Thursday, January 10, 2013

Procurement Fraud

Everyday, the Department of Justice announces convictions or settlements in civil and criminal cases. Many of these involve some sort of procurement fraud. And, with the beefed up "qui tam" provisions ("qui tam" is where the the relater, usually a inside whistle-blower gets to share in the money that's recovered), there is seemingly no end to the cases flowing in to the investigative pipeline.

Once the investigative wheels start turning, there is little a contractor can do to control the events. Cooperation with the investigation and self-disclosing may help reduce the punishment and expedite a settlement but the Government is going to do what it's going to do.

The best way to avoid fraud from occurring is make certain that you have strong ethics programs in place, good internal control systems, and a management team that sets the proper tone at the top. Those of you who have audited financial statements understand this well and have experienced the increased emphasis by the independent public accountants on fraud.

Concerning procurement fraud, there are six general categories.

Defective product/product substitution. This refers to cases where contractors deliver goods which to not conform to contract requirements, without informing the Government.

Defective testing. This involves the failure of a contractor to perform contractually required tests, or its failure to perform such testing in the required manner.

Bid-rigging. The absence of competition deprives the government of its most reliable measure of what the price should have been.

Bribery and public corruption. The breach of an employee's duty or loyalty.

Defective pricing. The Truth in Negotiations Act (TINA) requires contractors in negotiated procurement to disclose and certify that details concerning expected costs are current, complete, and accurate. A violation of TINA may result in a fraud referral.

False invoices. Invoices submitted when the contractor was knowlingly not complying with contract terms can be the basis of a False Claims Act.

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