Monday, August 12, 2013

Subcontractors, How Well Do You Know Your Primes?

This is a story about Government contractors and their suppliers. Last week the Department of Justice announced a guilty plea in a $2.4 million government contract fraud scheme. There are many procurement fraud schemes that are uncovered every month. But this one has a little different twist. The Government, in this case wasn't exactly defrauded - the Government contractors defrauded their suppliers.

According to the plea agreement, a woman (and her co-conspirators) set up at least 15 businesses in Maryland, Delaware, Georgia, Nevada, North Carolina and Tennessee. These companies were incorporated to bid on Government contracts to provide goods such as books, snowmobiles, plants, and paint. Most of the contracts were awarded using the FedBid online marketplace, where contractors compete for federal contracts through a reverse auction process.

This woman's businesses often submitted extremely low bids to secure the contracts. Once awarded, these companies enticed victim businesses to act as subcontractors and supply the goods required by contract with the promise that the subcontractors would be paid after the Government paid the prime contractors.

In due course, the subcontractors delivered the goods required by the contract and Government agencies paid the prime contractors for the products delivered. However, in many, if not most cases, the suppliers prices were higher than the prime contractors' bids to the Government. That didn't really matter much to the prime contractors because they never paid their suppliers for the goods delivered to the Government nor did they ever intend to pay their suppliers. The woman owner fraudulently retained these proceeds for her own personal benefit.

Of course this kind of scheme can't last too long and that's why the woman set up her 15 companies. She typically operated under a particular business name for a period of six to 12 months until the business was either disqualified from the FedBid marketplace or was otherwise burdened with lawsuits or liens. Then, she simply continued the scheme under a newly-registered business name. In order to avoid name recognition, the woman and her conspirators started using aliases.

The woman owner agreed to forfeit $2.4 million and a car. The sentencing comes later . She faces a maximum sentence of 20 years in prison and a fine of $250 thousand.

A lot of suppliers were duped in this scheme and it could happen to anyone. Be careful of new customers and ensure that your credit policies are sound before extending then credit. Beware of a good thing.

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