Seven Individuals Indicted in $14 Million Scheme to Defraud the Government

The Telecommunications Act of 1996 added a statutory objective for the FCC (Federal Communications Commission) to provide advanced telecommunications services to schools and libraries in economically disadvantaged areas. This became known as the "E-rate" program and it provides subsidies ranging from 20 percent to 90 percent of the cost of telecommunications services, internet access, and related equipment. FCC raises about $3 billion per year by tacking on a fee to everyone's phone bill (you've all noticed it, we're sure). Over 30,000 applications from schools and libraries seeking funds under this program are received each year. It's no surprise then that every year, requests exceed the availability of funds.

In order to obtain funds under the E-rate program, education institutions and libraries certify that they are purchasing equipment and services from a private vendor. Schools are required to enter into an open bidding process in order to select a vendor. The schools and vendors are also required to submit a series of certifications that they comply with program requirements. Some schools don't have people knowledgeable in the process of preparing and submitting applications. The program allows them to hire consultants to put together the applications. The only stipulation in hiring consultants to do the work is that the consultants must be independent of the vendors competing to sell E-rate funded equipment and services.

Three billion per year is a lot of money but when you consider the cost of administering the program (it is administered by a contractor for the FCC) and the 50 million or so kids in public schools, it amounts to only $50 per student per year. Obviously that is not going to buy very much technology so it is imperative that the funds are spent wisely.

But, wherever there's Government money to be had, there are also scammers and the Justice Department released yesterday a press release about several individuals who have been indicted on charges of defrauding the E-rate subsidy program. Evidently, these conspirators comprised of vendors, consultants, and school officials were more interested in lining their own pockets than they were helping underprivileged kids.

According to the Press Release, Mr. Klein, his wife, his nephew, and five other individuals have been arrested and charged with a $14 million fraud where they secured funds from the E-rate program but never provided the equipment and services they had promised. One school, a private religious school in New Jersey received over $1 million in E-rate funds for the purpose of paying Klein but those services and equipment were never provided. In another case, E-rate funded $500 thousand for video conferencing and distance learning systems at a pre-school that cared for 2 - 4 year old children. That equipment was never installed at the preschool. There were other purchases of equipment not authorized by the program such as cell phones for personal use.

The conspiracy worked because school officials signed off that they had received the services and equipment. In return, the school officials received benefits, including cash.

Its difficult to establish internal controls that prevent conspiracies - when two or more people conspire to override the controls put in place. We don't know how this particular fraud was uncovered. Perhaps someone stepped forward and blew the whistle. Perhaps the FCC decided to conduct an audit of program expenditures.

Contractor Agrees to Pony Up for Shortchanging its Workers

A Government contractor, performing work funded by the Department of Transportation, has agreed to pay back wages, overtime, and fringe benefits to 77 employees. This agreement was the culmination of an investigation by the Labor Department's Wage and Hour Division (WHD). The WHD found that the contractor violated requirements of the Davis-Bacon Act, the Contract Work Hours and Safety Standards Act (CWHSSA), and the Fair Labor Standards Act (FLSA). We do not know why the WHD initiated its investigation. It could have been a result of a whistleblower or other complaint (as is often the case in these investigations) or the contractor could have been randomly selected as part of WHD's ongoing oversight responsibilities.

The Labor Department investigators determined that the contractor, Hoytt Reinforcing Inc., "inaccurately classified" employees as "laborers" when they were really doing the work of "reinforcing ironworkers". That sounds pretty bad, right? Because a common laborer is about the lowest skill level - an entry level position. As a result of the misclassifications,  Hoytt was able to pay the workers less than the prevailing rate for ironworkers, violating the various aforementioned laws. The investigators also found that Hoytt violated the FLSA by failing to maintain accurate time records, a violation of record-keeping requirements. Accurate timekeeping is as important here as it is under regular cost-type contracts.

Hoytt agreed to pay back wages and benefits to 77 employees. There was no mention as to whether civil or criminal penalties would be assessed. The problem here is twofold. Employees are not being paid the wages they are legally owed under Federal construction projects and second, it results in unfair competition for contractors who do play by the rules - i.e. estimate their costs based on prevailing wages.

File a Claim First, Then File Your Appeal

The ASBCA (Armed Services Board of Contract Appeals) dismissed, for lack of jurisdiction, an appeal by a contractor because there was insufficient evidence to show that the contracting officer ever received the claim.

The Board ruled that it is up to the appellant (i.e. the contractor) to demonstrate by a preponderance of the evidence that it first presented its claim to the contracting officer before appealing to the Board.

The contractor, Starwalker PR LLC, identified an email addressed to the contracting officer (and others) that referenced an attached certified claim. That email however did not provide the referenced attachment. Furthermore, the contracting officer testified under oath that she did not receive the claim.

The Government moved to dismiss the appeal for lack of jurisdiction. The contractor didn't request that the Board deny the Government's request but merely asked for a stay of proceedings to give the contracting officer time to decide the claim.

The Board granted the Government's motion to dismiss. The Board noted that the preponderance of the evidence before it did not demonstrate that the contractor had first presented its claim to the contracting officer.

Guess that's one way for the Board to get rid of its backlog. It doesn't solve the long-term problem however since the contractor can simply resubmit its claim to the contracting officer and if necessary, re-file an appeal with the ASBCA.

Rule Prohibiting Retaliation for Disclosure of Compensation Information Becomes Final

The FAR (Federal Acquisition Regulations) have converted an interim rule to a final rule, without change. This new rule, based on an Executive Order (EO) from the previous Administration prohibits Federal Contractors from discriminating against employees and job applicants who inquire about, discuss, or disclose their own compensation or the compensation of other employees or applicants. This rule applies to all contractors, both small (fewer than 500 employees) and large.

The regulation contains definitions of "compensation" and "compensation information" which are rather intuitive as you might expect (those definitions can be found in FAR  52.222-26(a)). The fundamental requirements of the regulation are these:

1. The contractor shall not discharge or in any other manner discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant.
2. This prohibition against discrimination does not apply to instances in which an employee who has access to the compensation information of other employees or applicants as part of such employee's essential job functions discloses the compensation of such other employees or applicants to individuals who do not otherwise have access to such information, unless such disclosure is in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing, or action.
3. The contractor shall disseminate the prohibition on discrimination to employees and applicants by incorporation into existing employee manuals or handbooks and electronic posting or by posting a copy of the provision in conspicuous places available to employees and applicants for employment.

We suppose that this regulation was a nod to some interest group but we have never heard of an instance where an employee or applicant was discriminated against for disclosing compensation information.We were kind of surprised that the current administration let this interim rule become final but perhaps it was the easiest path and its a "do-nothing" regulation. But in the current environment with the Section 809 Panel trying to weed out useless procurement regulations, it would have been a logical one to drop.

Contractors, don't forget to disseminate this new prohibition.

DoD Formally Rescinds IR&D Technical Discussion Regulation

The Defense Department amended it FAR Supplement (DFARS) back in November 2016 to require contractors to engage in and document a technical interchange as part of the criteria for determining the allowability of IR&D (Independent Research and Development) expenses. Before IR&D costs could be considered allowable under Government contracts beginning in 2017, contractors were required to engage in a technical interchange with a technical or operational DoD Government employee before the costs were incurred.

DCAA (Defense Contract Audit Agency) published guidance telling its auditors to question any IR&D expenses that were not supported by documentation that a technical interchange occurred prior to the costs being incurred.

The requirement was essentially unworkable since on one within DoD knew what technical exchanges were supposed to look like. Additionally, there wasn't enough technical people within the procurement community to engage in deep technical discussions with contractors, and tirdly, no one with DoD was volunteering to step up and have such discussions.

Less than a year later, in September 2016, the Defense Department issued a class deviation directing contracting officer to not require contractors to engage in technical exchanges as a condition of cost allowability. DCAA issued conforming guidance that instructed its audit staff to no longer question IR&D costs for lack of technical interchange documentation. This guidance applied to all current and future audits of any type.

Last week, the Defense Department formally and quietly rescinded the requirement.

DoD is amending the DFARS to remove the text at DFARS 231.205-18(c)(iii)(C)(4) which requires major contractors to engage in and document a technical interchange with the Government, prior to generating independent research and development (IR&D) costs for IR&D projects initiated in fiscaal year 2017 and later, in order for those costs to be determined allowable.

DoD further stated that

...the DFARS coverage was outmoded and recommended removal, since requiring a technical interchange between the Government and major contractors is unnecessary. The objective of the interchange can be met through other means.

This is perhaps the quickest that any regulation has become "outmoded" in the history of procurement regulations - 10 months from a necessary regulation to becoming outmoded.

Proposed Changes to Progress Payment Rate

Significant changes are coming to progress payment contract financing for DoD Contracts.

Currently, FAR 52.232-16 sets customary progress payment rates of 80 percent and 85 percent for large and small businesses, respectively. DFARS (DoD FAR Supplement) 252.232-7004 gives small businesses an added boost to 90 percent.

A proposed change just published, leaves the customary rate for small businesses intact but reduces the 80 percent rate to 50 percent but provides incentives for contractors to increase the rate to 90 percent. These incentives are designed to increase the effectiveness and efficiency in five "domains"

1. On time or accelerated contract deliveries
2. Contractor quality
3. Contractor business systems
4. Increasing contract opportunities for small buisnesses
5. Receipt of timely quality proposals (i.e. good estimating systems)

So how does DoD propose to incentivize these goals? By adding percentages to the base rate as follows:

• 10% for meeting the contract delivery dates for contract end items and contract data requirements lists or performance milestone schedules
• 10% for not having open level III or IV corrective action requests (corrective action requests are sent to contractors when an item or process is in nonconformity and a remedy is required. These are usually associated with quality assurance activities)
• 10% when all applicable business systems are acceptable and have no significant deficiencies.
• 7.5% when at least 95 percent of the time during the preceding Government fiscal year, when responding to solicitations that required submission of certified cost or pricing data, met the due date in the request for proposal and complied with the Proposal Adequacy Checklist
• 5% for meeting small business subcontracting goals during the preceding Government fiscal y ear.
• 2.5% for providing subcontracting opportunities for the AbilityOne program.

You can read more about this proposed change including how to participate in public meetings on the subject here.