due to possible bodily injury or threat to national security

Indicators of Bribery, Kickbacks and Gratuities • Contractor offers monetary payment or other compensation in exchange for favorable consideration in contract award or oversight • REALLY obvious Red Flag • Frequent and Apparently Unnecessary Visits by Contractor to Purchasers • Contractor Entertains Purchasers • Shoptalk/Water Cooler discussions akin to abnormally close Contractor/Purchaser Relationships

Indicators of Bribery, Kickbacks and Gratuities • Frequent use of Contractor despite Quality, Cost or Performance Problems • Excessive Use of a Single Contractor in a Competitive Field • Unexplained or Unnecessary Disqualification of Competitors • Apparent Excessive Pricing for Items or Services Supplied • Apparent Favoritism of Contractor by Purchaser

Indicators of Price-Fixing and/or Bid -Rigging l Agreements Among Contractors to: l Adhere to Published Price Lists l Raise Prices by a Specified Amount l Establish, Adhere to or Eliminate Discounts l Not to Advertise Prices l Maintain Specified Price Differentials Based on Quantity, Type or Size of Product

Cost and Pricing Fraud Indicators • Nonpayment of subcontractors and suppliers • Submission of cost or price information through multiple channels • Requests for payment that are inconsistent with earlier cost reports • Undue delays in liquidating progress payments

Cost and Pricing Fraud Indicators • Contractor bills costs that are not part of or required for contract performance • Contractor makes little or no physical progress on the contract even though significant costs have been billed • History of frequent invoice/voucher errors, poor documentation, & claiming unallowable costs • Different typeface on an invoice • Invoices for services that could/should not have been performed as claimed

Cost and Pricing Fraud Indicators • High turnover of contractor personnel preparing payment requests • Double counting costs as both direct and indirect • Work performed for other divisions excluded from G&A (overhead) base • Specialized/dedicated equipment is capitalized as contract reaches target or ceiling • Later requests for payment that are inconsistent with previous cost reports

Cost and Pricing Fraud Indicators • Change in contractor’s name or payee • Payments to assignee terminated without notice • One person authorized to both order and receive goods and services • Inadequate technical or quality surveillance processes, reliance on Certificates of Compliance from unknown suppliers • Poor Control over Government Furnished Equipment • Includes unauthorized use on commercial work

Cost and Pricing Fraud Indicators • Brokers/distributors with no expertise or quality controls • Significantly lower prices than competition, with no explanation • Frequent complaints by users of supplies of services • Inadequate traceability of parts • Shifting of costs between contracts, categories and/or commercial work • Failure to disclose excess inventory

Quality Control Fraud Indicators l Altered Test Reports/Certifications l l Non-Operating Test Equipment l l l Minor discrepancies in typeface, “whited out” sections, handwritten portions of typed documents, other alterations “It works, just not today” Lack of invoices or other evidence of off-site testing by a third-party “Pre-Signed” Certification or Receipt Forms l Indication that actual verification was not performed as these should not be signed until actual verification of facts have taken place

Quality Control Fraud Indicators l Non-Availability of Basic Information l l l Commingled Tested and Untested Items l l Inability to produce documentation for Quality Assurance reviews or cost verification Information that is not immediately produced should be confirmed Tested items should be stored separately to prevent accidental use of untested items “Salting” the Lots l Does that Contractor have “sample” parts prepared and waiting for inspection?

Quality Control Fraud Indicators l Substituting Generic for Brand-Name Parts l l Check to ensure packaging matches Questionable Testing Claims l Examples: Two tests at the same time using the same machine; 72 -hour tests over 2 days (48 -hours) l Parts Failures After “ 100% Inspection and Testing” l Subsequent Test and Inspection Failures on Products in Performance. Based Contracts l Rush Jobs (End of Month) Example of subtle differences between authentic and fake packaging

Quality Control Fraud Indicators l Limited Government Access to Production and Storage Facilities l Unwillingness to Mark or Seal in the Presence of a Government Representative l Major Work Schedule Changes without Notice l Contractor Efforts to Hide Records l Poor Reproduction of Certifications, Illegible or Incomplete Documentation l Use of Lesser Skilled Labor than Originally Anticipated l Substitution of Foreign Parts for Domestic Items

Product Substitution Fraud • Use of Inferior Quality Raw Materials • Substitution of Products or Services l l l False Certificates of Conformance l l l Counterfeit/non-qualified parts Sale of surplus or used parts as new Foreign made v. domestic products Remarking/Repackaging Provided by Contractor to Affirmatively State that the Product meets Contract Requirements Use of Unqualified Personnel in Services Contracts Lack of Required and/or Falsified Quality Control Testing

Sample Certificate of Conformance "I certify that on [insert date], the [insert Contractor's name] furnished the supplies or services called for by Contract No. via [Carrier] on [identify the bill of lading or shipping document] in accordance with all applicable requirements. I further certify that the supplies or services are of the quality specified and conform in all respects with the contract requirements, including specifications, drawings, preservation, packaging, packing, marking requirements, and physical item identification (part number), and are in the quantity shown on this or on the attached acceptance document. “ Date of Execution: ____________ Signature: _______________ Title: _________________

Trends l Largest group of cases prosecuted involve false test certificates l Largest commodity affected is fungible parts such as fasteners, electronics, wire & cable • Growing number of cases with 2 nd and 3 rd tier subcontractors • Potential fraud is greatest where Do. D heavily relies on contractor integrity

What Should You Do? • Understand Contract Requirements • Be alert for indications of fraud • Recognize undisclosed non-conformances, defective or substituted items • Recognize irregularities • Ask Questions • Follow-up on Notices of Potentially Defective Products • Report Wrongdoing • Do not wait for proof – Investigators are there to collect evidence and conduct investigations

Fraud Investigations, Criminal, Civil and Administrative Remedies

Fraud Investigations While a fraud investigation is in progress, continue normal contract management duties, HOWEVER, • Review risk assessments and consider appropriate precautionary actions • • Review contractor’s financial status Increase review of backup documentation Terminate ARP/Fast Pay, delegation of rate determination Actions which may affect an investigation must be coordinated with Fraud Counsel: l Contract Closeouts l Exercise of Contract Options l Final Rate Determinations

Fraud Investigations • Do not discuss a pending investigation with any contractor personnel except with the consent of the investigator • Cooperate with Government investigators, but do not request information from a contractor • Track significant costs incurred in connection with supporting an investigation for cost recovery purposes • Information related to investigations can only be shared with Government personnel and only on a need-to-know basis l Penalties involved in violating this policy

Criminal and Civil Fraud Litigation l Department of Justice is responsible for overseeing all criminal actions involving civilians and representing the Government in civil actions l l Oversees Government participation in Qui Tam (False Claims Act) cases Responsible for working with investigators to determine the merits of individual cases and action is in the best interests of the Government Main point of contact for cases involving Military Extraterritorial Jurisdiction Act for the prosecution of civilian accompanying the military Staff Judge Advocate retains primary responsibility for prosecuting active duty military members accused of procurement fraud

Suspension and Debarment l Administrative measures used to help ensure that the Government does business only with responsible contractors l l Based on a finding that the contractor is “Not Currently Responsible” l l Protects the integrity of the procurement process by ensuring that Soldiers receive safe, reliable, goods and services Can result from fraudulent or other illegal activity or from poor contract performance FAR 9. 403 defines “Contractor” as any individual or other legal entity that may reasonably be expected to submit offers or be awarded Government contracts l Has been interpreted to include Government employees or military members who are familiar with the contracting process

Suspension and Debarment l Suspensions are for a maximum of one year unless extended due to criminal or civil proceedings l Debarments are for the time period specified by the SDO and are generally three years in length l Suspended or Debarred contractors are not eligible for award of new (future) Government contracts l l l Contractors are obligated to complete previously awarded contracts Contracting Officers order minimum amounts necessary in IDIQ Contracts Contract Options are not exercised

Air Force Suspension and Debarment Program Components l l Air Force Suspension and Debarment Official (SDO) l Makes Suspension and Debarment Determinations l Located in Arlington, VA The Procurement Fraud Branch of the AFMC Law Office (Wright. Patterson AFB) l Coordinates and monitors all criminal, civil, contractual and administrative actions involving contract fraud or corruption within AFMC l Prepares Suspension and Debarment actions for review by the SDO and executes SDO decisions l Reports contractors suspended or debarred by the SDO to the General Services Administration l Assists the Department of Justice in all criminal and civil litigation matters concerning fraud related cases within the Department of the Air Force

Air Force Suspension and Debarment Program Components l Air Force Office of Special Investigations (OSI) l l Procurement Fraud Advisors l l l Major Procurement Fraud Unit, W-P AFB, OH Fraud Field Offices (6 in CONUS) and Fraud Resident Agencies (26 in CONUS) Deployed Personnel Located both at the Installation and MAJCOM levels Contracting Personnel Installation and Unit Legal Offices l Military and Civilian attorneys

Do. D Voluntary Disclosure Program l Provides a means for encouraging voluntarily disclosure of potential criminal or civil fraud matters to enhance contractor responsibility l l Prompt, voluntary disclosures, full access to records adequate corrective action and restitution are key indicators of contractor integrity and responsibility Disclosure cannot be made to avoid imminent criminal or civil action by the Government l l Disclosures are made with no advance agreement or promises regarding potential criminal or civil action – Not a “Safe Harbor” Matters disclosed cannot be the subject of an ongoing audit, investigation, contract administrative action or whistleblower disclosure

Do. D Voluntary Disclosure Program l Contractor conducts internal investigation and provides results to Do. D IG within 60 days of disclosure l l Remedies are coordinated with Dept of Justice, Investigative Agencies and the contracting organization l l May be subject to verification by DCAA and/or investigative agencies Criminal, Civil and Administrative remedies remain available to the Government Program is run by the Department of Defense Inspector General, Arlington, VA

Other Issues

Third Party Contact l Promptly report all contacts by non-Air Force counsel regarding Air Force or Government business to your Legal Office or Fraud Counselor • Refer all media inquiries to Public Affairs • Do NOT engage in discussions with non-Air Force counsel or reporters without approval • • Procurement Fraud cases are high-profile issues Unapproved discussions may compromise the Government’s ability to act in ongoing investigations and criminal or civil litigation

Records • All official written materials and e-mails may be subpoenaed or released under Freedom of Information Act or during litigation. • Record all facts, observations and comments accurately and professionally. • • Record facts as soon as possible so that they are fresh in your memory Make sure to include dates and times • Preserve all written material related to a issues under investigation or in litigation, no matter how old. • If in doubt about the relevance of a document, sample or other item, keep it – it may have a value later on to investigators

Determination of Fraud Exercise and Discussion Get ready to answer questions!

Is This Fraud? l Nutsen Boltz LLC is a small distributor of military and commercial items l It is awarded a contract for OEM Mil. Spec valves l Nutsen Boltz buys the valves from F. A. K. Enterprises, repackages them and ships them to the Government l Several valves are returned because they don’t fit and others because they leak

Is This Fraud? • What if the valves are not only the wrong size but are not OEM parts? • What if Nutsen Boltz relies on a F. A. K. Enterprises Certificate of Compliance? • What if Nutsen Boltz delivered the valves to major prime contractor, who delivered them to the Government. • who is liable?

Is This Fraud? Does a contractor commit fraud if it: • Lies to the Government? • Doesn’t provide any false information, but • • intentionally “leaves out” important information? Makes statements that might or might not be true? Makes a statement that turns out to be untrue?

Yes! There’s Fraud Here! l Non-conforming parts are not by themselves fraud, however, if those parts are deliberately substituted for those specified in the contract there is fraud l Labeling Non-OEM parts as OEM parts constitutes fraud l Deliberate alteration of non-conforming materials/parts to meet contract specifications constitutes fraud l Reliance on a certificate of compliance may limit criminal liability, however, deliberate ignorance or failure to test according to contract specifications constitutes fraud

Yes! There’s Fraud Here! l Determination of liability for fraud may fall on both the prime contractor and the subcontractor if it can be proved that they had knowledge of the incorporation of non-conforming parts l Statements that are made to intentionally mislead the Government constitute false statements and may be prosecuted l l This includes deliberate “omissions” of relevant facts or information Statements that are true at the time they are made may constitute fraud if they are part of an attempt to deceive the Government

Conclusion l Why are You Here? l Consequences of Procurement Fraud l Definition of Fraud l Primary Criminal and Civil Statutes Affecting Procurement Fraud l Who Commits Fraud and Who Reports It l Types of Procurement Fraud, Fraud Indicators and Trends l Fraud Investigations, Criminal, Civil and Administrative Remedies l Other Issues l Exercise and Discussion: Is this Fraud?

And REMEMBER…. REPORT suspicions of Procurement Fraud promptly! DO NOT WAIT FOR PROOF Contact Your Supervisor, Fraud Advisor, Law Enforcement, Legal Office or contact a Fraud Hotline