The current willingness in Washington to give out millions of dollars to help spend the US out of recession may end up pushing the country further into debt. Many of the programs aimed at jump-starting the economy and infusing cash into dying market sectors come with little to no government oversight, which may result in a vast increase in the number of government contract procurement fraud cases.
In this type of distressed economic situation, it is more important now than ever before for businesses to ensure they have effective and efficient corporate compliance procedures in place to protect themselves from federal procurement fraud claims.
Federal Procurement Fraud
Each year, the federal government signs contracts worth billions of dollars with private companies and contractors for different types of goods and services. Procurement fraud refers to the practice of using false or deceptive methods in bidding and fulfilling government contracts. The fraud can occur in a number of ways, including:
Bid fixing
Cost mischarging
Defective pricing
Defective parts
Labor mischarging
Price fixing
Product substitution
Procurement fraud is a federal crime. The crime is punishable under several different federal laws, including the False Claims Act, Sherman Anti-Trust Act, Contract Disputes Act and the Truth in Negotiations Act. In 2006, the federal government recovered over $3 billion from procurement fraud cases.
New Programs Likely to Lead to Increased Fraud
With the current government’s emphasis on giving money to state infrastructure projects (like building/repairing bridges and roads) and environmentally sound projects (like “Cash for Clunkers”), the potential for fraud is rising exponentially. In a bad economy, businesses are in dire need of capital and some will use any means available to secure funding – even if these means are illegal.
Some of the areas that may be particularly vulnerable to fraudulent schemes include:
Green projects seeking government tax breaks or subsidies by claiming to be environmentally friendly
Projects claiming minority involvement in order to receive government tax breaks or subsidies
New ambitious infrastructure projects that will take many years to complete (i.e., bridges, tunnels, highways)
Lack of Government Oversight Not New
The government’s willingness to pay as well as its need to appear assertive, decisive and ready to take action may be trumping the need to first create proper infrastructure to oversee the projects before handing out tax-payer money. Instead, the federal government is pushing the country trillions of dollars into debt without first ensuring they are getting what they paid for.
Unfortunately this is not a new situation. There are many examples of the federal government willingly handing out tax-payer money without ensuring the money was used for proper purposes. For example, in the 1980s and 1990s, the government began a mass effort to enroll new health care providers into Medicare and Medicaid plans without truly vetting the providers to ensure they were legitimate providers.
More recently, this happened right here in Florida. It used to be that Medicaid did not even require an onsite inspection of a medical clinic prior to approving it and issuing it a provider number for billing. The result was millions of dollars paid to “phantom clinics” that would open for business and suspiciously bill hundreds of thousands of dollars in the first couple of months, receive payment and then disappear. The services were never provided because the patients were “professional” patients. As a result, the federal government lost thousands of dollars to Medicaid fraud.
More recently, there has been public outrage over how the financial institutions on Wall Street have used government bail-out funds. It is not known where all the money has gone and Americans are left questioning how their money has been used, especially after news reports of CEOs receiving huge bonuses.
Government Efforts to Monitor Fraud
The previous lapses in oversight, by both the Obama and Bush administrations, in the use of federal dollars have received much criticism from the press and public. There are some indications that this criticism has been at least partially heeded.
In 2006, the National Procurement Fraud Task Force (NPFTF) was created to provide the government with a group specifically focused on detecting and prosecuting procurement fraud. The task force includes members from the FBI, the Department of Justice and others. Since its creation, it has prosecuted more than 400 cases, resulting in more than 300 criminal convictions and millions of dollars in civil judgments and settlements.
In May 2009, President Obama took action to strengthen the federal government’s ability to prosecute those who defraud the government. The Fraud Enforcement and Recovery Act (FERA) makes several important changes, including expanding the reach and scope of the False Claims Act (FCA) to include those in TARP programs and those receiving stimulus money. In addition, FERA allocates $500 million to the DOJ, FBI, SEC and other federal agencies to help fund their efforts to prosecute fraud.
With the addition of the NPFTF and the passage of FERA, it is clear the federal government is serious about taking action against procurement fraud in government contracts. It has yet to be seen if these efforts will be enough to police the use of stimulus funds and other federal dollars.
Corporate Compliance Plans a Necessity
As the federal government continues its efforts to spend the country out of recession, it is vital that businesses take proactive steps to protect themselves from procurement fraud claims.
It is not surprising that procurement fraud claims increase in depressed economies. The need to cut costs leads some businesses to make poor decisions about where these cuts should be made. For many, the cuts may affect their information technology sectors and the companies may decide to wait on important system upgrades. However, IT systems are one of the most important ways for businesses to monitor employee activities, particularly in the bidding process and fulfillment of government contracts.
During such a turbulent time, corporations and other businesses need to strengthen and streamline their compliance procedures rather than take any steps that weaken them. It is necessary that companies not only have a sound corporate compliance program in place, but that they actually use it to monitor employee activities. The risks are too high to do otherwise, particularly with the potential of federal criminal prosecution and millions of dollars in civil fines.
Businesses concerned about the strength of their compliance policies or who are concerned about the possibility of federal prosecution for procurement fraud should contact an experienced attorney as soon as possible. There may be remedial steps that can be taken to reduce penalties the company may face.