Thursday, June 22, 2017

Poor Internal Controls Over Vendor Management Results in $530 Thousand Fraudulent Payment

Fowler General Construction holds a contract to build a new "Collaboration Center" at PNNL's (Pacific Northwest National Laboratory's) campus in Richland, WA. Taxpayers spend about $1 billion per year to Battelle Memorial Institute to operate the Lab for the Department of Energy.

In November 2016, PNNL received an email instructing the company to change the bank account for electronic payments made to Fowler for work performed. PNNL complied and issued a payment of $530 thousand to the new bank account on December 16, 2016.

In January 2017, Fowler called PNNL to ask the status of their payment stating they hadn't received the December payment. A subsequent investigation showed that the new bank account was not associated with Fowler and the account had been emptied shortly after payment had been made.


PNNL assigned Aleta Busselman, the Lab's enforcement coordinator, to investigate and prepare a root cause analysis report. Her job was to analyze PNNL's response to the bank account change request. DOE's (Energy) Inspector General and the Justice Department were performing their own investigation to determine how the  information to make the change was obtained by the thief.

Ms. Busselman's "audit" pointed to PNNL management and their failure to institute effective internal controls in its vendor program. PNNL management didn't like that result, fearing that it would make management and PNNL "look bad". For a few days she and management argued over what should be reported. Then, Ms. Busselman left for a scheduled vacation but when she returned, she didn't have a job. She also found that her report had been gutted of any mention of management responsibility.

Ms. Busselman is now accusing PNNL of retaliation and is suing to get her job back.

How effective would your internal controls be in preventing this kind of fraud?

The source for this post is an article appearing in  the June 21, 2017 edition of the Tri-City Herald.

Wednesday, June 21, 2017

FAR is Now Available for Kindle - Free

The FAR (Federal Acquisition Regulations) is now available for free in the Amazon Kindle Bookstore. With this version, you can highlight text, bookmark sections, and send quotes by email - features you're already familiar with if you use Kindle.

Now we can't say that this book will be something you want to read at bedtime (typical time to read: 92 hours and 49 minutes, 3,728 pages) and most people don't carry around a dedicated Kindle reader. But it might be handy to have as a reference tool - especially if you have Kindle on your smartphone. The version available for download is current through FAC (Federal Acquisition Circular) 2005-95 (January 19, 2017).

One thing that makes the Kindle version efficient is its integrated hyperlinks. For example, if you're reviewing the compensation cost principle to see if excise taxes on pension plan asset reversions or withdrawals are allowable, the cost principle refers you to another FAR section which, at a touch, will take you there.

The Kindle FAR can be accessed here.

If you need more detailed instructions including how to download the Kindle reader onto your smartphone, click here.

Note, FAR has been available in the Apple iBook format for some time. If interested in that format, click here to download it for free from the Apple Store.

Tuesday, June 20, 2017

Call for Public Input on Regulations that Need to be Repealed, Replaced, or Modified

In accordance with Executive Order (EO) 13777, Enforcing the Regulatory Reform Agenda, the Department of Defense (DoD) Regulatory Reform Task Force is seeking input on DFARS (the DoD FAR Supplement) solicitation provisions and contract clauses that may be appropriate for repeal, replacement, or modification. Interested parties have 60 days in which to submit written recommendations or comments.

Here's your chance to be heard and to be taken seriously.

EO 13777 directs Federal agencies to establish regulatory reform task forces. One of the duties of these task forces is to evaluate existing regulations and make recommendations to the agency heads regarding their repeal, replacement, or modification. The EO further requests that each Taxk Force attempt to identify regulations that

  1. Eliminate jobs, or inhibit job creation
  2. are outdated, unnecessary, or ineffective
  3. impose costs that exceed benefits
  4. create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies
  5. are inconsistent with "other" requirements
  6. derive from or implement EOs or other Presidential directives that have been subsequently rescinded or substantially modified.
An example of No. 6 would be the recent repeal of the Fair Pay and Safe Workplaces rules that were based on an EO from the previous administration but have now been rescinded. Keep this list in mind as you contemplate needed changes.

EO 13777 also requires the task forces to seek input and other assistance from entities significantly affected by Federal regulations including State, local, and tribal governments, small businesses, consumers, non-governmental organizations, and trade associations. Hence, this Federal Register call for input.

DoD has promised to consider all input it receives.

Click here for further information and directions for submitting your ideas.

Monday, June 19, 2017

What Does it Take to Enter SBA's 8(a) Business Development Program

GSA recently announced that it had added approximately 500 qualified industry partners to its GSA 8(a) STARS II Government-wide Acquisition Contract (GWAC). The 8(a) STARS II GWAC is a multiple-award, indefinite-delivery/indefinite-quantity (ID/IQ) contract engineered to provide federal agencies flexible sources of IT services and IT services-based solutions including computer programming services, computer systems design services, computer facilities management services, and other computer related services.

To gain entry to the 8(a) BD Program, a business entity must be unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of “good character,” are citizens of the United States, and who can demonstrate the potential for business success (see 13 C.F.R. § 124.101). A socially disadvantaged individual is someone who has been “subjected to racial or ethnic prejudice or cultural bias within American society.” (see 13 C.F.R. § 124.104(a)). An economically disadvantaged individual is a socially disadvantaged individual whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to non-socially disadvantaged competitors in the same or similar line of business.

When determining economic disadvantage, the SBA considers the personal financial condition of the person claiming disadvantaged status, including income from the past three years, personal net worth, and the fair market value of all assets (see 13 C.F.R. § 124.104(c)). An individual with a personal net worth of more than $250,000 is not considered economically disadvantaged. When calculating net worth, the SBA excludes the ownership percentage in the applicant company, and the equity in the owner's primary personal residence. Funds invested in an official retirement account are also excluded from the net worth calculation, as is income from the applicant company that is reinvested in the company or used to pay the company's normal taxes.

ORB Solutions Inc. (OSI) was denied admission into the 8(a) business development program because the owner of the company was not economically disadvantaged. The principle, Ms. Gupta's net worth exceeded $250,000. It wouldn't have exceeded $250,000 had it not been for the fact that OSI made a $132 thousand dollar loan to Ms. Gupta. And since Ms. Gupta was the sole owner of OSI, the SBA concluded that there was no assurance that Ms.Gupta would enforce the terms of the loan to herself - that and the fact that there was no formal loan agreement. So then the loan becomes an asset rather than a liability.

Owners of closely held companies often commingle their personal and company finances but an application for admission into the 8(a) business development program will open both personal and company finances to audit and a lot of scrutiny. The SBA is well aware of and on the lookout for firms and owners attempting to hide assets in order to qualify for the program.

Friday, June 16, 2017

"Steering Contracts" Results in Guilty Plea

One thing well known about fraudulent activity is that fraud involving collusion is one of the hardest to detect and prevent. It is extremely difficult to design a system of internal controls that can or woulds be effective in preventing or discouraging collusion from happening. A simple internal control that requires two signatures on each check is ineffective if the two signatures conspire to both sign a check to a fictitious company and then split the proceeds.

Recently, a former deputy director of US Aid for International Development (USAID) plead guilty to a contract-steering scheme where "by engaging in cronyism and contract steering" she chose to enrich a friend instead of actively seeking the most qualified and cost-effective bidder.

The case involved a close personal fried of Ms. Moskov who she want to hire for some consulting work. Ms. Moskov engineered the contracting process so that she was the selecting official, the approving official, and the person to whom the consultant would report. She provided internal government documents for the consultant to pattern his bid and all but guaranteed his the work: "we need to jump thru a few hoops and will go through the motions but you will be selected in the job". Moreover, she pretty much directed him to submit fraudulent invoices by telling his that his activities related to the bid should be added to his days of consultancy.

What was in it for her? The investigators found that she received a $7 thousand loan from the consultant that she never repaid. She called him "peaches". He was the "man of honor" at her wedding. They took trips together. The full extent of her largess may never be known.

It is hard to imagine that given all of the regulations inherent in Government contracting that one person could wield this much authority. The Justice Department write up of the case noted a co-conspirator which was probably why internal controls were ineffective.

We don't know how the scheme was uncovered. Perhaps someone took notice of the cozy relationship between contracting authority and one of the contractors/consultants she to oversee and blew the whistle. Do you have any similar situations in your organization?