Wednesday, August 21, 2019

American Airlines to Pay $22 Million to Resolve False Claims Allegations

It doesn't matter how big or small the company, contract fraud happens.

The U.S. Postal Service (USPS) contracts with commercial airlines for the safeguarding and timely delivery of U.S. Mail to foreign posts, including the mail sent to deployed military. American Airlines is one of those USPS contractors. USPS contracted with American Airlines to "take possession of receptacles of United States mail at six locations in the United States or at various Department of Defense and State Department locations abroad, and then deliver that mail to numerous international and domestic destinations."

To receive payment under the contract, American Airlines was required to submit electronic scans of the mail receptacles to USPS reporting the time the mail was delivered at the specified destinations. If the mail was delivered late or delivered to the wrong location, American Airlines would be penalized.

Yesterday, the Justice Department announced a settlement to a long-running investigation into American Airlines performance under the contract. The USPS's Office of Inspector General's (OIG) investigation disclosed widespread falsification of the dates and times that American Airlines said that it transferred possession of US Mail to intended recipients. Based on this investigation, the Justice Department charged American Airlines with fraud under the False Claims Act.

Under the terms of the settlement, American Airlines agreed to pay $22.1 million to resolve its alleged liability under the False Claims Act. The Government's claims are allegations only, and there has been no determination of liability.

Tuesday, August 20, 2019

DoD Contractors Return $200 Million to Government through Mandatory Disclosure Program

For the past ten years or so, Government contractors and subcontractors have been required to self-disclose "credible evidence" of certain (i) violations of criminal law, (ii) violations of the civil False Claims Act, and (iii) significant overpayments on Government contracts (see FAR 52.203-13). Such disclosures are usually made to the Office of Inspector Generals' (OIG) office for the respective Agency awarding the contract. Within the Defense Department, the DoD-OIG is the Agency designated to receive disclosure from Defense contractors.

So how is the mandatory disclosure program working? The DoD-OIG recently reported that since the inception of mandatory disclosure rules, more than $200 million has been returned to the Government by Defense contractors under the mandatory disclosure program since inception.

Most of the disclosures and subsequent recoveries fall into two, somewhat related categories; labor mischarging (e.g. timecard fraud) and misclassification of costs resulting in inflated indirect rates. Other less significant recoveries included non-conforming or counterfeit parts, false certifications, and theft of Government property.

Typically, the resolution of self-disclosures, in addition to paying the Government back, involve commitments to strengthen internal controls including training.

The OIG also reported that many disclosures involving overpayments or false claims ultimately lead to additional recoveries than initially reported. Cost impact analysis by contractors are typically audited by contract auditors who tend to dig a bit deeper into the data than contractors are wont to do.

Monday, August 19, 2019

Prison Time for Construction Equipment 'Flipper'

Here's a type of contract fraud you don't see too often.

The Federal Surplus Property Donation Program allows qualifying non-profits, municipal agencies, and disadvantaged businesses to acquire Government surplus at special below-market rates. Sometimes surplus items are free. Recipients are required to demonstrate a legitimate need for the surplus, and they must agree not to sell, lease, or rent it.

Mark Jackson and his construction company Kingridge Enterprises, Inc. were accepted into the program by falsely claiming his disadvantaged nephew owned and operated Kingridge. However, the nephew never worked for Kentridge, drew no salary, exercised no operational control, and lived more than 100 miles from the office.

Once in the program, GSA (General Services Administration) who administers it, doesn't ask too many questions. Jackson took advantage of this lapse in oversight to acquire more than $1 million in surplus property that he in turn, sold at significant profits.

Jackson gave false justifications to acquire surplus property - mostly construction equipment. One example included a CAT 621B scraper that Jackson purchased for $12,000 and sold to an out-of-state equipment dealer for $18,500. Jackson claimed he needed the scraper for a Corps of Engineers contract he had been awarded. In a four-year period, Jackson flipped more than 100 items, netting him more than $1 million in the process.

In some cases, he had his buyers sign 'sham' joint venture agreements so conceal the fraud.

Mr. Jackson has now been sentenced to fie years in prison for his flipping scheme, ordered to forfeit his million dollar profit and pay an additional $350 thousand to settle related tax deficiencies.

The full Justice Department press release can be accessed here.

Friday, August 16, 2019

Does DCMA Effectively Resolve Audit Findings?

What is going on between the Defense Contract Management Agency (DCMA), the Defense organization that administers contracts and the Defense Contract Audit Agency (DCAA), the Defense organization that audits Defense contracts? DCAA audits the contracts but it is up to DCMA to resolve any findings that might arise as a result of the audit.

We ask this question because the Defense Department Office of Inspector General (DoD-OIG) recently announced that it would begin an evaluation of  "DoD Contracting Officer Actions Taken on Defense Contract Audit Agency Report Findings Involving Two of the Five Largest DoD Contractors." Those two contractors, as it turns out, happen to be Boeing and Lockheed Martin. Implicit in this announcement is that someone has not been at all pleased with how DCMA is resolving DCAA audit reports. Who? The OIG's announcement does not say. It could be that the OIG has been receiving hotline complaints concerning the manner in which audits are resolved. It could be that the OIG is tracking its own metrics on the percentages of audit exceptions sustained. Whatever the genesis, this is not a routine OIG evaluation.

The OIG has selected a sample of thirty audits for its evaluation. Many of the selections are audits of annual incurred cost submissions. There are several involving Cost Accounting Standards (noncompliances with disclosed cost accounting practices and cost impact when contractors fail to comply with CAS). Also on the OIG's list are audit reports on identified business system deficiencies (usually involving the accounting system) and estimating system deficiencies.

This might become interesting.

Thursday, August 15, 2019

SBA Surety Bond Guarantees - Lower Fees Trial Extended Another Year

The SBA (Small Business Administration) just announced a one-year extension of the temporary decrease in the guarantee fees that it charges all Surety companies and Principals on each guaranteed bond issued in SBA's Surety Bond Guarantee (SBG) Program.

SBA's SBG program is a pretty good deal. Under this program, SBA guarantees a certain percentage of bid, payment, and performance bonds for small and emerging contractors who cannot obtain bonds through regular commercial channels. The SBA guarantee incentives sureties to provide bonding for small businesses and thereby assists small businesses in obtaining greater access to contracting opportunities. SBA gets to establish such fees for small business concerns and premiums for sureties as it deems reasonable and necessary. The guarantee fees are assessed against both the small business concern and the surety. These fees, in turn, are deposited into a revolving fund to cover the program's liabilities and certain program expenses.

Back in October 2018, the Surety fees were reduced from 26 to 20 percent of the bond premium, and the Principle fee decreased from $7.29 to $6 per thousand dollars of the contract amount. These lower fees were set to expire next month, September 2019 but SBA now believes it needs more data to fully evaluate the effect of the lower fees on the SBG program. What are the risks to the program? Do these lower fees generate enough money in the revolving fund to keep it afloat?

To acquire more data and provide more time to study it, the SBA has extended the trial period for the lower fee amounts another year. Its a good deal for small businesses.